Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good afternoon. This is Jim Ricchiuti in the Equity Research Department in the Needham & Company. Welcome again to the second day of the 23rd Annual Needham Virtual Growth Conference. Following presentation is going to be a fireside chat with Universal Display, which many of you know is the only pure-play in the OLED display market. So we're delighted to have with us today, Sid Rosenblatt, Executive Vice President and CFO; along with Darice Liu, Company's Director of Investor Relations. Sid and Darice in the background there, thank you for joining us.

Well, thank you for inviting us. We really appreciate it. Thank you.

Well, why don't we dive right into this? So I wanted to go back to last summer, where clearly a very difficult second quarter. You came out of that in -- I guess it was in early August when you reported. I think sounding more optimistic note in -- about the near-term outlook. And that was certainly borne out in the stronger revenues that we saw in Q3. So what I'm curious at is if you're able to tell us how much of that improvement in demand that you saw was tied to some of the newer smartphone introductions that we're all familiar with versus perhaps the burning off of that excess inventory that we built up that we now goes back to relates to COVID, it relates to some of the tariff situations with one of your Chinese customers late in Q4 '19.

Well, it was -- obviously, the quarter Q2 pretty much everything just stopped. And we -- literally, like somebody turned to force it off, and our revenues were half of what they were in Q1. And to be perfectly honest, during the quarter, we really didn't know when it would turn around. And pretty much once July started, it's almost like someone opened up the spigot again. So I do think that there may have been some inventory that was being used up. But clearly, some of our customers that were in China and in Korea, all had COVID-19 issues in their fabs. And some of the fabs are just running at very, very low utilization rates. But it did rebound very well and almost -- so our guidance now for the year is $380 million to $400 million, which is only about 15% below what our original guidance was when you go back to February of the year. So we did recover very quickly. And I think it was pretty much across the board, not just smartphones or TVs, but pretty much all of our customers just started buying again. And there is obviously a lot of demand. There's new products getting introduced in Q4 and the first quarter of this year.

I can't imagine you thought you could finish -- end up where you are, given where you thought you were at back in the spring.

No, we thought, to be perfectly honest, we were surprised that it was even close. I mean once it started, it was -- we really figured based upon Q2, Q3 would look just like Q2, and it clearly was not. So there was a lot of pent-up demand. And I think there's a lot of setting the stage for Q4 and for 2021.

And that Q4 guide, we've been seeing data points out there that talk about OLED penetration in the smartphone market. And certainly, we started out at very low -- lower levels at the beginning of 2020. And of course, Darice has corrected me in a couple of instances where it's not always apples-to-apples comparisons because we had a major product launch from a large consumer electronics company and that's skewing things. But I'm wondering how are you guys -- you guys see all the external data, you talk to the customers, how are you thinking about OLED penetration in the smartphone market? Because you got [ tougher ] dynamics. You've got 5G, you've got major releases.

Yes. I mean we do think that there's -- you are correct. There's a number of things. In Q4, I know there was some reports that talked about OLED smartphone penetration being 60%, but that really is just a quarter as opposed to where it is. Estimates from where I think 475 million units, smartphone units in 2020 going to about 600 million in 2021. And I think it's a combination of a large consumer electronics company in California that has 4 OLED phones now. And there is -- I think it is really a replacement cycle moving into 5G. OLED screens are power efficient, and 5G is very power-hungry. So having an OLED screen in a 5G phone really makes a lot of sense so that you don't have issues with the battery. So I think a combination of, a, more SKUs, having OLEDs and the fact that 5G replacement cycle is really kicking in. So the TAM for smartphones is about usually 1.4 billion to 1.6 billion, I think it was estimated to only be like 1.2 billion for 2020. So at 600 million units, you're getting close to 40% up to -- moving your way to 50%.

Yes. So that's the penetration story in smartphones, and that's clearly been pretty healthy. At the -- on the TV side of the business, if you look at the TV market, LG is making traction, and units are going to -- looks like you're going to be up very nicely in '21. Whatever they're talking 7 million or 8 million units. And they're roughly, I don't know, 4.5 million in 2020. But I guess, regardless of the exact units, it's still fairly modest. And I guess that's what I wanted to pursue a little bit with you. And as far as your concern, there's a lot still even that number of units, you can coat a lot -- there's a lot of material that's used to coat a 65-inch OLED TV. But I'm just wondering how you view that market. And looking at the TV market in general, is it fair to say that, that's basically about 20% or so of revenues, but where does that potentially go for you guys as you look at that market over the next few years?

Yes. I mean that market is -- you are correct. The TAM for TVs is somewhere between 240 million and 260 million units. So even if you're at 7 million to 8 million units in 2021, you're still below 5% of that market. And historically, the approach by LG and by its OEMs that brand OLED TVs is the high end of the market. And folks are talking about, you need to reduce the price in order to get more disparate demand so that you get more capacity and increase the supply, which then we know how that works. OLED TV pricing has actually come down significantly. I mean today, if you go to Best Buy, you can buy a 55-inch 4K OLED TV for $1,299 and on Black Friday, it was under $1,000. And you can get a 65-inch TV, I think, for $1,799 and a 65-inch OLED TV, which is now only $3,499. Now of course, you can also get a 88-inch 8K TV, which is $30,000, but that's still a little pricey. But I do think that when you look at the premium end of the market, OLEDs have been rated the best TVs ever. We are very bullish on OLED TV production and increases in capacity and got folks, whether it's BOE or others talking about and Samsung talking about getting into the OLED TV market. And you are correct. For us, if it -- approximately 10 million OLED TVs and square meters of glass is equivalent to almost 700 million smartphones. So if the OLED TV business doubles, it really does impact our revenues because we coat the entire substrate, and you are correct. Coating a 65-inch TV versus a 6-inch screen is very different. So square meters of glass and new capacity would -- really will drive our revenues in the future.

