Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning, everyone. This is Krish Sankar from Cowen, and the next company presenting is Universal Display. And we're very fortunate to have Sid Rosenblatt, the CFO, with us. So thank you very much, Sid, for your time today. How are you doing?

We're well. Thank you very much for inviting us today. This is going to be a little difficult to get through along with this in a way that's efficient for everybody, but we will do our best.

I appreciate it, and nice to see you virtually, Sid. So let me start with, like, a bunch of questions I have here. And maybe I'll start with -- like, since you had your earnings call a couple of weeks ago, on that call, you mentioned about a $20 million that got pulled into March quarter since customers were worried about supply chain issues beginning with COVID. So I'm kind of curious, how do you see that play out? Do you see a large part of that to be consumed in the June quarter? Or does -- because if there's a pull in, does it impact your future revenue?

When we estimated the $20 million in Q1, this was really very early on, and it was February 20. So it was really very on in knowing exactly what was going to happen. And I think with our customers, everything was uncertain at that time. So it made sense for customers to pull some of their orders in just to make sure that they were going to have enough inventory. Whether or not this is going to all be used up in Q2 is really difficult just to -- as an example, last year, we sold about $400 million, $405 million, which $20 million was maybe 3 weeks' worth of normal inventory. And in normal times, we would think that, that would be used up. But with all the uncertainties surrounding where we are in, and particularly on the demand side, we've seen very -- obviously, everybody is seeing very weak demand across the board. So -- and on our call, we also said that we said that this quarter was weak to begin with. So it's difficult to say whether it will be used up in this quarter or not, but it all depends. It's really everything that we see now depends on the demand side.

Got it. Fair enough. I think that makes sense. And then on the inventory, you spoke about, how would you characterize the inventory situation of your customers? I understand that with COVID, there is a thought process that many customers might be adding more inventory. So how do you look at your inventory management situation with your customers?

Yes. It is -- initially, I think, in the first quarter, we looked at all the uncertainties involved, and it made a lot of sense for customers to prepurchase inventory. We didn't know from our side whether we're going to have any issues with our supply chain and whether or not we're going to have any issues with shipping to customers because if you recall, initially, they were talking about quarantining packages for 2 weeks before anybody had looked at them. Well, to be perfectly honest, everything has moved at -- from our side has moved very smoothly. We've had no disruption in our supply chain. We're making material. We're shipping material. Our customers are receiving the material on a timely basis. So we have not seen any issues. PPG, ourselves, Adesis, who's our sub, all have been deemed essential businesses. So we have been running. We have been receiving orders. We've been shipping orders every day. So that piece of it has been taken out of the equation, thus the whole supply chain issue and the shipping issue. However, you still have, as I said a little bit earlier, the demand side. And we don't see customers -- we don't believe customers are building up inventory today because they know they can get it. The question is going to be when did they -- when will they use the inventory.

Got it. And then you guys withdrew the fiscal year guidance on the earnings call which kind of makes a lot of sense given the uncertainty, but would you -- if you try to handicap that, would you say the key uncertainty is on the mobile phone side? Or is it on the TV/large panel side? And then along the same path, are there any criteria or goalposts you're looking at? And once you meet certain metrics, you're going to reinstate the full year guidance?

Yes. I think that the key word to all of this is uncertainty. There's uncertainty on the demand side. There's uncertainty on the macroeconomic side. There's uncertainty when it comes to when this pandemic will end. Uncertainty in when the recovery will start. There's just so much uncertainty. And I think until some of the visibility starts to get traction and we get a real feel for what the remainder of the year or whatever time frame we're talking about is, that's really when we'll be able to really give better information. It's just difficult right now.

Got it. All right. Fair enough. And also at the earnings call, like, you had a press release talking about the new China Star agreement. Now my understanding was that they were already an existing customer, so what is different with this agreement? And assuming it's an expansion of the existing relationship, when should we start seeing the revenue start flowing through from this new agreement with China Star?

