Universal Display Corp

NASDAQ:OLED

Earnings Call Analysis

OLED Growth and Technology Innovation Drive Performance

Universal Display Corporation (UDC) reported a third quarter revenue of $141 million, with $52 million in net income, equating to $1.08 per diluted share. They narrowed their full-year revenue guidance to $565-$590 million. The company is riding on the wave of foldable phone adoption, with a 28% growth to 16.4 million units in 2023 and estimates surpassing 100 million units by 2027. The OLED IT segment forecasts robust growth, more than doubling to 18.8 million units in 2024, and OLED TV units are expected to grow at a 13% CAGR to 9.2 million units by 2027. Automotive OLEDs are predicted to capture about 10% of the display market by 2026. UDC plans to introduce an all-phosphorescent RGB stack in 2024, promising new opportunities for efficiency and performance.

Steady Financial Performance Amid Challenging Market Conditions

For the third quarter of 2023, the company reported $141 million in revenue, a downturn from $161 million in the same quarter of the previous year, reflecting a challenging market environment. The operating profit stood at $48 million with net income reaching $52 million, equating to $1.08 earnings per diluted share. This performance, although slightly lower compared to the $53 million net income or $1.12 per diluted share the year before, showcases a stable financial position with a manageable year-over-year reduction.

OLED Market Trends Reveal Diverse Growth Drivers

The OLED industry is amidst a form factor revolution, with technological shifts towards conformable, foldable, and rollable electronics, where OLED's inherent flexibility propels its use across a wide array of applications. Foldable phones, for instance, are gaining traction, with forecasts indicating a 28% year-over-year growth to 16.4 million units in 2023 and potential to surpass 100 million units by 2027. The IT sector is also a burgeoning market for OLED, with expectations of a 41% average annual growth rate, reaching 31.3 million units by 2027. In both the TV and automotive industries, where OLED penetration is relatively small, future growth is anticipated due to OLED's superior characteristics, which fuel consumer demand and industry innovations.

Advancement in OLED Material Technologies

The company continues to make strides in enhancing its OLED materials and technologies, with emphasis on developing a commercial phosphorescent blue emissive system and preparing for the 2024 commercial launch of its all-phosphorescent red, green, and blue (RGB) stack. This innovation is expected to significantly boost energy efficiency and performance across various OLED applications. Additionally, progress is underway for the company's groundbreaking OBJP system, although its mainstream launch is a few years away.

Financial Details and Revised 2023 Guidance

As investors dissect the company's financial details for Q3 2023, they will note total gross margins of 76%, a marginal decrease compared to 77% in Q3 2022. OLED material gross margins improved to 66% from 60% in the same quarter the previous year. Operating expenses are projected to rise by a low single-digit percentage year-over-year, with a reduced income tax rate influenced by recent IRS regulations. Looking forward into the fiscal year, expected total gross margins are forecasted at approximately 76% to 77%. Meanwhile, the company's cash reserves are substantial at roughly $779 million. With revisions to the annual revenue guidance narrowed to $565 million to $590 million, investors are provided with a more focused outlook on expected financial performance. Lastly, a commitment to shareholder returns is evident with the announcement of a $0.35 quarterly dividend to be paid out in late December 2023.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to Universal Display Corporation's Third Quarter 2023 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is recorded for replay purposes.

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

[Darice Liu, executive]

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

Before Steve begins, let me remind you 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 November 2, 2023.

During this call, we may be 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 V. Abramson, executive]

Thanks, Darice, and welcome to everyone on today's call.

For the third quarter of 2023, we reported revenue of $141 million, operating profit of $48 million and net income was $52 million or $1.08 per diluted share. For the year, we are further narrowing our revenue guidance range. Our updated range is $565 million to $590 million.

As we look ahead, the OLED industry has multiple market verticals driving its long-term growth path. The significant shift in the world of technology is occurring with the introduction of conformable, foldable and rollable consumer electronics, and OLEDs are fueling this form factor revolution. Since our inception, UDC has envisioned the future where OLED enable flexible displays to become part of the everyday life of consumers around the world. OLEDs are inherently flexible, bendable and stretchable, making them the ideal display technology across a vast array of applications. With more devices using flexible OLED displays, consumers are seeing more adaptable product with fresh designs and new productivity features and functions.

