Universal Display Corp

NASDAQ:OLED

Earnings Call Transcript 2022-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to Universal Display's first quarter 2022 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. [Operator Instructions].

I would now like to turn the call over to Darice Liu, Senior Director of Investor Relations. Please proceed.

[Darice Liu, Director, IR & Corporate Communications]

Thank you, and good afternoon, everyone. Welcome to Universal Display's First Quarter Earnings Conference Call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Before Steve begins, let me remind you that today's call is a property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, May 5, 2022. During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements.

Now I would like to turn the call over to Steve Abramson.

[Steven Abramson, President, CEO & Director]

Thanks, Darice, and welcome to everyone on today's call. We are pleased to report that revenue in the first quarter of 2022 was $150.5 million. Operating profit was $62.3 million and net income was $50 million or $1.05 per diluted share. The adoption of OLED continues to increase in a myriad of applications, including AR/VR, smartphones, foldables, IT, TVs and automotive.

In addition to increasing proliferation of OLED smartphones in the mid-range and even some low-end models, the landscape of foldable smartphones is also expanding. Vivo launched its first foldable smartphone last month, and Google is expected to launch its first foldable smartphone in the second half of this year. According to Omdia market research, foldable smartphone display shipments are forecasted to grow more than 100% year-over-year from 9 million units in 2021 to 20 million units in 2022.

On the foldable IT front, it has been reported that HP is working on a 17-inch laptop that you can fold into just 11 inches. Samsung is also reportedly looking to commercialize a foldable laptop. Earlier this year, Samsung unveiled the Flex Note concept at CES, a foldable laptop that has a portability of a 13-inch laptop when folded and a 17-inch wide monitor size screen when unfolded.

What was once just CGI created for movies, foldable and rollable displays are now becoming a reality. The evolution of form factor in consumer electronics is just beginning. All under essentially film layers, they are inherently conformable, bendable and rollable. Additionally, OLEDs can be manufactured on glass, metal foil and plastic. The versatility and flexibility of OLED is energizing the consumer market with new ideas, designs and products. OLED momentum continues to accelerate in a broad range of consumer electronics, particularly in the IT segment of tablets, notebooks and monitors. Market research firm, DSCC forecast significant OLED IT growth in the coming years, a 45% CAGR for OLED tablet units, 51% CAGR for OLED notebook units and 104% CAGR for OLED monitor units from 2021 to 2026.

With the move to OLED IT, there are reports that leading panel makers are planning to adopt the tandem structure. Tandem structures are expected to increase brightness, lifetime and efficiency as well as lower power consumption of OLED panels. The world of OLED TVs remains bright. In addition to Samsung Electronics, garnering great reviews for its first hybrid QD-OLED TV, LG Display reaffirmed its plans to increase OLED TV shipments in 2022 to almost 10 million units, up from slightly under 8 million units in 2021.

As we look to the OLED market, we believe that panel makers and OEMs are preparing for an extensive new wave of medium and large area capacity investment, driven by escalating push from leading OEMs for OLED IT products and meaningful strength in the OLED TV market, there are reports that leading panel makers, including Samsung, LG Display and BOE are planning to invest in Gen 8.5, 8.6 capacity for OLED IT. And for the OLED TV market, there are reportedly ongoing investment discussions to expand Gen 8 capacity even further.

During last week's conference call, Samsung announced that it expects its display sales to increase as its portfolio of foldable products expands and from accelerated adoption of OLEDs in new application areas such as IT, where demand has increased in the pandemic; gaming, as portable gaming device OEMs are moving to higher picture quality displays; and automotive, where there is increasing demand for premium displays in markets like electric vehicles. In addition, Samsung announced that yields for its recently launched hybrid QD-OLED displays have improved faster than projected and reached 75% and that it plans to grow and expand its QD-OLED display lineup.

LG Display shared on its recent earnings call, the company's positive OLED outlook for the second half of the year. For OLED TVs, LG Display intends to expand its customer base and product portfolio. In small and medium OLEDs, LG Display expects profitability to improve in the second half as new smartphone models with LGD's OLED displays are introduced.

Another growth area that the company highlighted was automotive and that OLEDs make up approximately 30% of LG's premium OLED display orders today and that it expects that percentage to continue to increase. BOE technology recently announced that it shipped approximately 60 million OLED units in 2021. As BOE looks to 2022, it is planning to ship more than 100 million OLED units or an increase of more than 60% year-over-year.

