Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Great. Good morning, everybody or good afternoon. I am Meta Marshall. I lead up the Networking Research here at Morgan Stanley. We're pleased to have Universal Display and Sid Rosenblatt, who is CFO, with us here today.

So maybe to just kick off, Sid, for those in the audience who might be a little bit less -- or virtual audience who's here, who might be a little less familiar, can you just give -- maybe kick off with a brief overview of the company and the business model? And just maybe what some of the COVID impacts you've seen this year have been?

Well, first, thank you, Meta and NASDAQ, for inviting us. We've been coming for a number of years, and it's always a pleasure to present at this conference. Universal Display is a developer and -- a technology developer, a material seller in the OLED's field. We are a company that has developed the materials and the architecture that is in pretty much all the commercial OLED displays that are in the marketplace today. And OLED is a new type of screen that is essentially layers of film that light up. And the layers are 11,000 the thickness of a hair. And so these give you very thin lightweight devices and they could be made on glass, plastic, stainless steel foil, a lot of the new screens, such as the ones that are in the iPhone and the Galaxy products and others are actually displays that are made on plastic with a glass cover. So it gives you a lightweight device and that you don't have 2 pieces of glass. These are self-emissive materials and the red, green and blue materials light up when you put current to them. And therefore, because these are self-emissive and it's not a reflective technology or it's not a filter technology, you get a 180-degree viewing angle so you can see it from any direction, very different than the LCDs that you have to do a lot of tricks to make it work. It gives you the TVs that are out have been rated the best TVs ever because of the picture quality. It gives you a true black background because you only light up the pixels that you put current to. And for us, the benefit is what we call phosphorescent technology is that it is very power efficient. OLEDs were actually embedded in the early '80s by Kodak Corporation. And they invented a technology or material that were called a fluorescent emitter. Essentially, you put energy into a molecule, you put current into it, it goes into an excited state. It creates energy. That energy comes out in the form of light or heat, and then it goes back to its original form. It does this 180x a second. So that's why OLEDs give you 3x video rates inherently without having to do any tricks. But the key is the original technology that was developed, only 25% of the energy was converted into usable light, 75% was wasted as heat. Our scientists figured out a method of converting that 75% into usable light. So we have what's called 100% internal quantum efficiency. In English, it means we use 75% less power than the conventional OLED technology. So our materials and all visual displays use red, green and blue materials to give you all the colors of the rainbow. Our red materials and green materials are in every device that's commercially available today. The blue technology that's in these devices is still the original blue technology that was invented by Kodak, and I would probably talk about blue a little bit further down the road. Our business model is one where we enter long-term license agreements for the rights to our patent portfolio, of which we have more than 5,000 patents issued and pending worldwide. And for that, you get the rights to use phosphorescence and any of other architecture. In addition, we make and sell the materials that go into the device. So we have long-term agreements that we've signed with Samsung, with LG, with the BOE, with China Star, a number of others. So anybody who is in the display business, whether they're making LCDs, which most of them were making, until OLEDs were invented, is a customer of ours. We get revenues from license fees and royalties, and we get revenues from selling the material that we make. We actually -- we're fabless. We have a partner, PPG Industries, who makes the material for us, with our help, and there is a number of trade secrets in the manufacturing process. These materials actually go a very long way in that if you're talking about a layer of film, that's 11,000 the thickness of a hair, we're putting down molecular layers. And it's been estimated 1 gram of our red emissive material can make about 3,000 mobile-sized screens. So we don't sell truckloads of material. We sell boxes of material. So it is a very efficient business model, and our margin profile is -- our overall margins have been in the above 80% between license fees and royalties or commercial materials have been in the 70% to 75% range. So hopefully, that was short enough.

No, that's perfect. And just -- so in terms of kind of impacts that you would have seen, just given the COVID that's kind of keeping us all virtual this year, it would largely be through kind of lower demand from your customers, correct?

Yes. And obviously -- in Q2, our revenues dropped in half. So essentially, at the end of March, the demand for consumer products around the world just dried up and production in the factories. Our customers are in Korea and China, for the most part, and obviously, the factories were running at very, very low utilization rates. So Q2, for us, was essentially half of what it was in Q1. And however, though, in July, essentially, this picket opened up again and fab started coming back online, and our Q3 revenues were above what they were in Q1. So we recovered pretty quickly, but we did have a quarter that really was half of what we are anticipated.

Got it. So you noted on the last earnings call kind of just what you alluded to that there had been a pickup for the high-end smartphone. Maybe further expanding on that, can you just note what trends you're seeing, particularly just as we hit kind of a smartphone refresh cycle? And where do you think OLED penetration can go in the smartphone market?

