Qualcomm: Apple Dependency Analysis (Part 1)

Qualcomm's dependency on smartphone chips has an issue, especially its Apple-centric revenue.  Despite the company's diversification efforts, smartphone chips continued to be the mainstay of Qualcomm.  Within smartphones, the company is exposed to Android and Apple, with the latter's chipset revenue going away soon.  What does that mean?  How much revenue is at stake?  

I will explore the Apple-Qualcomm relationship in the first part of this analysis.  In part 2, I will explore Qualcomm's future beyond Apple and whether Android, auto and IoT can offset lost Apple revenue.

Qualcomm's semiconductor business QCT saw a revival after the introduction of 5G in 2019 and posted massive growth between 2020 and 2022.  The company's core smartphone chip business nearly doubled in 2022 compared to 2020, driven by higher priced Android chips and Apple 5G relationship.

Qualcomm embarked on a diversification strategy in 2014 and even attempted to acquire NXP in 2016 before terminating the deal in 2018 due to a lack of timely approval from China.  However, despite setbacks, the company went ahead with its organic plans and built a sizeable business beyond smartphones.

Qualcomm's non-smartphone chip revenue grew faster than smartphone chip revenue and crossed the $9b mark in CY 2022, thanks to Qualcomm's increased clout in automotive and IoT markets.  The company's auto business will grow double-digit for several years.

Despite all the traction in non-smartphones and higher-priced Android chips, Apple remains the elephant in the room for Qualcomm.  So the focus of this post is Qualcomm's Apple revenue.

Qualcomm entered Apple's supply chain in 2011 when Apple launched its first CDMA iPhone.  The relationship was off to a big start in 2012 when Apple introduced its first 4G LTE-supported iPhone.

In 2016, Apple added Intel to its supply chain and dual-sourced from Intel and Qualcomm for two years before going exclusive with Intel in 2018.  During this time, Apple-Qualcomm legal battles escalated quickly, covering dozens of infringements in multiple jurisdictions, including the USA, China, Japan, Germany, Taiwan and others.  However, with its exclusive 4G LTE baseband supplier Intel's 5G roadmap going nowhere and a lack of immediate alternative, Apple had no choice but to agree to a licensing and 5G chipset supply agreement in 2019.  In addition, Qualcomm's all-around solution and field experience played a part in Apple's decision.  

Apple's chip relationship with Qualcomm restarted in 2020 with iPhone 12 5G lineup. Qualcomm's licensing agreement with Apple runs through April 2025, while the chipset agreement extended for a year through 2023.  While Apple agreed to source 5G basebands from Qualcomm, it acquired Intel's 5G modem assets to develop an internal 5G chip to replace Qualcomm eventually.

Apple sources 5G baseband, RF transceiver, power management IC, envelop tracker and mmWave RF front-end modules.

Qualcomm's Apple revenue bottomed in FY2019 and grew to $9.2b in FY22.  At its peak, Apple accounted for 25% of Qualcomm's revenue.  However, Qualcomm's Apple revenue grew 20% in FY22 to $9.2b.  Of this $9.2b, chipset revenue accounted for around two-thirds, with the rest coming from licensing.

Apple's chipset revenue accounted for 16% of QCT (Qualcomm's semiconductor division) revenue in FY22, while Apple's licensing revenue accounted for almost 50% of QTL (Qualcomm's licensing division).

By my estimate, Qualcomm gets $25+ chipset revenue per Apple cellular-enabled 4G/5G device.  In addition, I estimate Qualcomm gets up to $13 royalty per Apple cellular-enabled 4G/5G device.  So, when Apple transitions to the internal modem, Qualcomm will lose the chipset revenue but likely retain the licensing revenue. In FY2022, Apple revenue grew slower than non-Apple revenue for Qualcomm.

In the worst-case scenario, Qualcomm will lose all Apple revenue ($9b+), but the company will likely retain IP licensing revenue (up to $3b).  So, around $6b in chipset revenue from Apple is at stake for Qualcomm.

With this background established, I will explore Qualcomm's semiconductor revenue forecast, reduced Apple dependency and potential growth from auto and IoT markets in Part 2.