In a surprising turn of events, Qualcomm (NASDAQ:QCOM) announced on Monday that it will continue to supply 5G modems for Apple's (NASDAQ:NASDAQ:AAPL) smartphones through 2026. This comes contrary to previous expectations from Wall Street analysts and Qualcomm officials who predicted Apple would begin using an internally developed 5G modem from 2024.
The extension of Qualcomm's supply contract with Apple is significant for the company's handset business, which reported sales of $5.26 billion in the quarter ending in June. According to a UBS estimate, approximately 21% of Qualcomm's fiscal 2022 revenue of $44.2 billion was attributed to Apple. The continued sales to Apple could potentially cushion the impact of losing such a crucial customer.
Despite this extension, Qualcomm anticipates supplying only about 20% of the modems required for Apple's 2026 smartphone launch, suggesting that the company still expects its business with Apple to gradually decline. This is in line with information from analyst Ming-Chi Kuo who last week forecasted that Apple would start using its own modem chip as early as 2025.
Apple has been striving to develop its own modems in a bid to reduce dependency on Qualcomm chips. It acquired Intel's (NASDAQ:NASDAQ:INTC) smartphone modem division in 2019 to facilitate this transition. However, experts believe that the complexity of Qualcomm's chips could pose challenges for Apple's shift.
The relationship between the two tech giants extends beyond chip supply. Qualcomm also earns revenue from Apple through cellular licensing fees which amounted to about $1.9 billion in 2022, as per the UBS estimate. Furthermore, Qualcomm continues to collect royalties from Apple under a six-year agreement that was reached at the end of a legal dispute over royalties in 2019.
While an Apple-designed 5G chip could enhance power efficiency and improve profit margins by reducing licensing fees paid to Qualcomm, Apple's reliance on Qualcomm will persist for the next few generations of iPhones. This includes the upcoming iPhone 15 lineup, which is expected to be announced on Tuesday.
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