Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the second day of Deutsche Bank Tech Conference. I'm Sidney Ho. I cover semiconductors and semi cap equipment at DB. Next up, we have Universal Display. Universal Display is a pure-play in the OLED display industry. They sell the raw materials in each OLED screen, and they also collect licensing revenue. Today, we're very pleased to have Universal Display's CFO, Sid Rosenblatt, with us. Welcome, Sid.

Thank you very much, Sid.

[Operator Instructions] I will try to ask those questions as we go through our discussions.

So with that out of the way, let me start off with a few questions that I ask every company at the conference. There's a little technical difficulty. Well, here go. So starting with Huawei, with the new rules that were just announced by the Department of Commerce a month ago, I know you don't really sell directly to Huawei. But what is the potential indirect impact to Universal Display and do you think down the road, other OEMs can make up the shortfall from Huawei? Or maybe how quickly do you think that, that could happen?

Well, thank you, number one, for inviting me. And the Huawei issue is one that is -- it's very fluid, to be perfectly honest. As you said, we're not a direct supplier to Huawei. However, our customers are. And if there is a complete ban that Huawei is not able to get product and not able to make smartphones, which is what they use our OLED screens for then there clearly will be a void, and the question is how quickly will other OEMs make up for that. And so whether it's Vivo or Oppo in China or whether it's Samsung or LG or others, I mean I think the overall demand is there. And the question is will there'll be some delays because they could get the product that they really want as opposed to saying, I just need a phone. So it may have an impact, and it may have a small impact. We just don't know to be perfectly honest at this time.

Okay. That's fair. Now maybe switching gears over to the customer inventory. In the past, you talked about some customers in China buying some safety stocks ahead of some potential trade issues. But there were also customers buying ahead because of potential COVID supply chain disruptions. Can you give us an update on where things stand with customer inventory levels today? And do you think customers will continue to carry a higher level of inventory from here?

Yes. The first issue, you are correct that at the end of last year, we had a issue that our customer in China was a supplier to Huawei. And when the trade issues first started, they contacted us and wanted to have a safety stock, which we shipped to them with a right to return it in the first quarter in case they didn't need it if the trade issues really did not materialize. They purchased that material in the first quarter in March. So it became revenue for us in March. In early March, we also contacted all of our customers because of some of the trade-related issues, and we were concerned about the supply chain going to our customers. And we asked them if they wanted to buy some safety stock so that if there were some disruptions in the supply chain that they would be able not let their factories run out of material since our phosphorescent emitters are the key, and we are a sole source. And we had a number of customers who did pretty much across the board, which is approximately $20 million worth of material that they purchased. If we recall when this offer started, we were all concerned about shipping materials or shipping products. Folks were not opening packages from Amazon at their home, customs officials were saying they're going to quarantine packages. And there was a number of issues that really made us concerned, and that's why we contacted our customers. It ended up that those issues really did not materialize. They did for a while, but now packages go, there's no quarantine of packages. So in terms of what we saw, we believe that our customers -- and we do talk to our customers, obviously, about inventory levels and what they need. And we get estimates of how much they're going to purchase at any given time. However, for any quarter or any month, but they're not guaranteed amounts. I do believe that if I was a manufacturer, I probably would keep more material on hand today than I would under normal circumstances just because there are uncertainties whether or not they're COVID-19 uncertainties, whether they're second waves or whether employees can't come to work. Whatever the issue is or things happened here, I think everybody on the inventory side is probably going to be conservative and make sure they have enough. So...

That makes sense. Absolutely. Well, you touched upon a little bit, but the next question is more on the supply chain, COVID-related impact of the supply chain. We'll talk about demand shortly. But from a supply chain standpoint, has everything returned to normal levels, both for your own supply chain and your customer supply chain?

