Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Okay. Good morning, everyone. My name is Jim Ricchiuti. I'm with the Equity Research department in Needham & Company. I've been following Universal Display for a number of years. We're very pleased to have with us today the company's CFO, Sid Rosenblatt. Sid, welcome. Also have Darice Liu in front row here, who heads up IR at Universal Display. And I go out on a limb and say that probably most everyone in this room knows Universal Display. So maybe in the interest of time, we can jump right into Q&A, if that's okay. And we'll leave some time for you folks if you want to ask some questions.

But I guess, a question I wanted to start off with, Sid, is that generally, this time of the year, the beginning of the year, as you report Q4, you provide a revenue outlook. And so you look back over the last couple of years, a fair amount of variability in that forecast, both upwards and downwards. 2018 was down, 2019 when you report, we think is going to be up sharply. So that as kind of this backdrop, well, what I'm trying to find out is if you look at the business today and look at the size, the customer base, the diversity of it, is there anything you can tell us that makes the business more predictable?

Well, that's -- obviously, it's been difficult in terms of being able to predict, giving guidance, future guidance for the year. It is -- even though there's about $30 billion worth of OLED displays sold, it is a new industry. And we are not an end manufacturer of the products. So we are not the ones that are actually selling the products. So we're part of the supply chain. So as demand goes up and down to our customers, it affects us. So that makes it very difficult to predict. And as you said, we've had one down year, one up year significantly. To some extent, the change in accounting rules have exacerbated that problem. So 2018 was down significantly under the new 606 guidelines. Under 605, it was a lot higher. So it's still going to be significantly up this year over last year, and there are a couple of things that happened in 2017 that really impacted us. So 2018 was really a difficult year to predict because of some of the things that happened at Samsung at the end of 2017, negotiating a new contract and then the smartphone market being really soft. With all of that, do we have better visibility? Probably better than we have had, but not -- it's still a new market. We still have our customers, we have customers that are just building fabs. When those fabs actually get turned on and when they start producing product, you've heard LG's OLED TV facility, it's been reported all over the place that it's not producing when they first anticipated it. So all of those things go into our guidance. So to give you a long answer to your question, it should be better, but it's still not -- we're still not at a point where we can sit there and give you a number that's within 10% to be on that.

Fair, fair answer. You have added a number of customers, new customers in China. They've grown in importance over the past year, clearly. Is the relationship with some of these customers, the communication, the forecasting of that business with them, is it -- how does that compare with some of the more established guys, the LGs, the Samsungs of the world?

It's the same thing for them, I'll be perfectly honest, because they're just getting started. We know that the ramp-up and introduction of new displays and new materials, it still takes a long time. There's a long learning curve to get all of your OLED factory at a place where your yields are at a point where you're comfortable selling products. So there is -- we have good relationships with all of our customers, I mean, we had constant discussions on an R&D level, on a purchasing level, at a CEO level and Chief Technology Officer level, and they will give us their best forecast. But none of them are binding, and their best forecast is as good as what the end market looks like.

Okay. So do you want it quickly?

Sure.

Can you talk about the 2020 and the [indiscernible] for example, just smart [indiscernible]?

Okay. Well, a couple of things. One, we will give full year's guidance -- should be bigger. We will give full year's guidance on our conference call at the end of February. And where we actually see for 2020 for the smartphone market, IHS talks about 600 million units from about 475 million to 500 million in 2019. So we see growth on the smartphone side. To be honest, a lot of that is probably going to come from BOE, because this BOE stab is going to be up and running. The other part will come maybe from yield improvements or utilization improvements at Samsung, which is a supplier of most of the smartphones today. On the TV side, LG has talked about -- LG's new facilities should come up online, probably in Q2, sometime. That's what they've talked about recently. So we think that the TV market, I think, this year will grow, I think, by 1 million units or 1.5 million units over 2019. So we do see growth on both sides, and that's where we will see the growth in our business.

Sid, where do we go in terms of penetration rates in handset? Morgan has some of the forecasts -- are 50%, north of 50% over the next couple of years. There's that. And there's also the -- what are the implications from 5G? I mean we're hearing 5G in a lot of the sessions. What's your take on what it potentially does for that core part of your business?

Right. The thing that you hear across the board is that 5G is going to use a lot more energy. It's -- the mobile devices are going to have to be more efficient because they are going to use a lot more power, because the speed is so much faster. And for us, 2 things. One, customers are asking us for better materials that we're providing in terms of efficiency of the materials, whether it's our red materials and green materials. And the second part, which I'm certain is one of your questions in here, is talking about blue and the fact that the fluorescent blue is not that efficient. So when will we have a phosphorescent blue, which when Samsung adopted our green in 2013, they stated they got a 25% increase in battery life. So we believe that they will get at least that when they adopt our blue. The question is when will we have a blue? And it's something that's going on. I -- we get this question quite a bit. We actually get it more from our customers than we do from you guys, and you guys always ask it. So...