Well, today, there's about 500 million OLED smartphones in 2020. It's the estimates. The TAM for smartphones is about 1.4 billion units. So OLEDs are about 1/3 of the market today. Some of the reasons that I discussed a little earlier is: a, the picture quality of an OLED display is rated the best display, and it is power efficient. And as we move into the 5G replacement cycle, one of the major drawbacks of 5G is that it's very power hungry. And the OEMs are looking for ways of managing the power and putting an OLED display in your device reduces the power consumption compared to the -- comparable LCD. So we think that OLED penetration in the smartphone market will continue to grow. It's estimated by market analysts that it will be about 600 million units in 2021. And going almost half of it, I think, within a couple of years.

Okay. Got it. That's helpful. And then obviously, in terms of kind of the other big display market that we think of with the TV market, that penetration has been a little bit lower. What do you think can catalyze further OLED penetration there? And just what are some of the reasons that the TV market has lagged the smartphone market?

Well, it really is the fact that there are not very many OLED fabs that exist today. There's about 80 LCD fabs. At one point, there were over 100 LCD fabs. They are being closed because it's a very unprofitable business. Today, there are less than 10 OLED fabs. And there is only one manufacturer of OLED TV panels, which is LG Display. They have 2 fabs, one in China and one in Korea. The TAM for LCD TVs is about 240 million units. And they're estimated that in 2020, there will be about 4.5 million OLED TVs sold. And LG has stated they expect to sell between 7 million and 8 million panels in 2021. There are 19 OEMs, brand OLED TVs, but all the panels come from LG. And LG's fab opened up a few years ago. Samsung, who was the leader in OLEDs and a pioneer in OLEDs actually started construction -- started actually making displays in 2007, introduced the Galaxy product in 2010 and continue to grow. So it is not a simple technology. It is -- LCDs have been around for 40 years, and it's a very mature technology. So if you want to make an LCD panel, you can go out and buy older pieces of equipment and get the recipes and literally turn it on. OLEDs are still under development. Everybody has their own architecture. Everybody has their own recipes. And for LG, when they started making OLED TVs, they looked at it and the premium market is what they wanted to approach because obviously, price was an issue. They have come down, but they still are expensive. The premium end of the TV market is somewhere around 10 million to 15 million units, which LG is still focusing on. I personally bought a 55-inch OLED TV that was just HD, I think, 4 years ago -- 4.5 years ago, and it was $3,600. You can get a 4K OLED TV for just over $1,000 today. So prices have come down, and I think it is -- the approach by LG's marketing team is to start obviously trying to get the price down to have the market grow. And it really is a price versus -- it was just again rated the best TV ever. So if you're going to go in and spend a premium price for a TV, you're going to build a media room or you just want a big TV and you want the best picture, if you could afford it, you're going to pay for an OLED TV. There is a magic number under $1,000 if people think the market will really expand. And it's getting close, but it's not there.

Okay. That's helpful. And then maybe just expansion into other markets, what are some of the use cases and maybe the automotive or IT markets? And then are those a key growth driver or are there enough units to kind of to make that an attractive opportunity? And how does the sales opportunity differ than maybe the smartphone or TV market?

Well, it is -- it's -- I think it's about 450 million units annually, which are tablets, laptops and the IT market itself. OLEDs have not had much penetration in that market to date. Samsung and others have focused on mobile because of battery. But you are starting to see some IT products, mainly for gaming. OLED displays are more expensive than LCDs. So it's going to go into premium-priced products initially. But as the capacity continues to grow, I think you will see this market continue to grow. You're also seeing some automotive displays. As I said, you can make these on plastic. So you can have a conformable display that some of the automotive applications, I know, I think it's -- that Cadillac Escalade is going to have a 32-inch curved OLED screen essentially as it's dashboard. It is a -- it's a market that takes time to get in. I mean to get designed into an automobile, it takes a number of years before you get designed in. It is a premium-priced product. It's a very good market for our customers. We don't make displays. We are just part of the supply chain. So we provide material and architecture, but we do know that our customers like it because they can get a premium price for these. It is not a huge market, but it's incremental business for them and for us. It's not the same as 600 million smartphones, you don't sell 600 million cars. And right now, it's a premium end of the car market. You're also seeing automotive applications in tail lights. BMW, Mercedes, Audi are putting tail lights in their OLEDs because they can do a lot in designing what the tail lights can do.

