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Apple (NASDAQ: AAPL) is expected to launch a trio of new iPhones in September. These new phones are expected to incorporate significant internal enhancements compared to the models that launched last fall, including support for super-fast gigabit LTE download speeds.
Two companies are expected to supply the cellular modem chips that'll enable those speeds -- Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM). Qualcomm was long Apple's only cellular modem supplier, but beginning with the iPhone 7-series smartphones launched in the second half of 2016, Apple began sourcing modems from both chip giants.
Image source: Intel.
Fast Company reports that about 70% of Apple's cellular modem needs for the new iPhones will be supplied by Intel. In perusing the company's recent quarterly filing, I noticed something quite interesting related to the cellular modem that Intel is expected to supply for this year's iPhones.
Apple chip takes a bite from Intel's profits
Last quarter, Intel reported that its Client Computing Group (CCG) suffered an operating-profit decline of around 8%, even as revenues grew by 3%. The good news from the company's strong sales performance was more than offset by issues related to initial production costs of chips built using its 10-nanometer technology. But what's interesting is that there was another big detractor from operating profit year over year -- initial production costs of the company's upcoming XMM 7560 LTE modem.
Intel said in its quarterly filing that it saw a $115 million year-over-year reduction in CCG operating profit due to "lower gross margin from adjacent businesses, primarily due to initial production costs of our new modem product."
As you may recall, the XMM 7560 modem is the first Intel modem to be manufactured using Intel's own 14-nanometer chip production technology. The prior Intel modems that Apple has used in other iPhone products have been manufactured by a third party.
If we go back to Intel's quarterly filing from a year ago, we see that Intel didn't call out production of the modems that were going to power the current iPhones as a year-over-year drag on operating profit.
What this suggests, then, is that Intel is facing yield-rate issues (in other words, a large percentage of the chips produced are unusable) as it begins manufacturing the XMM 7560 LTE modem.
Fast Company's sources were good
Interestingly, Fast Company reported just a little while ago that Intel was, indeed, facing yield-rate issues as it tried to manufacture the XMM 7560. The issues are so severe, Fast Company says, that "only just more than half of the chips being produced are keepers."