Do you tell them the excellent progress?

Absolutely. Always. No, they actually get a lot more information. So -- and we are doing our best. Obviously, it's something we think is very important. We have more than 100 people of our 300 people working on blue materials, whether it is the emissive side, whether it's the transport materials, whether it's host materials. We work across the board to come up with a solution that will allow them to adopt phosphorescent blue into the -- whatever generation product we think we'll have it ready for. That's I think what's your next question.

Well, I mean, no, I wanted to go back to the green adoption and how quickly that was adopted. And if you have a breakthrough on blue...

I wouldn't take...

Would we assume that we'd see that kind of an adoption, similar adoption?

It is -- the adoption would have to be -- you have to redesign your driving [ scene ]. So you can't just substitute a phosphorescent blue material into a device that has a fluorescent blue material in it today because it uses 75% less power. So that your TFT has to be redesigned to drive some blue pixels differently. So it would be the next-generation product that it would be adopted, and you wouldn't go back and retrofit anything. So it would be the next generation and next generation and next generation.

Okay. But generally speaking, the move towards more 5G handsets over time should, it sounds like drive adoption, I assume that's what you're hearing from your customers?

Yes, absolutely.

Okay. Good. So one of the other questions I get sometimes is with the growth in production and the number of customers in China, you see more mainstream applications, adoption in the handset market. The question comes, what about volume discounts? To what extent, as the market, like would you see penetration rates will really increase? At what point does that exert more pressure on you guys from a pricing standpoint?

There's a couple of answers to that. One, all of our long-term agreements have pricing built into the agreement. So we know what the price will be through the end of the agreement, for all of our long-term contracts that we have. So we know what the pricing will be. The second piece, though, that impacts the financial results is under the new accounting rules of 606. For the long-term contracts, you have to estimate how much material you're going to sell over the life of the agreement. And what that price will be, even you adopt new materials in the way that our pricing structure works as you adopt a new material, you pay more money in the beginning until we then get the efficiencies of manufacturing and it drives it down. You get cumulative volume discounts. So you have to build all of that into a financial model, and then you use an average price for the life of the agreement. So even though I may sell it for 2x what the average is in the beginning, at some point, I'm going to sell for less than the average price. So that impacts our deferred revenue number. So there's a couple of things that impact our balance sheet: deferred revenue, which you get a big payment or you get licenses or royalties that are higher than what you report under 606. As you see, our cash being significantly coming in higher than what our revenue would generate now because you're seeing the deferred revenue and the balance sheet go up. Yes. So doesn't have as much impact as you think. So if a customer, purchasing agent and folks are -- what they are always saying, we need a discount, we need a discount when you -- so if you give the 1% or 2% or whatever it is they want on specific material, we know that the purchasing people are measured by getting the price down even though we're pennies in the device.

I was just going to say...

We're still...

Billing materials.

In the billing materials, it's estimated that our red and green emissive materials between $0.10 and $0.20. However, it is expensive per gram. We estimate that you can make, a few years ago, we estimate you can make 3,000 screens with 1 gram of our emissive material because the organic layer that actually lights up is 1/1,000 the thickness of a hair. So we don't use a lot of material. So when you talk to the purchasing agent, they'll say, "Yes, but it costs x per gram." And our answer is, "It's $0.10 and the billing material is $40." And so that's the push and pull that you get from that side. But that gets just built into the average. So it doesn't really impact it very much.

As the customer base has expanded, are you seeing different levels of just more variability in the inventory levels that these customers carry? Does it vary by customer significantly?

Yes. The inventory levels by customer vary. It really depends on what they're comfortable with. We have customers -- we've been working with Samsung since 2000. We've never missed a shipment to Samsung, but [indiscernible] someplace here. So we are -- they know that when they place an order, it's shipped within 24 hours. So will they keep 1 month? 2 months? It's really up to them. Obviously, it makes sense to have enough inventory in case something happens, that x goes on strike or something like that, you want to make sure you have it. Will they keep a year's worth of inventory? No.

And of course, last year, there was some indirect impact from the U.S.-China trade dispute, and that caused some pre-buying. I don't know if you can talk a little bit about that and potentially where we are and where are you seeing?

Yes. In Q2, we had some Chinese customers that purchased some excess inventory because they were concerned that the retaliatory tariffs that were going to be put in place when the U.S. raised its tariffs were going to cost them an extra either 10% or 25%, depending on where the material was. So they purchased excess inventory. It never really came to fruition that there's retaliatory tariffs kicked in, but there's always either geopolitical or there's issues that may make a customer buy more material than they normally would. But that's out of our control.