On the capacity front, BOE recently opened up the first phase of its third Gen-6 OLED fab in Chongqing and is focused on bringing online Phases 2 and 3 this year. Each phase has a capacity output of 16,000 plates per month, adding up to 48,000 substrate starts per month when the plant is fully ramped similar to BOE's 2 other Gen 6 fabs in Chengdu and Mianyang. At the end of March, Tianma announced its new Gen 6 flexible fab in Xiamen has started trial production and that it expects to enter mass production by the end of the year. This OLED plant, when fully ramped, will have an installed capacity of 48,000 substrate starts per month. Also in March, China Star reaffirmed its plans to ramp its Gen 6 flexible OLED capacity at its Wuhan plant. China Star's first OLED fab has a monthly installed capacity of 45,000 substrate starts.

On the lighting front, while we are still in the early commercialization stage, we believe that the benefits of OLED lighting which includes high power efficiency, novel and innovative form factors, beautiful natural colors and cool operating temperatures are all quite compelling. As OLED activity continues to flourish, we remain steadfast in our commitment to advancing our robust OLED materials and technology leadership.

On the FOLED front, with our deep and broad experience and know-how of more than 25 years of pioneering research, we are innovating, inventing and introducing new OLED phosphorescent emissive materials, including new reds, greens, yellows and hosts. With respect to blue, we continue to make excellent progress in our ongoing development work for a commercial phosphorescent blue emissive system. We believe that we are on track to meet preliminary target specs with our phosphorescent blue by year-end, which should enable the introduction of our all-phosphorescent RGB stack into the commercial market in 2024. We believe that the commercial introduction of our full color emissive stack will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications.

We also continue to make considerable progress with constructing the key subsystems for our OVJP alpha system design. The completion of these subsystems is a critical step in our commercialization road map. While the commercial launch of OVJP is still a few years away, we believe that OVJP represents a groundbreaking platform towards low-cost, high-performance, high-throughput, highly efficient RGB side-by-side OLED TV manufacturing.

On that note, let me turn the call over to Sid.

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Thank you, Steve. And again, thank you, everyone, for joining our call today. Revenues for the first quarter of 2022 were $150.5 million, compared to fourth quarter 2021's $146.2 million and first quarter's 2021 $134 million. Our total material sales were $86.7 million in the first quarter of 2022 compared to material sales of $85.8 million in the fourth quarter of 2021 and $79.8 million in the first quarter of 2021. Green emitters sales in the first quarter of 2022, which include our yellow, green emitters, were $66.4 million. This compares to $66.7 million in the fourth quarter of 2021 and $60.5 million in the first quarter of 2021.

Red emitter sales in the first quarter of 2022 were $20.2 million. This compares to $18.9 million in the fourth quarter of 2021 and $19.1 million in the first quarter of 2021. As we have discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors include COVID-19 issues as well as consumer product demand cycles, capacity ramp schedules, production and loading rates, device recipes, product mix, material ordering patterns, customer inventory levels and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us.

First quarter 2022 royalty and license fees were $59.8 million. This compares to $56 million in the fourth quarter of 2021 and $50.9 million in the first quarter of 2021. First quarter 2022 Adesis revenues were $4 million, this compares to $4.5 million in the fourth quarter of 2021 and $3.3 million in the first quarter of 2021. Cost of sales for the first quarter of 2022 were $33.2 million, translating into overall gross margins of 78%. This compares to $32.2 million in gross margins of 78% in the fourth quarter of 2021 and $23.3 million and gross margins of 83% in the first quarter of 2021. Cost of OLED materials in the first quarter of 2022 were $29.9 million translating into material gross margins of 65%. This compares to 66% in the fourth quarter of 2021 and the comparable year-over-year's quarter material gross margins of 74%. As we have noted in the past, material gross margins can vary quarter-to-quarter.

First quarter 2022 operating expense, excluding cost of sales, was $55.1 million, this compares to $57.5 million in the fourth quarter of 2021 and $47.1 million in the first quarter of 2021. Operating income was $62.3 million in the first quarter of 2022, translating into operating margins of 41%. This compares to $56.5 million and operating margins of 39% in the fourth quarter of 2021 compared to $63.6 million and operating margin of 47% in the first quarter of 2021.