Foldable phones have been a bright light in this year's smartphone market. Market research from GSCC estimates that as more brands enter the foldable market and existing brands introduce more foldable products, 36 different foldable phones will ship this year compared to 19 in 2022. Some of those brands include Samsung, Google, Huawei, Vivo, Honor and Uppal. GSCC forecast of foldable phones will increase 28% year-over-year to 16.4 million units in 2023. According to Counterpoint Research, foldable smartphone shipments are expected to exceed 100 million units by 2027.

In addition to foldable smartphones, panel makers are developing foldable IT panels. In late September, LG Display announced it would start mass-producing 17-inch foldable IT panels for notebooks. Initial products include LG's Gram phone and HP Spectre phone.

Speaking of IT, with OLED is only about 2% of the IT market today, this market segment offers a tremendous opportunity for growth. We believe that a significant new OLED IT adoption cycle will begin next year. UBI market research forecasts that OLED IT shipments of tablet PCs, notebooks and monitors will more than double from this year's 7.9 million units to 18.8 million units in 2024 and will reach 31.3 million units in 2027, translating into an average annual growth rate of 41% over the 4-year period. UBI also recently reported that Samsung Display is expected to start production of its Gen 8.6 line for IT devices in the first half of 2026. The market research firm also noted that LG Display and BOE are expected to invest in Gen 8.6 for IT.

Moving up the scale to OLED TVs, which are only about 3% of the total TV market, growth in this segment is expected to resume in 2024. The SEC forecasts that OLED TV units will grow at a 13% CAGR from 2023 to 2027 to 9.2 million units. Consumer reports once again ranked OLED TVs as the best TVs in the market. With the brilliant color, fast refresh rate, a 180-degree viewing angle, high contrast ratio, thin form factor and other benefits, it's not surprising that OLED TVs are considered the best of the best.

Another exciting and emerging opportunity for OLED is the automotive industry. During the quarter, Audi unveiled that its upcoming 2025 Q6 E-tron EV SUV will include 2 OLED displays, an 11.9-inch gauge cluster and a 14.5-inch infotainment touch screen. In the 2025 Mini Cooper EV, a 9.4 inch circular OLED interface display is centered on the dash. Leading Chinese EV maker, BYD, through its sub-brand Yonggang, launched the UA Premium Edition EV SUV that features a 12.8-inch OLED central screen on its dash. And Hyundai unveiled a newly redesigned Genesis GVADSUV with a 27-inch OLED display that integrates the instrument panel and central display screen.

Market research firm TrendForce notes that automotive displays, including rear seat entertainment screens, passenger side displays, central information displays and digital clusters are evolving into a more powerful communication mediums. Additionally, to integrate the various independent functions found in a traditional cockpit, larger screens and more flexible spatial designs are vital. TrendForce forecasts that OLED automotive panels will continue to grow and could capture approximately 10% of the automotive display market by 2026.

Why the growing interest in OLED for the automotive market? Well, I learn a OLED displays are lighter or more flexible than traditional displays. OLED displays using our energy-efficient phosphorescent materials require less power, which makes OLED the ideal displays for electric vehicles. OLEDs can also be designed into various shapes and form factors, have a wider temperature range and provide exceptional clarity whether it's day or night. OLEDs in the automotive market also encompass OLED lighting. Audi featured OLED taillights in its A8 and smaller Q5 crossover. And most recently, Audi expanded OLED taillights to its 2024 Q8 SUV.

As OLED activity continues to expand across the consumer display and lighting landscapes, we remain steadfast in our commitment to advancing our robust OLED materials and technology leadership. We continuously push the boundaries of what we can achieve and our unwavering dedication to delivering best-in-class products to our customers is our guiding light.

With our deep and extensive experience and cutting-edge know-how of nearly 30 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 continue to believe that we are on track to introduce our all-phosphorescent RGB stack into the commercial market in 2024. We believe that the introduction of our full suite of red, green and blue phosphorescent emissive materials 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 notable progress with constructing the key subsystems for our OVJP alpha system design. The completion of these subsystems is a crucial 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 a low-cost, highly efficient, dry-printed RGB side-by-side OLED TV manufacturing platform.

And on that note, let me turn the call over to Brian.

[Brian Millard, executive]

Thank you, Steve. And again, thank you, everyone, for joining our call today. Our third quarter revenue was $141 million compared to $161 million in the third quarter of 2022. Material sales were $92 million in the third quarter compared to material sales of $84 million in the third quarter of last year. Green emitter sales, which include our yellow green emitters, were $69 million. This compares to $64 million in the third quarter of 2022. Red emitter sales were $22 million. This compares to $20 million in the third quarter of 2022. As it has been discussed in the past, material buying patterns can vary quarter-to-quarter.

