The smartphone boom has created many winners over the years. As smartphones became ubiquitous, and as their capabilities expanded at a rapid rate, demand for the chips inside them rose. Inside of every smartphone is DRAM, which serves as primary system memory, as well as NAND flash, which is used to store applications and other data, like photos and videos.
Memory maker Micron (NASDAQ:MU) has been a beneficiary of the smartphone boom as it sells both DRAM and NAND flash memory to major smartphone makers. In fact, sales of memory chips in the mobile market is such a large part of Micron's overall business that it breaks out financial results for a segment called its Mobile Business Unit, or MBU for short.
Here, I'd like to go over the basics of Micron's MBU for investors.
What does it sell?
According to Micron's most recent annual filing, the company's MBU "includes memory products sold into smartphone and other mobile-device markets and includes discrete DRAM, discrete NAND, and managed NAND."
Managed NAND, Micron says, "includes eMMC and universal flash storage (UFS) solutions, which each combine high-capacity NAND with a high-speed controller and firmware in a small ball-grid array." The company explains that it also sells eMCP (short for embedded multi-chip package) solutions that "combine an eMMC/UFS solution with LPDRAM."
"MCPs are used in the vast majority of smartphones, and we have robust demand from customers for these products," Micron CEO Sanjay Mehrotra said on the company's Sept. 20 earnings conference call. "We are focused on growing MCP revenues and are introducing new, differentiated products to enhance our portfolio."
The financial picture
During Micron's recently completed fiscal 2018 year, its MBU generated $6.58 billion in revenue. That was up almost 49% year over year and made up about 21.6% of total annual company revenue. As a percentage of Micron's overall revenue, MBU hasn't changed much over the last several years, with the segment making up 21.8% of the company's sales in its 2017 fiscal year and 20.7% of sales in its 2016 fiscal year.
Micron's MBU has seen its profitability expand dramatically over the last several years. In fiscal 2016, the unit generated $97 million in operating income, and achieved an operating margin of just 4%. However, those figures grew to $927 million and 21%, respectively, in fiscal 2017, then popped to $3.03 billion and 46% in fiscal 2018.
The company attributed the improvement in MBU's operating profit and operating margin in fiscal year 2017 to "manufacturing cost reductions, partially offset by declines in average selling prices." The profit and operating margin growth in this segment during fiscal year 2018 was, per Micron, "primarily due to increases in pricing and sales volumes for LPDRAM products, higher sales of high-value managed NAND products, and manufacturing cost reductions."
Going back to the company's most recent earnings call, Mehrotra seemed optimistic about the opportunities for increases in mobile memory content in the years ahead.
"[In] mobile applications, DRAM is growing nicely as well as machine learning kind of features, as facial recognition etc. get implemented in these phones," Mehrotra said. "We are already starting to see six-to-eight gigabytes, even 10 gigabytes coming in high-end smartphones now." During its analyst day in May, Micron said it expects average smartphone DRAM content to grow to 4.8 gigabytes by 2021, from 2.7 gigabytes in 2017.
As far as mobile NAND flash goes, the executive pointed to the fact that "you're now seeing 512 gigabyte smartphones offered," and added that "terabyte smartphones are not far away." As an aside, the latest Apple iPhone XS and iPhone XS Max smartphones come in configurations with 512 gigabytes of storage.
In its May analyst day comments, the company observed that in 2017, the average amount of storage in a smartphone was 43 gigabytes, and it expects that figure to rise to 143 gigabytes by 2021.
"When you look at these demand trends, we feel confident about the long-term trajectory," Mehrotra said. "One or two quarters here or there, there can certainly be ebb and flow in terms of demand or supply in the industry. But the long-term trend is positive."