The income tax rate was 20.1% for the first quarter of 2022. Net income for the first quarter of 2022 was $50 million or $1.05 per diluted share. This compares to last quarter's $45.9 million or $0.96 per diluted share and the comparable year-over-year's quarter of $51.7 million or $1.08 per diluted share. We ended the quarter with approximately $838 million in cash, cash equivalents and investments or $17.67 of cash per diluted share.

Moving along to guidance. Our outlook for the year remains unchanged. We expect 2022 revenues to be in the range of $625 million to $650 million with the ratio of material to royalty licensing revenues expected to be in the ballpark of 1.4:1. And lastly, our Board of Directors approved a $0.30 quarterly dividend which will be paid on June 30, 2022, to stockholders of record as of the close of business on June 16, 2022. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.

With that, I will turn the call back to Steve.

[Steven Abramson, President, CEO & Director]

Thanks, Sid. The trajectories of the OLED market and of Universal Display continue to be very bright. Some macro headwinds may continue in the near term. At the same time, OEMs, panel makers and the ecosystem are setting the stage for a significant new wave of OLED capital investments and OLED market proliferation. As a key OLED innovations partner, we continue to be well positioned to participate in a myriad of exciting opportunities that lie ahead. As a fast-moving forward-thinking company, we continue to target new opportunities for growth. We are broadening our core competencies, bolstering our worldwide footprint and expanding our global team to fuel our strategic initiatives and increase our first-mover competitive edge.

We are working closely with our customers as they map out their product road maps for the coming years and are building on the breadth of our more than 2.5 decades of experience and know-how and are continually innovating and developing enabling materials and technologies to support our partners and the OLED industry for the near term, midterm and long term. Advancing our path forward is our strong corporate culture and stewardship, which you can learn more about in our recently published 2021 Corporate Social Responsibility report. Our CSR report can be found on our website under Corporate Responsibility.

And finally, I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers and for our shareholders.

And with that, operator, let's start the Q&A.

[Operator]

[Operator Instructions]. Our first question is from Krish Sankar with Cowen & Company.

[Kinney Chin, Cowen and Company]

This is Steve calling on behalf of Krish. Steve, if I could start, I have a question regarding some of the comments you made regarding customer -- your customer plans for increasing OLED production in the coming year. I just wanted to ask about sort of the implications for emitter material usage. Given some of these CapEx expansion plan to your customers, can you have any thoughts on whether overall emitter materials intensity will stay about flat going forward on average? Or just given the usual yield ramp curves and maybe potential profit recipe changes, do you see the material leases tend to going up or down over the coming year [indiscernible] new production ramps?

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Thank you for your question, with Steve talking about some of the issues that new capacity coming online, there are a number of Gen 8.5, Gen 8.6 capacity coming online really aimed towards the IT market, which is only about 2% penetration in today. So it is something that we see as 1 of the big areas for growth over the next few years for us.

In terms of material utilization, I think you talked -- just a couple of things I think you're asking. One is having to do with different structures that we've heard about and that you've read about tandem structures. And that is something -- it's really in the early days of development for that. But we think there's probably more material per square inch of ours that would go into the product. However, we can't really say just because it's called tandem, that is 2 times, but we do think it will be. But as you're well aware, all of this new capacity for us is all new revenue opportunities for our materials.

[Kinney Chin, Cowen and Company]

Okay. Got it. And then the second question for Sid. In terms of gross margins and specifically Materials gross margins. So the last few quarters, the material gross margins have sort of been in the low to mid-60s range. And just kind of curious, compared to the more historic roughly 70% materials gross margin level, what kind of drivers or levers would you need to see happen in the coming quarters for those material gross margins to get back to that 70% level? Is it customer mix? Or is it potentially your transport fees that need to moderate for that to happen?

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Yes. 65% to 70% material gross margins is our target for 2022. Higher development materials, increasing complexity of our next-gen materials as well as higher raw material pricing such as iridium costs that we've talked about, have added to our COGS. We are really working diligently on cost reduction programs to maintain our gross margin profile.

[Operator]

Our next question is from C.J. Muse with Evercore ISI.

[Christopher Muse, Evercore ISI]

I guess first, wanted to ask regarding the weakness that we're seeing globally around consumer electronic demand, particularly in the lower end, how that's impacting your business. So what kind of impact are you seeing in the supply chain in terms of willingness to hold inventory, your inventory? And then from a mix perspective, how you're seeing your customers kind of decide between LCD and OLED for both smartphones and TVs.