Yes. The new agreement that we announced earlier this month was a long-term agreement, and we had an evaluation agreement with China Star that we worked with. We normally work with our customers early on with their R&D team, and then we start working with their production team. And so the normal progression is always going from a valuation to a long-term agreement as they start building capacity. And as you're aware, last year, they built their first commercial manufacturing facility. And that facility has the capabilities of about 15,000 plates per month of Gen-6 size plastic substrates. And they've said that they're going to add a couple more lines to that, which eventually they'll be at 45,000 plates per month. So this agreement is just normal progression. It is like a lot of our other long-term agreements. It includes a material supply piece. It includes a license agreement, whether it's royalty or whether it's fixed fee, we don't disclose what they are. But it's just like our other ones, and it's just the normal progression as customers expand.

So and then talking on technology side, first, in the last couple of weeks, there's been a lot more chatter or noise on mini LED and MicroLED. And we also saw a couple of weeks ago, Apple invest over $300 million of mini LED production in Taiwan. So where do you see those technologies in terms of volume adoption relative to OLED technology? And which one of these, either mini LED or MicroLED, would we be considered a real threat to OLED?

Well, the global display industry is in excess of $150 billion. So it is a huge industry, and it is still dominated by LCDs. OLEDs essentially are -- have been the next technology, and we're starting to get a traction and starting to get a big piece of that market, but it's still dominated by LCDs. And many LEDs are an extension of the LCD. They're just backplates. So it's the number of progression LCDs have been getting better and better using new technologies and moving forward. So many LEDs is just something that has just been part of the industry growth. MicroLEDs are a little different. I mean we see them as an R&D project. There's a lot of questions about how manufacturable it will be. You have to pick and place MicroLEDs. And everything that we have read, it's difficult. However, it is a $150 billion market. And that market, there's niches across the board. There's always something. You had LCDs that replaced CRTs a number of years ago. And -- but you still have companies like E Ink that have found niches. So I think there are lots of other things that will be in little niche markets, but OLEDs are really one of the few technologies that can go from very small and scale to very large, which is something that MicroLEDs could never do. So we do believe that OLEDs are the future. Well, we've been doing it for a long time, obviously. So we believe that. But OLEDs work with everything. So we're -- we think that there's lots of things. There's always things that come and go.

Got it. Fair enough. So sticking to the topic of technology, the other question that comes up every so often is on the blue. And can you give an update on where you are with regards to either your testing your blue with customers or the progress on a commercial deep blue emitter? Any kind of color would be helpful.

Well, I will refrain from our usual comment, which is, all I can say is we've been talking about blue for 9 quarters now on our conference calls. And we are encouraged every day by the progress that we're making, and we're continuing to make progress. And -- but as we have stated, until we get to a point where we think that something that meets initial commercial specs, we're not going to give day-to-day progress because that just makes no sense. So it is something that is obviously a key initiative at the company. As Steve has said multiple times on our call, we have over 100 folks working on this. So it is something that will be here. The question is when.

Fair enough. Now when you look at OLED technology, clearly, the big market today is smartphones. And where do you think the penetration of OLED and smartphone is today? And how do you think it evolves? And also, the whole move to 5G, is there a positive, neutral or a negative impact for OLED material screens?

Well, today, based upon 2019 figures, OLEDs and smartphones was about 471 million units out of a TAM of 1.4 billion units. So it was about 1/3 of the market, and it was in the premium market mostly. And right now, we believe that, that will continue to grow. And it will continue to grow, particularly as prices start to come down and new capacity comes online. I think that the hiccup in the demand cycle today is a real issue. 5G, we think, is something that a lot of smartphone manufacturers are talking about, how do you get a replacement cycle, because demand side does not. So I think 5G is something that will actually help the manufacturers on the replacement side. And you're starting to see some smartphones that have lower-cost smartphones. You're moving into the midrange and even low range. You've got the Honor 30, which is a $425 phone, and then you've got the Galaxy M21, which is a $200 phone, all of which have OLED screens. So as capacity grows, more manufacturers get into the market, obviously, costs come down. And the benefits of OLED that is something that if you talk to any manufacturer, they would say, "Yes, we love an OLED screen. We just -- it's the price."