Third quarter royalty and license fees were $46 million compared to the prior year period of $71 million. The year-over-year $25 million decline was due to a few primary factors. One is customer mix. Additionally, the cumulative catch-up adjustments, the majority of which are recorded to royalty and license fees, decreased by $8 million between periods. And finally, Q3 this year had a lower average contract royalty and license fee per gram for certain customers as a result of an increase in estimated demand over the remaining lives of their contracts. For the full year, we continue to expect the ratio of material sales for royalty and license fees to be in the ballpark of 1.5:1.

Adesis third quarter revenue was $2.7 million compared to $4.9 million from the comparable period in 2022.

Third quarter cost of sales in 2023 was $34 million compared to $37 million in the third quarter of 2022. This translates into total gross margins of 76% in the third quarter of 2023 compared to 77% in the third quarter of 2022. Third quarter OLED material gross margins were 66%. This compares to material gross margins of 60% in the third quarter of 2022. For the full year of 2023, we now expect total gross margins to be approximately in the range of 76% to 77%.

Third quarter operating expenses, excluding cost of sales, were $58 million. In the third quarter of 2022, it was $55 million. For the full year of 2023, we now expect operating expenses to be up by a low single-digit percentage year-over-year.

Operating income was $48 million in the third quarter, translating into operating margin of 34%. This compares to the prior year period of $68 million and operating margin of 43%.

The third quarter income tax rate was 4.4%. This lower tax rate was primarily due to a recent change in IRS regulations that now allows certain foreign withholding taxes to be credited against U.S. income for 2022 and 2023. For the full year of 2023, we now expect our tax rate for the year to be in the range of 17% to 19%.

Third quarter 2023 net income was $52 million or $1.08 per diluted share. This compares to $53 million or $1.12 per diluted share in the comparable period in 2022.

During the quarter, we purchased our Shannon manufacturing site for $14 million. For the year, our capital expenditures are expected to be approximately $60 million.

We ended the quarter with approximately $779 million in cash, cash equivalents and investments.

Regarding our 2023 guidance, as Steve mentioned, we are revising our revenue forecast by narrowing guidance to a range of $565 million to $590 million.

And lastly, our Board of Directors approved a $0.35 quarterly dividend, which will be paid on December 29, 2023, to stockholders of record as of the close of business on December 15, 2023. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.

With that, I'll turn the call back to Steve.

[Steven V. Abramson, executive]

Thanks, Brian. Innovation, collaboration, inclusion and sustainability are the primary pillars that drive UDC and our people. Innovation is part of the company's DNA. It is what propels us forward, opens the door to new opportunities and reinforces our position as a leader in the OLED industry. We foster a culture of continuous innovation, and innovation thrives on collaboration. UDC's diverse and talented team work together to provoke and exchange ideas and solutions. With our growing portfolio of new and next-generation energy-efficient materials and technologies, we are making a positive impact towards a sustainable future.

In recent months, we have been recognized for these principles. We were awarded a silver rating for corporate social responsibility from EcoVadis, a leading provider of business sustainability ratings. We were named to Newsweek's 2024 list of America's Greenest Companies, placing UDC among the top 300 companies in the U.S. for its commitment to being good stewards of the environment. We're also recognized by the Forum of Executive Women and the Executive Women of New Jersey for Board diversity. Led by our corporate culture that celebrates inventiveness, integrity, inclusion and imagination, we are proud of the diverse and dynamic global UDC team.

I would like 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 Brian Lee with Goldman Sachs.

[Brian Lee, analyst]

Sorry if I missed this, but I think, if I back into Blue, maybe you just stated it outright, but Blue was $1.5 million of revenue in the quarter. Is that correct, number one? And then I know you've been saying it's going to be lumpy until you get to full commercialization scale? What would you expect kind of near-term trends? Or are we going to see that kind of start to pick up off of the level you saw here?

[Brian Millard, executive]

Yes. Thanks, Brian. Yes, as you indicated, Blue sales for Q3 were $1.5 million. So that brings the total for year-to-date to $4.3 million, so certainly a positive trend over the course of the year. But it is going to be variable quarter-to-quarter as we continue to move forward closer to the commercial launch. So no specific guidance to give, but it's going to be a variable result from here to commercialization.