Got it. Okay. That's helpful. Maybe in terms of -- maybe moving on to some of the technology, your fee -- in terms of your vapor -- organic vapor jet printing technology, you're scaling that currently. Just can you describe plans to ramp this and how you think about timing there?

Yes. OVJP, or organic vapor jet printing, is essentially taking the best of vacuum deposition process, which is how all OLEDs are manufactured today. You essentially put these materials into a vacuum chamber at the bottom, you heat them. And when you heat them, when you're in vacuum, they vaporize, they rise and then your substrate or your piece of glass that may make 200 displays is actually an up deposition process. And you have a shadow mass that blocks the areas. You don't want whatever color it is, you're depositing in that chamber to go, whether it's -- you have a red chamber or green chamber and a blue chamber. You waste a lot of material on the shadow mask. And so folks over the years have talked about a printing technology. Maybe there's a way that you can deposit the red material directly where you want it, the green where you want it and the blue where you want it. Folks have talked about inkjet printing in OLED display for 15 years. It is a very challenging process to inkjet print these organic materials. They are very sensitive molecules. And they -- in vacuum, because it's an oxygen and moisture free environment, we know how they react. If you try to print them, you have to turn them into a liquid. And if oxygen and moisture damage them, it's kind of hard to turn them into a liquid without doing some damage to the molecule. In addition to that, in order to have a fast printing process just like the inkjet printer on your desk, you need to have solvents and the print heads to keep them flowing and then you need to heat the substrate to make it -- to make them dry quickly because you want to deposit millions of pixels every 2 minutes. All of that, we worked with Seiko Epson for 7 years -- for 5 years, about 7 years ago and decided that we did not think it would work. So what we started working on is the best -- I said the best of both worlds, you have these materials vaporized essentially in vacuum and then use a print head to deposit these directly on your substrate. So it's like inkjet printing in that you're putting your red material where you want it to go and you're not -- and you don't have a mask, but it is a vapor process where we know how these materials react. And we're getting very good results. We have a tool in our facility that can make red, green and blue on a 6-inch substrate. You need to scale this up so that you're making either Gen 8.5 or Gen 10.5 size substrate for TV applications. This is -- printing is only for TVs. Your DPI or dots per inch for 55-inch or 90 dots per inch for 4K resolution for 50 and 8K for 55-inch is 180 dots per inch. This is something that we have formed a company in California with some folks who have actually scaled up equipment. So Jeff Hawthorne, who used to be the CEO of Photon Dynamics, is running our group out there. We are going to do the R&D in our facility, but his team is going to look at the scale-up issues and also work with customers to figure out what the best way is to commercialize this. It will be 3 to 5 years before you see a full commercial product in the marketplace making displays.

Got it. In terms of maybe what you've seen, you've talked about a lot of challenges in that we need to build the facilities, the price points need to come down, you maybe need to standardize the products or processes. So what do you view as like what is -- what helps this market take off? Is it really just kind of standardizing those processes or is it getting the price point -- to an attractive price point in the OLED -- on the display market, understanding that it's already within the smartphone market?

Well, I think you need more capacity. As I said right now, you've got Samsung and LG that were the first 2. BOE was next to commit. BOE has 4 facilities that they've committed to, 2 of them are up and running and 2 more that are in process. We've got China Star, Tianma. So it's really capacity. As you see new entrants into the market, you always see prices come down. So -- but it is a process that is just not an overnight process, as I said. So I think it will take some time. Normally, when you see BOEs and China Stars and others from China enter the marketplace, the one thing that they are is price competitive. So you've seen it with LCDs, and you'll see it with -- the same thing with OLED displays. I think you will then see the lower the price, the more market share it will gain, whether it's smartphones or whether it's TVs.

Got it. Okay. And a question came in from the audience of -- as the price of OLED TVs come down, how does that impact some of your licensing fees or how that would track to your overall kind of revenue line item?

Well, for us, the key is capacity. We coat the entire substrate. So if you're going to make mobile size displays on a Gen 6 size tool, you can theoretically make 200 and some units, your yield may be 70%, 80%, 90%, doesn't matter what it is, we will put our material on the entire substrate. So as yields go up, which helps pricing, it won't matter to us. We will sell the same amount of material. Factory utilization is key for our current revenues. If the factories are running at half capacity, we're only going to sell half the material. New capacity is the future revenue for us. So I do believe -- and for us, we have long-term agreements in place. We have pricing for the life of the agreements for all of them. We are not the driving cost in OLED display. A 6-inch or so size display on plastic sells for estimates are $55 to $80. It's been estimated that our red emissive material in that display is somewhere between $0.10 and $0.20. So -- and then you add in license fees and royalties, but we still -- we're not going to do this. If I gave it away for free, it's not going to impact the $80 price tag.