Got it. And then the other thing on the OLED market opportunity, which I feel like doesn't get a lot of press, is the large panel TV segment. While I understand it is still expensive, these TVs, to me, it seems like a huge opportunity for universal display. So how would you characterize the premium TV market? Where do you think OLED penetration is there? And how do you see that evolve over the next few years?

Yes. The OLED TV market, as you said, it doesn't get a lot of talk. I mean it's -- based upon last year's numbers, there were about 3.3 million OLED TVs sold out of a TAM of about 240 million units. Of that 240 million units, there's a premium market of about 10 million units. And the OLED TV manufacturers, LG initially when they started making they said, that's the market that they are looking at. It's essentially somebody who wants to build doesn't care what it costs. They want the best technology. OLED TVs have been rated the best TVs ever since they've been looked at by all of the different groups that analyze TVs. And if you have one or you look at one, I mean, obviously, I have a few of them and people commented, "Wow, it's like, what is that?" So it is something that needs to grow. Last year, there were about 15 OEMs that used LG panels. And now they've added 4 more this year. So you've got VIZIO, Sharp and Huawei all coming out with OLED TVs this year. We believe that OLED TVs are the best technology. And again, it's demand and it's price. So as prices come down, the initial 55-inch OLED 4K or just high-definition TV was $3,600 a few years ago. Now you can get a 55-inch 4K OLED TV at Costco's for about $1,200. So it is getting close to that price point. But again, it has to continue to get more manufactured, more OEMs in the market so the prices come down.

Got it. And Sid, on the manufacturing side, you -- like, Universal Display itself is probably looking at alternative manufacturing approaches like OVJP, the Vapor Jet Printing process. Some of your competitors are looking at other approaches. So where do you think these alternative manufacturing approaches are today? And there's a view that if these approaches get more production worthy, they'll consume less material. And therefore, customers would need less material. Is it true? Or do you think these things actually help lower the cost and it actually will drive more OLED adoption?

Yes. It's -- organic vapor jet printing is something that we've been working on for a number of years. You've heard about printing processes, even for LCDS, a number of years ago that if you can print these materials in a continuous flow, it will be cheaper, faster, more efficient in terms of technology. And that's true. Unfortunately, for years, it just hasn't worked, the printing technology, I mean OLEDs are layers of film. And OLEDs, we can make on glass, plastics, any substrate that you can put a device together on. So having a printing technology that can deposit these layers of film would be a good thing. Inkjet printing, though, we work with Seiko Epson, who was obviously an inkjet printing company years ago for 5 years to try to get inkjet printing to work. The way that it works is you have to -- the OLED materials today are all made using vacuum deposition. And so it is essentially a dry process. You put the materials in a vacuum chamber, you heat them in this chamber, they rise and then they stick to the substrate, and you use a shadow mask to block the areas you don't want the materials to grow. Then you go from chamber to chamber, red, green and blue to deposit all of your pixels. It's expensive in that each chamber, the aligning the masks and doing all the technology necessary to ensure that you have a high yield is expensive. So if you can deposit your red pixels and then your green pixels and your blue pixels directly on the substrate without a shadow mask, you're not going to coat the shadow mask. So inherently, this process will use less material. And so we looked at it after we gave up working on inkjet printing because when you turn these materials into liquids, there's a lot of things that occur with these very sensitive organic molecules. I mean as you're aware, there's not a lot of material that goes onto a substrate. We estimated a few years ago that 1 gram of our red material can make almost 3,000 5-inch screens. So obviously, this is molecule by molecule, and they all have to work. And when you inkjet print things, you have to use solvents to keep the printheads flowing, and you have to use liquids. And all of those things damage the organic materials. So we've started working on a process that is the best of both worlds. How do we use what we know about how these materials react in vacuum chambers? And can we deposit these materials directly on a substrate without a mask? So that's Organic Vapor Jet Printing is essentially taking this process, getting materials, using an inner gas and then depositing the red, green and blue materials directly on your substrate. It -- will it use less materials? So we will sell less material. And this is for large [ area ] TVs that we're working. The answer is, yes, it will. But this is where you're now starting to talk about making TVs much more efficiently and bringing the price down. So LG has talked about selling 10 million OLED panels, I think, in 2 years. You want to go from 10 million to 50 million. You really wanted to be half of the TV market, which is 240 million. You want to get to 100 million. The only way you're going to get there is new technologies being developed. And we believe that Organic Vapor Jet Printing is a process that has the potential to do that. We have a pilot line in our facility that deposits all 3 chambers. And we're working to figure out what the next steps are in terms of commercializing this and how we commercialize this.