[Brian Lee, analyst]

Okay. Fair enough. And then I guess you kind of headed it off in your prepared remarks, Brian, but just trying to unpackage the mix between materials and royalty and license. A couple of questions there. I guess, first off, this was a record quarter for you guys in terms of materials revenue. Seasonally speaking, the past couple of years, you've seen Q4 of off Q2 -- or Q4 off of Q3, but I know in the past, you've talked about seasonal downtick. Is this more of a normal year where you expect materials revenue to kind of be seasonally down into Q4? And was there maybe any pull forward that helped the number be so strong in Q3?

[Brian Millard, executive]

Yes. So thanks, Brian. I think as you said, the ratio for the third quarter in terms of the materials to royalty and licensing, it was 2:1, which is much higher than it's been in prior periods. A couple of factors there. One is customer mix, as I said in my prepared remarks, that we just had a different customer mix this period. We also had a situation that as we went through the quarter on the royalty and license side, we had a larger volume expectation over the remainder of certain customer contracts. And so that has an impact of lowering the ASP on the royalty and license side per unit. And then on the material side, we also had a situation where we had an expectation that some newer, kind of next-generation materials will be used by our customers over the remainder of their contract. So that has a favorable ASP increase on the material side. So those are a number of factors kind of going the same direction that caused the ratio to fluctuate a bit this period.

[Brian Lee, analyst]

Okay. And then maybe just a couple of last ones and then I'll pass it on. You mentioned the ratio should get back to 1.5:1. Is that starting in Q4? Or is that more of a 2024 comment? .

[Brian Millard, executive]

Yes, that was a '23 comment. So we expect for the full year to be 1.5:1. And on a year-to-date basis through Q3, it is 1.5:1, and we expect Q4 to be similar in terms of 1.5:1.

[Brian Lee, analyst]

Understood. And then last 1 for me. I know you've talked about the past in terms of ASC 606 accounting and how the royalty and license rev rec is tied to materials expectations. So is this volume projections under those material purchase contracts just moving out and to the right? Or did you actually take volume expectations up in some of these contracts and some of that volume is just kind of in the latter half of those contracts, and that's why the upfront royalty licensing recognition is smaller here in the quarter? Just understanding whether this is just timing or there's also volume in aggregate also in question.

[Brian Millard, executive]

Yes. So it was really a change in estimate from what we had estimated at Q2 relative to Q3. So an increase in our estimate of volumes over certain customer contracts over the remaining term of their agreements.

[Brian Lee, analyst]

Okay. Fair enough. I will pass it on.

[Brian Millard, executive]

Thanks.

[Operator]

Our next question is from Krish Sankar with Cowen.

[Unknown Analyst]

This is Eddie for Chris. I have a question on the OLED tablet ramp. I'm wondering if you can take our hand and guide us through the linearity of revenues coming from that product next year. Like, will it be back half weighted or more evenly spread out? And wondering if you can give us any color about the incremental revenue opportunity from that product next year.

[Brian Millard, executive]

Yes. I think certainly, we've been saying for a number of quarters now that we think 2024 is a pivotal year for the IT market. Certainly, tablets are a key part of that segment. So we expect a positive trend heading into next year in that area. Hard to put an exact percentage or dollar figure to it at this point, but we know there's positive momentum behind the IT segment as we go into '24.

[Unknown Analyst]

Got it. And I understand you won't be guiding for 2024, but wondering whether you're saying consensus estimates of up high teens for revenues is renewable given the tablet and the Blue product ramp next year?

[Brian Millard, executive]

Yes. I mean, I think we'll give full guide on '24 when we get into February and do our year-end call with you guys, and we'll give a full guidance at that point. I think at this stage, the best information we can say is that we expect 2024 to be a growth year and to be up relative to '23, but we'll give more info in February on that.

[Unknown Analyst]

I understand. That's helpful. And just last thing, looking at deferred revenues, it seems they were up $37 million quarter-over-quarter, like they more than doubled. Can you share some reasons behind that? Is it related to blue or the tablet or is there any other reason? That's it for me.

[Brian Millard, executive]

Yes, we had an increase in both accounts receivable and deferred revenue in the period, and that's due to a milestone that we hit on one of our contracts. So that was a billing milestone. So the increased AR and increased deferred revenue as that amount was uncollected as of the end of the period.

[Operator]

Our next question is from Jim Ricchiuti with Needham & Company.

[Chris Grenga, analyst]

This is Chris Grenga on for Jim. You mentioned that one of the tailwinds for material sales was the product mix for new generation. I'm just curious, our new generation materials a majority of material sales at this point? And then do you have any visibility into whether those types or that generation of emitters is going to be used in IT and automotive applications? Or will that be one of the former generations? Any insights that you could provide there would be helpful.