Right. Now I keep going back for the customers in China because they've become more and more important. I'm curious, broadly speaking, these customers and some are very sophisticated like BOE. But as they ramp the business, are you seeing a change from some of the newer customers in the learning curve to the OLED market? Because we've seen some, over the years, right, there's been a long...

I think it still is fairly long. It is not something that you could put the equipment in like an LCD. You build a new LCD fab, you know where everything goes, you buy all the material, you turn it on, you pretty much start producing product at a very high yield. There's still a lot that they have to do. As I said, the layers, 1/1,000 the thickness of a hair, the organic layer, which is all different materials. It's not just the emissive material. So it is a fairly complicated manufacturing process. Are they better? Yes, Samsung took years to get their yields down. That was on glass. They got their yields in excess of 90% on glass-based OLED displays. But their flexible displays, it's not -- they don't say it, but estimates are in the 70% for some range. So they're not at 100%, and they've been making OLED since 2000. So it is not simple.

Yes. Maybe we'll shift gears for a second and go to some of the larger screens. I think at least one market research firm, maybe others have lowered the forecast for OLED TVs. Yes. At the same time, you still see really good reviews in the press on these products. So -- and they were out in force in CES. What -- yes, how do OLED TVs really get to become a bigger part of this TV pie that everybody is interested in?

Well, it's estimated that LG Flex about 5.5 million to 6 million OLED TVs for 2020. The TV market is about 250 million units on an annual basis. The premium market is anywhere from 6 million units to 10 million units, which is the one that LG has targeted. You need more volume. Obviously, you need additional capacity. But OLED TVs have historically been rated the best TV ever. And even at CES, that's what you hear, it's the best TV ever. When you look at an OLED TV, you see much more natural colors, it isn't so bright that it hurts your eye. If you sit and watch a very bright LCD, it's too great. One that -- you see it in Costco and looks great, except they have fluorescent bites everywhere. And if they didn't have them bright, you wouldn't see them. So I think you are starting to see pricing. You got VIZIO that's been announced that they're going to introduce an OLED TV product or 2. I'm not sure exactly. They also talked about having a 48-inch OLED TV. And I think that's aimed at getting -- there's a $1,000 price point, and I think that people -- it used to be $1,000, now you've Costcos and buy it for $300. But if we get at $1,000 or less, I think people say that, that's much more mid-range market. So it's capacity. Right now, LG is the only player.

Yes. And the consumer awareness is built over the years. Maybe this is a good segue to OVJP. Maybe you could talk a little bit about that. What that potentially could mean for manufacturing large area screens?

Yes. We -- for large area displays for -- today, all mobile size screens use red, green and blue pixels. Self-emissive pixels to give you all the colors of the rainbow. But you have a red pixel, a blue pixel and a green pixel. For large area displays, such as LG, and we've talked about Samsung's quantum dot OLED is instead of red, green and blue because the manufacturing process of depositing red, green and blue for a large area, whether it's Gen 8.5 or even Gen 10, the deposition process using movable shadow mask just doesn't work. You can't scale that high. So what LG has done is they actually have a white OLED, and then they use color filters to give you red, green and blue that they use similar in LCD business. Pretty much the industry has talked about you really need to get red, green and blue direct materials on it to get your price, their costs down to get a better resolution. I mean the resolution, they make 8K resolution using this technology. So I don't think that's the driver, but it will be cost. And over the years, you have heard folks talk about inkjet printing. So instead of using a vacuum chamber, a red, a green, a blue vacuum chamber, you then heat the materials and you have your substrate, you put your green materials on your green pixel, you have the mask and move it. How can you do that in large scale on large areas? Printing was one of the methods that's been talked about for 15 years. If what you can do is inkjet print all across the substrate red, green and blue dots, very small dots, then you then would be able to get high volume, high throughput, high-yielding products. The problem over the years and still is it doesn't work. And we've talked about that for years because when you are putting these red, green and blue materials, you think about it, you want to do it in 2 minutes across a substrate that's the size of a garage door, and you have to -- these can't touch each other. And if you're talking about 4K resolutions, it's 90 dots per inch; you talk about 8K resolutions, it's 180 dots per inch. These materials, you can't have any overspray, because you can't have the red material go to the green material. And so it's very difficult. We looked at that, we worked with Seiko Epson for 5 years, and we gave up. They gave up. So we said, let's try to figure out a way of using the best of both. So we actually have what's called organic vapor jet printing. We heat these materials in the vacuum chamber, in the source. And then we take this vapor stream, not the liquid, but a vapor stream, just like you would in VTE, and then use an inner gas to put these materials where you want them. We have a prototype tool. We have lots of patents around this. We have a prototype tool that can make a 6-inch full color display using this process. And we have found today that everything we believe is true that you can scale this. We need to do that. We will do it with a partner. We're not going to become an equipment company.

Right. You need an equipment partner. So maybe where are you with respect to...