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Yes. I think there have been ongoing headwinds, either pandemic, component shortages, economic uncertainties. I mean the consumer electronics industry is a very dynamic industry. And it is something that we look at pretty much consistently. Right now, we have not seen anything from our customers that would change what's going on. I mean, our orders are coming in now as expected, and that may lead into one of your next questions, which is that's why we have essentially kept our guidance the same for this year of $625 million to $650 million because we are pretty much on track.

[Christopher Muse, Evercore ISI]

Okay. Very good. I guess a longer-term question, as you prepare for the launch of blue and commercialization in 2024, how should we think about the implications to your financial model in '23 perhaps or into '24. What should we be thinking about whether it's from an investment perspective or an OpEx perspective?

[Steven Abramson, President, CEO & Director]

Well, right now, C.J., we're really focusing on the technical progress to get to the commercial -- hit the targets at the end of this year and get the commercial blue in 2024. The -- we believe it's going to be a significant new revenue opportunity. You may see some stuff in 2023, but we think it's really going to be a 2024 event, and we think it's going to be significant.

[Operator]

Our next question is from Sidney Ho with Deutsche Bank.

[Sidney Ho, Deutsche Bank]

I want to follow up on the blue emitter side. Now that you announced the timing of blue, for the last few months, do you have any additional color that you can provide in terms of customer development, timing of ramp? Do you get a sense from customers how they plan to adopt blue in the product lineup? And do they tend to ramp up all the SKUs at the same time or just pacing it out or any kind of comparisons with the red and green emitters in the past would be helpful.

[Steven Abramson, President, CEO & Director]

Sidney, those are all really good questions, and there is very strong interest in the industry for our blue phosphorescence. The questions you asked, unfortunately, are really questions for our customers and our conversations with them are confidential. So we really can't answer those questions specifically. The -- we believe that the significant value of all-phosphorescent stock is going to unlock a vast array of opportunities across a broad range of OLED applications from small to medium to large consumer products.

[Sidney Ho, Deutsche Bank]

Okay. That's helpful. Maybe my follow-up question is the other technology, the OVJP side. I know it's still a few years away from being ready and there's a lot of progress being made. When I think of OVJP, I think of it as a technology mostly associated with large displays and specifically related to TV. How do you think OVJP, is it in an [indiscernible] IT market as well? Does that make sense from a cost perspective or a performance standpoint? And if so, does that accelerate the deployment of that technology?

[Steven Abramson, President, CEO & Director]

Sure. We're really focusing on TVs, large-area TVs, work and 8K types. It -- our current focus is on the large area TVs. It may -- the market opportunities may go beyond OLED TVs, but that seems to be -- that is the initial target market that we're focusing on.

[Operator]

[Operator Instructions]. Our next question is from Atif Malik with Citi.

[Atif Malik, Citigroup]

My first question is -- and are you seeing or did you see any impact from the lockdowns in China? Are any of your customers changing their buying because of the lockdowns in China?

[Steven Abramson, President, CEO & Director]

So far, we are not seeing any impact on us from the Chinese lockdowns. But this is one of the headwinds that we have been keeping an eye on. So we'll see what happens.

[Atif Malik, Citigroup]

Great. And my next question is what's being called the fourth generation of OLED materials, hyperfluorescent materials, there is a startup company that's talking about this HF technology being superior to phosphorescent materials because it does not require any heavy metals or rare earth elements. So just curious on your comments on this next generation of OLED materials. And are you working on something similar in-house?

[Steven Abramson, President, CEO & Director]

We are focused on phosphorescence. We believe that, that is the best technology. It's been in products for almost 20 years. And frankly, as the leader in this industry, we understand where the benchmarks for a number of R&D companies and their laboratory research experiments. But we are technology has been commercial for a long time, and we believe that it will be the gold standard for the foreseeable future.

[Operator]

Our next question is from Mehdi Hosseini with SIG.

[Mehdi Hosseini, Susquehanna Financial Group]

Yes. Most of my questions have been answered. I just have a follow-up. Just wanted to see what the team is thinking about the more than $14 per cash and your ability to generate a lot more cash. Do you have any plans in more aggressive in capital return or investment in other areas? Any insight would be great given your free cash flow margin and what you already have on the balance sheet?