Got it. Then, Sid, on the competitive front, how is this environment treating your competition? It seems like a lot of the startups are struggling, given in this COVID world. Do you see some of your smaller competitors who are not well capitalized, are they struggling on issues with R&D? And how do you like basically, in this environment today, how is the competitive dynamics?

Well, obviously, we have a very strong position. We are -- our leadership position is very, very strong with all of our customers and across the industry. And we've been working on this for 2.5 decades. So we have been working on OLEDs, all of us who started the company always thought it was going to be the technology of the future. It has taken a long time. We're an R&D company for 17 years. So we know how long it takes to get technology developed and to get an idea from a lab to a manufacturing process and then meeting all of your customer needs and all of the ever-changing needs that your customer has. It is not simple. We've got the best R&D team. We've got the largest phosphorescent emitter R&D team in the world. And we know what it takes to do it. And we've got, obviously, a very strong balance sheet and a great R&D team, and we are the R&D arm for all of our customers. So they get this, all of this effort as part of their license agreement. So yes, are there folks that are trying to get into this market and be competitive? Yes. But we think that our leadership position, our knowledge, vast knowledge that we have that continue to grow is very important, and our customers know us and they know that we always deliver.

Right. So on that path, you guys clearly have a rock-solid balance sheet, and you also have a venture arm. How do you look at, like, with all the dislocation that's happening in the market with COVID, how do you look at M&A? Do you still think organic growth is the way you're looking at it? Or do you think that between your balance sheet plus the venture arm, there's an opportunity somewhere else?

Well, I think that we are looking at opportunities, and we have -- we purchased Adesis a few years ago because it made sense. And with all of the things that are going on around the world today, if something comes up that makes some sense -- and that's why we formed our venture arm, is to look at different opportunities. So if something does come up, we are not [indiscernible] to organic growth or growth by acquisition, we would like to be able to grow where it makes sense and enhances our leadership position.

Got it. There's an e-mail question from an investor. I think it's an interesting question. I'll ask you to the extent you can answer it. Sid, which do you think comes first, blue, MicroLED or OVJP?

Obviously, I can't answer that question. What I can tell you about the 2 of the 3 that I know is we -- OVJP, our pilot mine, is up and running, and we are depositing materials. We believe -- we only make them on 6-inch substrates in our facility. And you need to get -- really for TVs, you need to move to Gen 8 or Gen 10. So that will take 3 to 5 years to scale up technology so that it can be used commercially. We believe that blue is something, as I said earlier, that we're making progress every day. And we will continue to make progress. And it isn't if, it's when. And on MicroLEDs, I can't answer that question. That's not anything -- we have anything to do.

Fair enough. And then, again, another one to the extent you're going to answer this, when are the license renewals for your top 3 or 4 customers? And are there any patent cliff we need to worry about over the next year or 2?

