Challenges Loom for Intel’s Modem Chipsets
Will Apple’s 2018 iPhone use Intel?
Intel’s (INTC) CCG (Client Computing Group) revenue reached $9 billion in fiscal 4Q16 due to high ASPs (average selling prices) and strong demand for modems and i7 cores. In Intel’s fiscal 4Q16 earnings call, chief financial officer Bob Swan expressed confidence in the company winning modem orders for the next-generation Apple (AAPL) iPhone.
He stated that the company’s fiscal 2017 gross margin could be driven by volume sales of nonvolatile memory and modems, which both have narrower gross margins. The recent licensing lawsuit between Qualcomm (QCOM) and Apple boosted Intel’s chances of winning Apple’s modem orders.
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However, there are some fresh rumors on TheLayoff.com, a website used by Intel’s current and former employees to discuss potential layoff activity. The website stated that Apple would not be using Intel’s upcoming XMM 7560 cellular modem in its 2018 iPhone. Although the website is not a trusted source, there have been other rumors that Apple is postponing the supply contract with Intel until the latter meets its requirements.
If the rumor comes true, Intel’s modem sales could decline significantly in fiscal 2H17. However, this may prove beneficial for the company’s gross margin as modems are lower-margin products and their removal could strengthen the company’s product mix.
Troubles loom for Intel’s cable modem chipsets
Things are tense for Intel’s cellular modem as well as its cable modem. Cable modem maker Arris recently switched from Intel to Broadcom (AVGO) after it faced a class-action suit for misleading customers and selling a lag-prone line of SURFboard SB6190 cable modems.
The Arris SB6190 modem featured Intel’s faulty Puma 6 chipset, which was prone to high latency and jittery connectivity. Although Intel and Arris have developed a firmware update to resolve the Puma 6 latency issue, it is an incomplete solution to the problem.
Arris was not the only vendor hit by the Puma 6 design flaw. Comcast’s (CMCSA) and Virgin Media’s boxes, Hitron’s and Compal’s cable modems, and Cisco Systems’ (CSCO) and Linksys’s network gears were also impacted by the faulty Puma 6 chipset. While the defect resulted in lost sales for Intel, the impact was not significant and is unlikely to affect CCG’s earnings in fiscal 1Q17.
Intel has big plans for its mobile connectivity business. It’s looking to become a key player and tap into the next big wave of 5G. We’ll discuss this further in the next part.