Qualcomm Inc. has secured a multiyear agreement to supply modem chips for Apple Inc.'s iPhones, spanning a period of at least three years. This development not only eliminates a financial uncertainty for Qualcomm but also indicates that Apple's efforts to produce its own chips are progressing at a slower pace than anticipated.
Qualcomm's stock (QCOM) saw a notable premarket increase of approximately 6% on Monday following this announcement.
Under the terms of the new deal unveiled on Monday, Qualcomm will provide iPhones with SnapDragon 5G modem-RF systems in 2024, 2025, and 2026. While Apple has been diligently working on developing its own connectivity chip sets since its acquisition of Intel Corp.'s smartphone-modem business in 2019, the timeline for its independent modem deployment has experienced delays.
Executives at Qualcomm stated that they anticipate having a 20% share of modems in the 2026 iPhone models, signaling a potential target for Apple to begin integrating its own modems. However, it's worth noting that in the previous three-year deal signed in 2021, the same 20% share expectation for the final year was outlined. Additionally, Qualcomm has publicly affirmed that it is providing the "vast majority" of modems for 2023 iPhones since the end of the previous year.
Qualcomm described the terms of the new agreement as "similar" to the prior three-year arrangement. Apple has yet to confirm or provide comment regarding this development, with the company expected to unveil its new lineup of iPhones at an event scheduled for the following day.
The extended partnership between Qualcomm and Apple has garnered positive sentiment from analysts, with Bernstein analyst Stacy Rasgon noting that it underscores Apple's challenges in developing this technology and Qualcomm's technological leadership in the field. Rasgon emphasized that as cellular technologies continue to evolve, the longer Apple takes to develop its modems, the more challenging it becomes.
Evercore ISI analyst Matthew Prisco highlighted that this deal provides Qualcomm with a clearer path to drive an increase in earnings per share, estimating that the iPhone modem business will contribute $2 to $3 in annualized EPS for Qualcomm.
Qualcomm's CEO, Cristiano Amon, had previously indicated earlier this year that the company did not plan to supply any mobile chip sets to Apple in 2024. However, when asked about this assumption in an August earnings call, Amon stated, "We're not making any updates to our prior plans for 2024," leaving analysts concerned about potential revenue losses beginning in the following year. Oppenheimer analysts in August anticipated an eventual revenue loss of $10 billion for Qualcomm as a result.
Qualcomm's shares have faced challenges as the prospect of losing substantial revenue from Apple loomed. Over the past year, the stock has experienced a decline of 19.6%, while the S&P 500 index has registered a gain of 9.6%.
The history between Qualcomm and Apple includes a protracted legal battle that commenced in 2017 when Apple sued, alleging that Qualcomm's licensing fees were excessively high. This legal dispute concluded in 2019 with a settlement, coinciding with Intel's inability to provide reliable chips for Apple's transition to 5G wireless technology. Intel subsequently ceased its modem business, selling it to Apple a few months later.
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