You either need an equipment company, or multiple equipment company or a customer who says, "You know what, we want to scale it." So we're working at all of them. I mean we really want to spend this year now that we have our pilot tool in place to show the customers and show the equipment guys, look, this is what you can do with this. You can do it. You cannot have overspray, you can get high yielding, you can -- the tack time could be very fast. So that's where we are. We don't -- I don't have an update for you today, but we're working towards getting something done probably this year.

Okay. You touched on QD-OLEDs, and there's been a lot of press around that at CES. And you see headlines about Samsung making $11 billion investments in that. Why don't you talk a little bit about -- is that an opportunity or is it really all dependent on the time line of when you might commercialize them?

Well, QD-OLED, as I said, LG uses white with a color filter. Samsung's TV approach is using a blue OLED material. Using quantum dot materials for red and green, the blue OLED pumps the red and green, so you get all 3 colors. And today, the blue that meets commercial specs is a fluorescent blue. So the opportunity for us, obviously, is to get a commercial blue, and then be able to put that into the next-generation product, because even for large area displays, efficiency is important. Since we use 70% less power than a fluorescent emitter for battery life, it's great. For mobile devices, you want to do that. For TV, though, for large area displays, your issue is heat. So you want to be able to manage the heat in the device because when you have 2 million pixels on the screen, even though they use very little heat, that many pixels generates heat. So you have to spend money on heat management, copper heating or whatever it is you want to do. And so they want efficient materials for TVs just as much as they wanted for mobile devices.

The -- years ago, we saw plasma displays by LCD. If we look at this market, the premium TV market and look at OLEDs, and even if you want to look at MicroLEDs, can these -- the new Samsung display technology, can they coexist? Or is it -- are we going to see the market eventually move towards at the higher end? LCDs aren't going away, obviously.

LCDs are not going to go away. I mean there's still [ AD ] LCD fabs around the world, they're still making them and are making them cheap. No one is making money on them. So that's why a lot of guys are shuttering their LCD fabs because if you're doing it for your cash cost, why bother? I think there's room in the market for multiple plasma TVs where there actually still have a plasma TV. That's a great picture. I never like the LCDs. So -- and so there's an opportunity. It's not OLED or nothing, and it's not LCD or nothing. There's lots of technologies that can grow and be very profitable.

Looking at some of the other applications outside of handsets and TVs, maybe you could talk about some of those. And any of those do you think have the potential to move the needle in the market, as well the laptops, the application, sorry, automotive?

Sure. No, I think that you're seeing more laptops. You're seeing because OLED switch 180 times a second, which is 3x faster than video rates. So what you're seeing it first in gaming opportunities, you're starting to see foldables, you saw at CES multiple foldables, even laptop-sized foldables. Automotive applications, there's a number of high-end cars that are going to introduce large OLED screens. I think it's great. It's actually really good for the manufacturer. They're premium prices, they could make money on them. Not that many cars that are sold. It's not 600 million mobile phones, it's a few million cars. But it is new business, new opportunities or content. Because they're larger, it is more than it would be on a mobile device. So any opportunity that is available, we think is good.

Yes, I mean, in the automotive market side, I guess, the story is more multiple screens. I mean there were even some talk as with the market transitioning away from side-view mirrors and putting OLED screen actually in...

And taillights. I mean BMW, Audi, I think Mercedes will have OLED taillights.

Balance sheet. You guys are sitting on a lot of cash, $600 million at the end of September. What -- maybe you can talk a little bit about how management looks at deploying that.

Sure. One of the issues, obviously, we started being profitable. I'd always get this question, what you guys are going to do with cash. And my answer kind of was, well, when I spent 15 years raising money, so it's kind of hard for me to figure out what to do with the excess cash. But our Board has historically looked at this, and we had a few buybacks years ago. We believe that the way to return capital to shareholders is through dividends. So we instituted a dividend a couple of years ago, we went from $0.03 a quarter to $0.06, to $0.10 a quarter. So we intend to continue giving dividends and raising the dividend. So as we get more cash, that's how we will return it to shareholders. That's the philosophy of the Board and the company.

Okay. And I wanted to spend a moment on UDC Ventures. We don't pay that much attention. So maybe you could talk a little bit about where the company looks at some investments in that area. What are the areas of interest to you?

We've took -- we've allocated a certain amount of money to UDC Ventures. We have a couple of folks that are running that for us. They're here today. And we're looking at strategic opportunities. It isn't this great investment in something that looks good. Is there an opportunity for that at some point to impact our OLED business, our materials business or expand the market. So that's really what they're looking at, more strategic investments and financial investments.

But it is fairly narrowly focused around...

Yes, yes.

Okay. Got a moment, anybody? You got questions? You have a question?

I was wondering if you talk about TVs and smartphones, but iPads and laptops [indiscernible].

Okay. If not, thank you for your time.

Okay. Thank you.

Thank you.