Yes. We don't disclose a lot of the terms of our long-term agreements. Some of them have been disclosed in the past, so you can look at those. All of our long-term agreements have material supply and a license piece of it, whether it's royalty based or whether it is fixed fee-based. On the patent position, you may recall a number of years ago, folks said our first patent expires in 2017. And after 2017, we have no business. Last year was a record year for us in terms of revenue. So we never thought that was the case, but we have over 5,000 patents. There will be patents expiring because we started 25 years ago, every year. But we are continuing to build on our patent portfolio. We'll continue to expand the breadth of our patent portfolio, and we believe that we will be the leader and continue to be the leader. We were working on this technology, as I said, on an R&D basis for 17 years. We have a very, very large head start on anybody who's trying to be in this phosphorescent emitter business and the OLED business in general. So we are not concerned about that. We've been -- just with Samsung, we started -- we signed our first agreement with Samsung since -- this is our third -- second extension. So we've been working with Samsung for 15, 20 years. And we will continue to work with them in the foreseeable future.

Got it. And then on the topic of patents, there's a question from an investor asking that, "I'm seeing a lot more host patents in the last few months. Patents around the host material. Can you comment on that?"

Well, we have a number of partnerships with hosts, one host technology with partners around the world. We think it is something that allows us to have local content, local manufacturers that we were in the host business a number of years ago, and it is a much lower-margin business. And it is not one that we want to participate in directly, but we wanted to indirectly because having a host company and having host materials that match very well with our phosphorescent emitters is the key. So we want to make sure that we can accelerate the process of adoption of new emitters and hosts with our emitters and our partners' hosts.

Got it. Sid, on this point there's another question from an investor, which is a very interesting one. Can you talk a little bit about how much share you have relative to the other phosphor vendors? And of the new fluorescent fosters coming out of Japan, what is their share with the Chinese customers versus Samsung and LG?

Well, we are the phosphorus and emitter company. Of the commercial phosphorescent emitter market, we have 100%. So today, the fluorescent or the other materials, TADF, or whichever material they are relating to a lot of folks are talking about that technology, initially, it was talked about for blue technology. Phosphorescent technology is the most efficient technology. It has -- we know it's worked. It was in the first Samsung Galaxy product that was introduced in 2010. So our customers are asking us to continue to make better and better phosphorescent emitters, which is what we do. And obviously, develop a blue phosphorescent emitter because they want the power efficiency -- fluorescent emitters are 25% efficient. Phosphorescent emitters are 100% internal quantum efficiency, which means you use 25% of the power that you would use with the fluorescent emitter. So as I said earlier, there's a number of different companies that are trying to get into this market, but all of the materials that are being used that are phosphorescent by commercial customers are ours.

Got it. And then the final question, Sid, is that has there been any material changes in phosphor pricing over the last 6 months? And if you -- let's say, hypothetically, you developed a blue phosphor today, could be there winners and losers in materials?

Well, the pricing that we have, we built pricing into all of our long-term agreements. So the price that was entered into with any customer, whether it was 1 year ago or 6 months ago or 4 years ago, the pricing is built in. They all have volume discounts, and they all have discounts over time built into them. So there's been no change in any of our pricing specifically that relates to any existing contracts. If we have a blue phosphorescent emitter that meets our customer needs and is priced in a way that allows the customer to put it in, which we believe it will be, it's the fluorescent blue companies that would lose out. It would not happen overnight. You would get adopted into the next-generation technology. So it would be -- if we had a blue emitter that was working, it would get adopted into the next-generation product because you would have to change your TFT back plane to drive it differently. So it wouldn't be that all of a sudden all of the blue fluorescent materials would disappear. So it's not an overnight change. It is something that would happen gradually.

Got it. All right. With that, we're out of time, but thank you very much, Sid, really appreciate your time and effort, really, and hope you have a good rest of the day.

Thank you very much for allowing us to do this, and you guys be safe.

Thank you, Sid.

Thank you.