[Brian Millard, executive]

Chris, yes. I guess the comment we were making was more about as we introduced next-generation materials as our customers introduce new materials into their product portfolios that tends to start at a higher price once it's commercially launched and then work its way down as they purchase additional volumes. So I think that was more just a matter of weeks. And that's across a variety of applications, not unique to 1 particular segment.

[Chris Grenga, analyst]

Got it. And I guess it was reported recently that one of your larger customers is looking to adopt a maskless process in the production of panels. I'm just curious, does maskless have any meaningful impact on the amount of material consumed versus existing process? And is OVJP technology something that could potentially fit that description for a maskless process?

[Steven V. Abramson, executive]

Well, the new manufacturing technology is introduced. We'd have to take a look and see what the effect would be on the material consumption. And so we'll have to see how that plays out. In general, everybody wants to use our materials, whatever their production technology is. OVJP is a printing technology. So yes, it would be maskless. [Operator Instructions]

[Operator]

[Operator Instructions] Our next question comes from Sidney Ho with Deutsche Bank.

[Unknown Analyst]

This is Jamal on for Sydney. First question on gross margin, Brian, maybe if you can walk us through some of the puts and takes on gross margin for the next quarter. And then just to follow up, how do you get back to that sort of long-term target range of 77% to 78% for gross margin?

[Brian Millard, executive]

So we did update slightly our expectation for the year. Now we expect 76% to 77% for the year, and that's largely due to we had $2.5 million of inventory provisions that we had to put up in Q3 as we went through our evaluation of inventory on hand. So that's really what resulted in the tweak this quarter. We always are identifying opportunities, cost reduction opportunities, and making sure that we're being thoughtful as we go through contract negotiations in terms of gross margin. So we're obviously doing everything we can to increase it. I think that as volumes continue to increase in the years ahead, we also have the impact of volume pricing dynamics as well as certain input costs to our materials that have varied and increased in certain areas over the course of time, but it's something we focus a lot of attention on.

[Unknown Analyst]

Okay. That's very clear. And then my second question on, I guess, Tandem OLED. We've been hearing a little bit more about the adoption within certain IT devices. Can you just walk us through sort of the implications on your business given the central adoption of this 2-stack structure?

[Brian Millard, executive]

It's certainly an incremental opportunity because of the increased volumes of our material that would be needed in a Tandem structure. It's hard to say right now what the multiplier is there. It's somewhere between 1 and 2x, but we really won't know until we see some of those products come closer to market and be able to provide some insight on that.

[Unknown Analyst]

That's fair.

[Operator]

Our next question is from Martin Yang with Oppenheimer & Co.

[Martin Yang, analyst]

First question on contract reinsurance revenues. Can you maybe talk about what contributed to the volatility in that revenue? And why was it down versus the past few quarters? .

[Brian Millard, executive]

Yes. So those are our DSS revenues, our DSS subsidiary. Their performance in the quarter was a little bit variable. There were just some timing issues that impacted that business in Q3. We do expect for Q4 for them to kind of get back on track with the recent run rate. And for 2024, we also expect them to have growth off of where they are this year.

[Martin Yang, analyst]

Got it. And second question is, can you talk about the impact on utilization charges for Shannon after that facility is purchased? Should we expect no more similar charges after the acquisition is done?

[Brian Millard, executive]

So the acquisition didn't have an impact on the utilization or underutilization of the site. But independent of the acquisition, we actually were able to utilize Shannon to a greater degree in Q3, and we also expect in Q4 to utilize it to a greater degree. So the underutilization for all of Q3 was $2 million, which is much less than it's been in other recent quarters.

[Martin Yang, analyst]

A follow-up on that, would you say that the underutilization at Shannon during 3Q was less comparing to 2Q? So did Shannon perform better than expected?

[Brian Millard, executive]

Yes. Absolutely. Our underutilization costs that we recorded in Q3 were $2 million. And in the prior quarter, they were approximately, I believe, slightly over $4 million. So it is a decreasing trend. And as we head into next year, we also expect to be able to continue to utilize Shannon to a greater degree next year as well as in the years beyond that. It's a great capability, excellent part of our manufacturing network, and we expect to be able to utilize it to a greater degree as our business continues to grow.

[Operator]

This will conclude the question-and-answer session. I would like to turn the call back over to Brian Millard for any additional or closing remarks.

[Brian Millard, executive]

Thank you for your time today. We appreciate your interest and support. Have a good evening.

[Operator]

Thank you. This will conclude today's conference. You now may disconnect your lines.