Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Welcome, everyone. My name is Atif Malik. I cover U.S. semiconductors and equipment stocks here at Citi. It's my pleasure to welcome Sidney Rosenblatt, EVP, CFO of Universal Display; as well as Darice Liu, Director Investor Relations from Universal Display. The format of our discussion is fireside chat. I'll go with my questions first. [Operator Instructions] With that, welcome, Sidney.

Welcome. Thank you very much for having me.

Sir, I'm going to start with some big-picture questions first as we try to understand some of the secular drivers for year-end demand. Where do you think OLED penetration is in smartphones today? And how do you think it evolves with the introduction of 5G?

Well, today, the market for OLED for smartphones is approximately 450 million units out of a TAM of -- was 1.4 billion units. So it's about 1/3 of the smartphone market. And it's expected to grow over the next 3 or to 4 years to almost half of the smartphone market. And I think one of the drivers for that obviously is 5G in that 5G technology is a very power-hungry technology. And the OEMs are looking for ways of extending the battery or keeping the battery at least to where it is while using technology that is a very power-hungry technology. OLED displays the reason that they are where they are today, aside from the picture quality, which has always been rated the best picture of any display, is the fact that it's very power-efficient. Using Universal Display's phosphorescent emissive materials for red and green for mobile devices really extends the battery life. In 2013, when Samsung adopted our green emissive material, they stated that they got a 25% increase in battery life. So the reason that the premium smartphones and particularly now with 5G that you're going to see more and more migration towards OLED displays is the fact that it is a very power-efficient technology. And today, pretty much we use our displays, probably 70% to 80% of the time that our device is on. I kind of laugh because we still call them phones, but nobody ever makes a phone call on them anymore, but they still are phones. But it's -- we literally use our screens all day long. So it is the fact that our technology is power-efficient, is really the driving factor.

Got it. And then also on the OLED TV penetration, where do you think we are today? And what are the trends that you're seeing as we get out of the COVID-19 disruption?

Yes. I think that the TAM for TVs is about 240 million units. And OLEDs today are still 1.5% to 2%. Last year, there was 3.3 million OLED TVs sold. Estimates for this year are 4 million to 4.5 million. It has been the -- LG Display is the only manufacturer of OLED TV panels. It maybe have 19 different OEMs that brand OLED to TVs, but LG is the only supplier of panels to that market. And their focus has always been the premium side of the market, which is approximately 10 million TVs is the premium end of that 400 -- I'm sorry, 240 million units. And it's -- somebody wants the best of the best, you walk in, you say "I want the best picture. I'm building a new video room and I want something that looks great." The benefits of OLED TVs is the fact that they have 180-degree viewing angle inherent in the device. You don't have to have any tricks to make it viewable from side to side or up and down because these organic materials emit light in 360 degrees. And the fact that it could be very thin and power-efficient. Even though it's wall-plugged, you still need power efficiency, and you still have heat that gets generated within large area displays, and using phosphorescent materials allows you to save money on heat dissipation. So as expected, I think LG talks about having 10 million units in 2023, 2022. It really depends on whose estimates. Some of the market research folks say 2022. I think LG talked about 2023 -- or I may have it reversed, but that's still not a lot. But for us, approximately 10 million OLED TVs, when you look at panel demand square meters of glass, that's equal to about 700 million smartphones. So for Universal Display, TV growth really drives a part of growth and will drive our growth in the future.

Great. And just to finish it off, can you talk about the OLED penetration in IT auto markets?

Yes. In terms of IT, it's really just starting. IT will be glass-based OLEDs as opposed to OLED displays made on flexible substrates, of which most of the smartphones are and mainly because Samsung who makes them long glass has the highest yields. And I think pricing for glass-based OLEDs is lower. And as you get the larger and larger displays, you can't charge the same amount per square meter of glass. That has to come -- the price has -- per square meter -- per square inch, I'm sorry, has to be lower. So there's a few IT products that have. There's a few more that are being introduced, and mainly for gaming because of the picture quality, and you can get a premium price. You are also starting to see automotive applications. You've got Cadillac and Mercedes and a number of others that are putting it into their high-end automobiles. You can make these on plastic. So your dashboard can be conformable. And therefore, you really can't use any other display technology that is curved as OLED can be. These are -- we believe, these are great markets for our customers because they are premium-priced products. And they do show off all the benefits of OLEDs, and the OEMs can talk about the fact that they have OLED technology in their automobiles. To be perfectly honest, there's just not a lot of Cadillacs and BMWs sold when you compare it to 500 million smartphones that would have OLEDs in them this year. But it is a market that we think is very important and it's very important for our customers also.

Great. Sir if you look into this year, a bit of a tough first half because of COVID-19 disruption. You guys haven't updated the 2020 guide. Is supply or demand an issue with respect to your visibility? Or is it just that second and third wave of COVID-19 is kind of clouding the visibility of your customers?