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

And at this moment, we believe that quarterly cash dividend is the best way to return cash to our shareholders. And it is something this allocation is something that we look at every quarter. And we're also looking for opportunities, whether it's acquisitions or acquiring IP or companies is something that we are always looking at and trying to do something that will help move the technology and the company and OLEDs forward.

[Mehdi Hosseini, Susquehanna Financial Group]

Sure. Would it be fair to assume that your core technology and IPs can be theoretically applied to other applications other than display?

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

There are -- we're looking at lighting. We're looking at other opportunities for organic, electronics and solar cell technology, life sciences. There are a number of different areas that thin film technology and particularly our phosphorescent and OLEDs may have opportunities as the industry and we become more mature.

[Operator]

Our next question is from Brian Lee with Goldman Sachs.

[Brian Lee, Goldman Sachs Group]

And I had to hop on a little bit late, so I apologize if some of this is redundant. I guess maybe starting off with the -- your #1 customer, Samsung, I know the contract seems to be getting more attention just given the time line around it. So any high-level thoughts you can share would be helpful just around the renewal agreement? Or would you anticipate now that you continue to expect blue specs to get achieved later this year that you start working on a new agreement for a portfolio license, just given the historical precedent for how long it's taken for you to get deals signed with this customer in the past?

[Steven Abramson, President, CEO & Director]

Well, Brian, as you know, we've had a long and strong partnership with Samsung for about 20 years. We signed multiple agreements with them, and we plan to continue to work -- working with them for the foreseeable future. But of course, until anything is finalized, we can't comment on the status.

[Brian Lee, Goldman Sachs Group]

All right. Fair enough. I appreciate that, that color, Steve. On the -- I guess, staying on the topic, the blue phosphorescent again, I'm sure a lot of this has been asked already. But on the specs, you're reiterating the view that you'll achieve them by the end of this year and you announced this obviously, last quarter. It seemed like it was a bit of a surprise just given the amount of sort of finite time line you put around it. So I'd be curious what customer feedback has been since the announcement last quarter? And anything kind of quantifiable maybe if you're seeing more sampling activity or you're seeing any discussions around preliminary pricing here for the blue phosphorescence?

[Steven Abramson, President, CEO & Director]

Well, Blue phosphorescent has been something the industry has been waiting for, for a long time. And they are very excited to be working with us on Blue phosphorescence and working towards the commercialization efforts. So all of our customers are interested for various products.

[Brian Lee, Goldman Sachs Group]

But would you say there's any sort of change in the discussions just given your update to the market and to the industry 3 months ago?

[Steven Abramson, President, CEO & Director]

I think that what I would say is there's been more interest as we continue to move forward. As we continue to make progress, continue to talk to our customers, there's additional levels of enhanced interest in it because as we talked about previously, we have ongoing R&D programs with multiple customers.

[Brian Lee, Goldman Sachs Group]

Okay. That's great. And then just last one on the model here. The Adesis margins, I noticed a little bit lower, sub-20% here, they had been kind of tracking pretty consistently in the 30%-plus range for the past couple of years. Anything to read into that? Is there something mix related or something in the quarter that might have taken those margins down? And is this a onetime anomaly? Or should we expect this level of margins going forward for this part of the business?

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Yes. Adesis margins, they can fluctuate. Based upon contracts and timing of some of the expenses, we anticipate that Adesis revenues will grow this year, we don't see anything really different than historical amounts.

[Brian Lee, Goldman Sachs Group]

And Sid while I have you, could you remind us what is the thesis relationship? Or sort of can you contextualize where they fit into the grand scheme of things when it comes to your blue commercialization and ramp-up efforts?

[Steven Abramson, President, CEO & Director]

Well, most of the Adesis technical people are working on phosphorescent materials, and they are an integral part of our chemistry team, which includes what we're doing on.

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Yes. The revenue and expenses that we report are the CRO part of the business, which is a contract research organization, all of the other stuff just falls into underneath UDC.

[Operator]

This concludes our question-and-answer session. I would like to turn the program back over to Sid Rosenblatt for any additional or closing remarks.

[Sidney Rosenblatt, EVP, CFO, Treasurer, Secretary & Director]

Thank you all for your interest and time tonight, and I wish you all a good night. Thank you.

[Operator]

This concludes today's conference. You may now disconnect.