Right. Okay. There's just not -- it's not the piece of the bomb that's the inhibitor?

Correct.

Got it. Okay. And we talked about or you alluded to it earlier, but maybe just briefly provide for investors who may not be familiar, an overview on blue. And where are recent developments tracking with your expectations and next steps for blue versus red and green?

Yes. I mean, as I said in the beginning, when it was first developed, the fluorescent blue emitter was developed, and it is still the standard in the industry. It is a material that is used. Kodak is obviously not in this business anymore and the IPs are gone. There's a number of companies that make a blue fluorescent emitter that's being sold to all of display manufacturers. Customers want a blue phosphorescent emitter because of power efficiency. And as -- when Samsung adopted our green emissive material in 2013, they stated they got an incremental 25% increase in battery life. Obviously, when I talked about 5G and efficiency, folks are pushing us hard to get a blue phosphorescent emitter that they can put in product. And we've talked about it on the last, I think, 11 earnings calls and talked about excellent progress, and folks are always asking us what this excellent progress mean. It kind of means what it means. But on our call, we talked about the fact that Samsung presented a paper at Society for Information Displays in August, talking about their R&D team working on blue phosphorescent emitter and stated that they were getting the material from Universal Display, which is the first time a customer talked about getting blue emissive material from us and the first time we've talked about it. And we are providing it to a number of customers. It specifically stated that blue needed more lifetime for it to meet commercial specifications. Blue is a very difficult color to replicate individual spectrum. The last laser to be developed was a blue laser. The last LED to be developed was a blue LED. And it's mainly because the wavelength in the blue spectrum is very short, which, when you look at the physics of it, means it has very high energy. In English, what it means is it goes through that -- I talked about going into this excited state and then recombining and doing it 180x a second, you need to have products that last for 20 years, 6 hours a day, which is 50,000 hours of lifetime, 6 hours a day. We need -- and in order for it to do that, what happens is reason that lifetime goes down is sometimes because of the high energy in it, it does this so fast, it doesn't recombine to its original form and it starts to break down. So that's really where our scientists have been working is increasing the lifetime of materials to meet the customer specifications. So we have to be better than the fluorescent material that is in the marketplace today. It is -- yes, it is really -- it's not an if, it's when.

Okay. Got it. And just maybe a second on the balance sheet. What are your primary focuses on cash usage going forward? And would it be more focused on dividend side or share repurchases?

Yes. We -- obviously, we have a strong balance sheet. We have a lot of cash. And as an IP company, you want to have a strong balance sheet because you don't want to have to threaten someone. But if you do, you need to make sure you had to wherewithal the follow through. So we will always maintain a strong balance sheet. If there are opportunities for us to acquire either IP or a company we bought -- a contract research organization, the thesis that we were working with for a number of years, we bought them a few years ago. In terms of the philosophy of the company, we believe that returning capital to shareholders in the form of dividends is the appropriate way to do it. And we have stated that we expect to continue giving dividends, and we expect them to continue to grow as we grow.

That's helpful. Maybe just a second on form factors. I think there's been a lot made of foldable phones or foldable IT products from Lenovo, from Samsung, a rollable concept phone from Oppo, is this a market opportunity for you? And then just how does the OLED technology play or how is it kind of critical to those new segments?

Well, for us, it doesn't matter if it's glass or plastic. The recipe to make the device is the same. However, when we formed the company, actually, we had a rollout pen. I mean that was our mascot 25 years ago. It was our vision then. And from a personal standpoint, I think foldables and bendables are a whole new category that, over time, will dominate the market. I have the Samsung Galaxy Fold, the first one. And so when you open it up, it becomes a small tablet. Pretty much every time I take it out, people look at it and say, what is that? Why don't I have one? It's expensive. That's obviously. It's price right now is $2,000. But I do think that, that is the future. I think that it's really going to expand as the manufacturers can get the cost down. Whether it's new technology, it has to be developed for encapsulation and how it gets done. Man, it works. I've had it for -- since it came out, and it's great. I love it. So I do think that this is a whole new category that will really dominate the market in the future.

Got it. Okay. Well, I look forward to getting more updates just as kind of the ecosystem continues to ramp and the material progress will be made -- being made on blue. So with that, I think we're basically at time. So Sid, appreciate you being here today, and thanks for speaking with us.

Thank you very much for having us. It's our pleasure.

Thanks.