Well, as far as we know for our commercial customers, our commercial supply chain, things are fairly normal. There's always some little glitches and hitches that occur. But overall, we've never missed a shipment during this entire time to our customers. As far as we know, our customers are getting the other products that they need. I haven't heard any of the customers or any announcements -- and our customers are large customers, obviously, at Samsung, LG, BOE, Tianma and others that talk about real disruptions in their supply chain, their disruptions were in getting their factory utilization up. And then as you said, your next question is going to related to demand. So I think that is there's been no real issues that we have seen on our side.

Okay. One more before we get into the demand. If you look at the cost associated with managing COVID. I know you're fabless, it probably doesn't apply to you, but are there any additional costs that you're incurring right now, whether it's logistics or maybe social distancing that you expect to come out from your financials in the next few quarters?

No, there's nothing material. I mean, we are fabless. We have -- our folks are going in who are part of the group that actually ships material, we've shipped material every day, during COVID-19. Our chemists and our lab workers are back into the labs and have been. We have some incremental costs. We've set up nursing stations so that every employee who comes in, gets questions, get their temperature taken. We've set up multiple shifts so that there is no contamination from one shift to the other. The building has cleared out. We do decontaminate the entire building, which is our -- our only building right now and Ewing as we're holding out some others. So that's the only incremental cost, which is immaterial, to be perfectly honest.

Okay. That's fair. Now switching gears over to the demand side. Customer demand for high-end smartphones and TVs were pretty weak in the first half of the year, totally understandable. But in the last earnings call, you talked about a pickup in demand across your customers since the end of the second quarter. Can you talk a little bit about the current demand environment? And what areas are you seeing the most pickup in demand?

Well, we're seeing it across the board to be perfectly honest. All of our customers, as we said on our earnings call, we saw a significant increase in material sales during July. And the first few days in August before our call. And pretty much was sharp and large in that April, May and June were just bad. All 3 months consistently. There was nothing positive in any of those 3 months that occurred in that. You didn't see any light at the end of the tunnel at any point until July. And I think we've heard from our customers, and you've heard from their conference calls that their factory utilization in July went up and there's demand, there's new products that are going to be introduced in the second half of the year. And we saw that, and we have seen nothing that changes that as of this time.

Okay. That's good news. So if you look at your full year guidance, obviously, you did not reinstate the full year guidance in the second quarter earnings call. I know your lead times are generally very short. But can you give us a little context on the typical visibility that you have with customers? At this time of the year, in normal time periods versus what you are seeing today? Is it similar? Is it worse?

It's probably all of the above, to some extent, in that we do get -- we have folks who are with our customers all the time. They're always asking what they need, what inventory levels they have, when orders will be placed. But there are no guaranteed orders. We'll ask them what they need in 3 months, 6 months, 9 months, because if we do have to make sure that we make the material so that if there is a spike in demand, we know about it in advance because some of our materials take 3 to 6 months for us to make in terms of our supply chain of getting all the raw materials. So -- and we've been building up raw material inventory just in case there were any disruption. So there's really not been a major difference. The thing that I do believe that the customers more than likely are building to orders as opposed to building inventory because I don't think any of the customers want to have any excess finished goods. So I think their factories now are reacting faster than they may have in the past to orders being placed or orders not being placed. And they're managing the whole -- their whole supply chain, I think, much tighter than they ever have.

Excellent. I might be just -- I may be answering my own question. But if I look at your second half of this year, it would seem like the setup is pretty good. You got certainly better than the first half, but probably better than second half of last year, too. And I can point to, in North American smartphone OEM likely having a big product cycle, your large panel customer ramping up a new facility in China and your Chinese customers should be also ramping production. What are your biggest concerns for the second half of this year?

I'd say, our biggest concern for the second half is that it sustains its growth and that there's nothing that's really going to disrupt it. I agree with you. There are new products coming out. There are -- clearly, the factory utilization and the demand side has picked up. And the thing that we have to worry about is whether or not it will continue through the whole quarter. And that's through the quarter and then through the -- for the second half of the year. And that, as you said, we did not reiterate guidance because there are still so many uncertainties. And some of them went away when we first withdrew guidance, which was the supply side of ours. But there still is demand and making sure that things occur when we believe they will. Do I think that the second half will be better? Yes.