It's -- there's a lot of moving parts. When we withdrew our guidance and said that there were a number of uncertainties, to be honest, uncertainties were both on the demand side and on the supply chain side. So when we looked at the demand, you could see that folks were now shopping. I mean literally, when you got to March and things really shut down, you can see that the demand side for our product was a real issue in terms of uncertainty when that would come back. And for us on the supply side, whether it be disruptions in our supply chain. And in addition, whether it be disruptions in our ability to ship product to our customers. And as you may recall, when it first started, a lot of the shipping companies, FedEx and others and customs were quarantining packages. And we were concerned that if something -- we're a just-in-time supplier. We get an order, we ship it within 24 hours. If our customers are keeping their inventory close to the vest, they may not be able to get the material when they need it if things were going to be slowed down in customs and in shipping. That part of it has gone away. And our supply chain on the commercial material side has been uninterrupted. So the demand side is really the -- still the issue. We -- when we talked about Q2, we literally said that we -- Q2 was bad every month. And I think it was a number of factors. One, the demand wasn't there; two, our customers' factories were not running. Obviously, they were running at very low utilization rates. Some of them couldn't get workers into the factories, others just didn't have product to make. So a number of those uncertainties are the -- that's the reason why we have not -- we withdrew guidance. And we talked about on our last call, we just don't know whether or not some of these demand uncertainties will pop up in Q3. And so far, things seem to be moving along. There's no second wave. There's no shutdowns of countries and folks actually seem to be out and about shopping more than they have in the past, whether it's online or whether it's actually shopping in stores. I mean I think I think TV sales probably are help since so many people are trapped at home. They even just get a new TV set because you're looking at your TV all day long or whatever. I think the handset side is one that's still to be determined. You may not need to run out and buy a new phone. If you were out shopping and you saw a new phone that looked really cool, you'd say, "I want to go buy that." But I don't think there's a lot of people that are just out shopping to shop. So I do think that, that's still something that I know a lot of the analysts are talking about things picking up, which we believe they will and continue to hope that they will. But there's still some uncertainty there.

Yes, that's very helpful on the demand side, Sid. There was a company-specific item on the China inventory exiting last year. Can you break out the impact from the China inventory that got built because of the trade tensions since late last year versus what you saw on COVID-19? And if I look at your China and Korea customer sales, they are historic lows in the June quarter. So does that mean that their inventory has, to your knowledge, been kind of fleshed out?

Sure. Go back to 2019, the end of 2019, the trade-related issues that you referred to was a ban of selling anyone who sold directly to Huawei. We are not a direct seller. We sold to the manufacturers who then sold to Huawei. We had a Chinese customer, which I think we said multiple times, it's the biggest customer in China, come to us and wanted to have safety stock in case the trade-related issues were then extended from direct sales to indirect sales. So that was about $24 million of material at the end of December that was in our customers' hands, but they had a right to return it by March 15. If they didn't, then they would pay for it. So that was about $24 million worth of inventory that was purchased as a hedge against any additional trade-related issues. We also talk, relating to the first quarter that in March, we contacted our customers relating back to my comment of us being able to ship material and said to our customers, if you want to buy some additional reserve inventory just in case things get slowed down, please do so. We have it, and we will ship it so that you have it. Those purchases were across the board. It was pretty much all customers. So it wasn't just Korea, it was Korea and China. And it wasn't just mobile, it was mobile and TV. So those 2 were separate items, but both of them occurred in Q1, which, to some extent, made Q2 look even worse because about $20 million of the purchases, which normally would have been in Q2, were in Q1, which is why Q2 was -- every month was bad.

Got it. And Sid, I hosted Magnachip earlier this morning. They are an OLED display driver company based out of Korea. And their comments was that the near term, the demand is kind of outstripping the supply. And when I go back to look at your comments that you made on your earnings call that you saw very strong sales at the start of Q3. Can you just talk about how those trends have kind of progressed since the earnings call?

Yes. Without specifically talking about the quarter, we said at that time, we saw a significant increase. And the question was, is it a sustainable increase? Or will there be some other disruptions? There have been no real outside forces that have impacted what we see in the marketplace. So we think from the demand side, it is continuing. So without specifically talking about the quarter, there's nothing that makes us think that it won't continue with as of today.

Got it. And then if I look at the smartphone market. I understand you guys provide your materials to the display makers, like BOE or LG and Samsung. But if there are share shifts in smartphone market where, let's say, Samsung handset share goes up because Huawei is not able to get its semiconductor components and Huawei shares come down, does this really impact Universal Display? Or you guys basically provide it to everyone? I mean is Korea getting larger versus China next year? Is that a tailwind or a headwind or…

Well, it's -- we don't think it's going to be either one. We -- as you said, I think it is -- if there is demand there, the question is going to be, do they buy -- they can't buy a Huawei phone, then they want to buy a premium smartphone. Do they buy a Samsung phone? Do they buy an Oppo? Do they buy a Vivo phone? But from our standpoint, I don't see a real reduction in the quantity of materials that we're going to sell. Maybe -- will there be some impact? Maybe some. But I think if the demand is there for 500 million or 550 million smartphones, whatever the estimates are for 2021, or I think in part -- so it's -- if it gets impacted slightly, it's not really going to impact us. I think it -- I think the demand is demand. So it just depends who gets the sale.

Great. I'm going to take a pause on my questions because I'm getting a fair bit of questions from investors at this point. So let's go to the investor questions. What are you hearing from Chinese customers like BOE, China Star, et cetera, plans to expand their OLED production capacity?