1 Surprise Winner Inside the Apple Inc. iPhone 7

By Markets Fool.com

Image source: CEVA.

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Once Apple (NASDAQ: AAPL) posted key technical specs for the iPhone 7 and iPhone 7 Plus on its website, it became clear that microprocessor giant Intel (NASDAQ: INTC) was supplying a meaningful portion of the modems (with its XMM 7360 modem) that will go into these phones.

Obviously, this is a win for Intel. Even if the revenue impact is limited, it serves as a validation of the company's significant multi-year investment in cellular modems.However, there is a company besides Intel that could enjoy a more substantial financial boost from this development: CEVA (NASDAQ: CEVA).

What is CEVA, and how does it fit in here?

CEVA designs digital signal processors that are used in a number of applications, including cellular modems. To be clear, CEVA is an intellectual property vendor, which means that it produces a design that another company takes and integrates into a chip. Companies like CEVA usually receive up-front licensing fees for their technology and subsequent royalty payments from sales of chips incorporating their technologies.

With that in mind, it's important to note that cellular modems incorporate what are known as digital signal processors, or DSPs, to handle key processing tasks.Modems from Infineon Wireless (now Intel's wireless group) have historically used DSP cores from CEVA. In contrast, Qualcommmodems use in-house "Hexagon" DSP cores.

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When Infineon Wireless/Intel Mobile was kicked out of the iPhone several generations ago, CEVA lost a significant amount of smartphone DSP business.However, with Intel seemingly back in the iPhone in a significant way, royalties from CEVA's cellular baseband-related products should be poised to increase in the coming quarters.

What kind of impact could CEVA enjoy?

Last quarter, CEVA reported collecting royalties on 225 million units shipped by its partners, 191 million of which were related to cellular modems. The company's total royalty revenue during the quarter was $9.6 million. The average per-unit royalty, then, works out to $0.0427.

If the upcoming iPhone product cycle see shipments of 120 million to 130 million units -- total unit volume is likely to be higher, but keep in mind that Apple is also selling the older iPhone 6s/6s Plus/SE which do not contain Intel modems and CEVA DSPs -- then CEVA could be looking at an additional $5.3 million in royalty revenue over that period.

Considering that CEVA generated revenue of $59.5 million in its last fiscal year, the contribution to both the top and bottom lines should be significant.

Furthermore, if Apple opts to use an Intel modem again in the successor to the iPhone 7 (something that seems likely but is hardly assured), and assuming that Intel continues to use CEVA DSPs (the successor to Intel's XMM 7360, the XMM 7480, indeed uses a CEVA DSP,according to CEVA itself), then CEVA could benefit not only from shipments of the next generation device but continued iPhone 7 volume once it becomes Apple's mid-range offering.

A nice win for CEVA

At the end of the day, Intel's success at Apple bodes well for CEVA's results in the near to medium term. If Intel proves that it can continue to win a place inside the iPhone year in and year out, and the company continues to employ CEVA technology, the longer term boost for CEVA could be significant as well.

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Ashraf Eassaowns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.