Good. My next question, I'm going to weave into one of the questions just came in. Your last earnings call, you talked about your expectations that installed capacity to grow approximately -- the industry installed capacity to grow approximately 50% at the end of 2021 from the end of 2019 as measured in square meters. The question that came in is asking any -- is there any development with Chinese OLED panel OEMs, whether it's new plants opening or being planned that you can talk about? And the second part of the question is kind of the opposite side. We also heard from the equipment suppliers, suggesting capital spending on display equipment will be muted in 2021, for example, apply expects flat year-over-year for the fiscal year. How should we square those comments?

Well, I think there's a couple of things. We do believe that the end of 2021 compared to the end of 2019, in square meters of glass or OLEDs should be approximately 50% increase. Are there things that may change that may cause things to shift a little bit by 3 months or so? More than likely, yes. But there still is new capacity coming on in China. BOE just opened up its third fab or broken ground on their fourth. You've got China Star, Tianma. You've got a number of others that are talking about building OLED fabs, and LG is going to add capacity in their Guangzhou facility. So we still see a pretty significant growth. Is it 50 -- approximately 50%? Is it going to be a 3-month slippage here or there? That always happens. And obviously, this is such an unusual year that it may be. But overall, I think we'd still see that.

So in other words, you haven't seen any significant changes or delays in terms of building capacity from any of these large display makers?

There's been nothing announced by any of the large display makers that would make us see that.

Okay. Okay. Fair point. Moving on to a couple of future opportunities. And the first one is blue emitters. And I've learned not to ask about the timing of blue emitters because I don't know. But in your last earnings call, you did bring up the paper that was presented by Samsung display at SID display week. And for those who don't have access to the paper, can you talk about the importance of that paper? I ask that because some investors have pushed back on that paper because it seems like every year at that conference, company will make some sort of statement, some sort of announcement about the products. But so far, there hasn't been any commercial blue?

That is correct. There is no commercial blue at this time. And you are welcome to ask about it since everybody does. And we have been using the same language on, I think, 10 conference calls in a row. And that we said we're making excellent progress. And progress for us is multi-phase in that as we said, you need the right color, the right efficiency, the right lifetime. Specifications change over time. They get -- sometimes they get more stringent, sometimes they get loosened a little bit. There's a lot of moving parts before you get something that's going to go into a product. We thought that it was important to announce or discuss the fact that the Samsung R&D team presented a paper at SID, talking about deep blue phosphorescent emitters. And they acknowledged at the end of the paper that they receive the phosphorescent emitters for their work from Universal Display. So a lot of folks ask us, why can't you tell us anything? So we felt that this was something that made a lot of sense for us to point folks to say, we get asked question, well, are your customers playing with the material? What do your customers think about it? And we've always said, we're not going to talk about it. Well, our customers talked about it. And in the paper, they don't give specific data. They give relative data to some base that they're using, which they don't disclose. What I can tell you about the paper is the paper says that there's a lot of progress, there's a lot of good data in this paper. Lifetime still needs to be improved before it goes to a commercial product. So that's -- and that's what we've been saying. But it is -- I think it's important that our customers are playing with our material, which is always some of the early leading indicators that you're getting closer and that they're looking at this and how they can integrate this into a product.

Okay. That's fair. Another technology that you guys have been talking about for a number of years now is your Organic Vapor Jet Printing. And this summer unit is a formation of the OVJP Corporation. What are some of the advantage of having this as a fully-owned subsidiary, a separate entity call it. And how should we think about the commercialization of this technology in terms of timing. When this technology is commercialized, what is the most important thing to know about this technology? What would that technology enable?