QCOM QUALCOMM Inc

By Asa Fitch 

Intel Corp. dropped plans to make modem chips for 5G smartphones, it said Tuesday, hours after its chief rival in that market, Qualcomm Inc., resolved a yearslong legal dispute with Apple Inc.

The decision by Intel removes a major rival to Qualcomm for a critical component in the new generation of mobile handsets expected to dominate the market over the next several years. It followed a settlement between Qualcomm and Apple, which has been Intel's biggest customer for smartphone modem chips. That settlement includes a multiyear deal for Qualcomm to supply Apple with modems, a major reversal after the iPhone maker shifted to Intel as its sole supplier for those chips after years of using Qualcomm.

Intel's withdrawal, meanwhile, leaves only a handful of competitors to Qualcomm for 5G modems, which are small chips that manage connection and the transfer of data between smartphones and cell towers. Only a few other companies have 5G modems in the pipeline, including Taiwan's MediaTek Inc., which supplies many Chinese smartphone makers. China's Huawei Technologies Co. and South Korea's Samsung are also developing 5G modems for their own handsets.

Intel declined to comment on whether its announcement was related to news of the Apple-Qualcomm deal.

In a statement, Chief Executive Bob Swan said that while Intel is excited about 5G, in the modem business, "it has become apparent that there is no clear path to profitability and positive returns." He added that the new generation of wireless technology remains a strategic priority, and that Intel is "assessing our options to realize the value we have created" in 5G, including opportunities with other devices and platforms.

Intel could sell the business, although it isn't clear who would buy it, said Srini Pajjuri, an analyst at Macquarie Research. Without a customer like Apple in place and with regulatory scrutiny of any transaction, the proposition may not look attractive.

"They could look to sell, but I don't know if there are many buyers out there," he said.

Investors and analysts had long looked askance at Intel's smartphone modem business because profit margins were weaker than its other businesses even though it brought in revenue. Angelo Zino, an analyst at CFRA Equity Research, estimated that the division produced gross margins of around 40%, compared with more than 60% for other product segments.

"Intel benefits longer-term because now they can focus on higher-margin, more profitable businesses and take their foot off supplying Apple's iPhone business, which at the end of the day wasn't a great business for them," he said.

Intel shares rose 4% to $58.97 in after-hours trading following its announcement. The shares had closed up 0.76% in regular trading Tuesday.

Intel's move illustrates Mr. Swan's approach to leading Intel, which takes a hard look at whether the company's many ventures make financial sense. Mr. Swan, who was Intel's chief financial officer and then acting CEO until taking the helm permanently in January, was "looking at the business differently and looking at where the real opportunities lie," Mr. Zino said.

Intel has worked for years to build up its wireless business. It plowed millions of dollars into developing smartphone chips under previous CEO Brian Krzanich, who touted 5G and mobile technology as a big new revenue stream for a company that has long dominated the computer-processor market.

The company won a deal to supply modems for some of the iPhones Apple started selling in 2017. It became Apple's sole supplier of modem chips, starting with the iPhone XR that was launched last year, amid worsening tension between Apple and Qualcomm.

But Intel got a late start when it came to 5G and hasn't been able to keep pace with rivals like Qualcomm. Mr. Krzanich's abrupt departure last June for violating company policy by having a relationship with an employee left the future of the modem initiative uncertain.

Intel had expected to start sending sample 5G modem chips to customers in the second half of this year and put them into production next year before dropping those plans on Tuesday. Qualcomm, by contrast, is already working on its second-generation 5G modem.

--Tripp Mickle contributed to this article.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

April 16, 2019 22:34 ET (02:34 GMT)

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