And of course, we're also beginning to see signs -- maybe I didn't appreciate as much that we are seeing other applications. I mean we -- Samsung has been, I think, active with tablets, but -- and we're also hearing reports, seeing reports now that major U.S. consumer electronics company could go with an OLED screen in a future product. And I found it also interesting, I don't know if you guys thought much of it, but Samsung launching a larger scale branding campaign for their OLED displays, which is kind of surprising given how long they've been in this market, what took them so long. But the point being, as it relates to tablets, laptops, notebooks, automotive, gaming consoles, so what I guess I'm asking is, in the aggregate, you look at these applications in the area, does it have the potential to represent a nice incremental growth opportunity, perhaps in '22 and beyond?

Yes. I mean, historically, it's been smartphones and TVs. And we always get questions about what about the IT market, which is laptops and notebooks and tablets, which is about 450 million units. And today, it's very small. It's 1% of that market. And the ones that are in are essentially gaming products because of the True Black background. But you are correct, Samsung talk about adding 10 new displays for the IT market, some of the other markets, which automotive applications, even on -- when you see an ad for Cadillac Escalade, they talk about a 33-inch OLED screen in the ad for the Cadillac Escalade. So those opportunities are really good opportunities for our customers. There's not that many cars that are being sold, even though clearly, there's plenty of them on the road, but if you look it, it's not hundreds of millions of units. But the premium end, Mercedes, BMW, all are putting OLED screens in because of the benefits of OLEDs, one, is the picture quality and contrast ratio and the fact that it -- that can be made on plastic, it's lighter weight for automotive applications, and it's conformable, so they're going to have a curved screen. So all of those, I think, are areas that you're going to see growth over the next few years. And the Gen-6 size fabs are pretty much what most folks have today, except for LG for TVs, and they can make up to a 32-inch screen. So it is -- it fits right into any excess capacity that you may have or if you want to build new capacity to meet this need.

So in February when you report or first week of March, I'm not sure when exactly you're going to be reporting. But presumably, you're going to be giving guidance. You gave guidance as it relates to resuming guidance for 2020. If we think about the drivers so we've got OLED penetration rates at higher levels with more products out there, also being impacted by a 5G transition, higher OLED TV unit forecast, you've got some of these additional drivers that are taking shape. Seems like the setup looks pretty good, even though you still have a pandemic. And I'm wondering as you -- the setup would appear to be fairly healthy as it relates to demand?

Yes. I think our call is scheduled for February 18. So it is our intent to give revenue guidance for the full year, assuming that the world doesn't come to an end or there are obviously issues that could impact it. But based upon everything we know today and based upon what we're looking at in terms of our customers and where our customers are, manufacturing plants are, it looks like it should turn out to be, as you said, a very good year. We can't specifically, I'm not going to give any guidance right now. But as you said, we're going to go from 475 million smartphone units to almost 600 million. TV capacity is going to go up in other areas. So it should -- our revenues are not a straight-line with that growth, but the trajectory is correct.

And it also seems like we're seeing the capacity situation if anything, maybe tilting more toward investment, I mean, being the big investment actually, obviously coming out of China. But as you think about the '22, '23 time frame, did -- initially, did you see or hear of any issues related to COVID where some investment was paused? But more recently, it would seem like there's more activity. What are you guys hearing or seeing from some of your customers?

Yes. We've historically sort of given 2-year capacity increase guidance and started in 2015 to the end of '17 and then '17 to '19. And then we've given guidance from 2019 to 2021, and we talked about approximately 50% increase in installed capacity. Installed versus when it's turned on are a little different. We don't see revenues until the tools are actually turned on, but we haven't seen a real push out. So what we're hearing is things are pretty much intact whether things slip a little bit that's probably always going to happen. But I think that right now, everything that we see, we believe that, that 50% increase in installed base should be correct from -- at the end of 2021.

Got it. I want to segue to the topic you always get asked, that blue commercialization of the phosphorates and blue emitter, every earnings call, every investor conference. And I want to maybe try a different approach with this because we all focus on it. You guys constantly ask the question from us. But what -- how much interest is there from the customer base? How much pressure are you getting from the customer base about this?

Well, to be perfectly honest, if you talk to our CTO and other folks that work with the customers as much as you are correct, we hear it from you guys, we hear it from our customers more so because it is very important to get an all phosphorescent mobile device. And as we talked about a little bit earlier in that 5G technology is very power-hungry, and adding a blue phosphorescent emitter to a mobile device will increase your battery life. And in 2013, when Samsung adopted our green emissive material, they stated at Display Week that they got a 25% increase in battery life just by adopting our green emissive material. So we fully expect to get an increase in battery life, whether it's exactly the same numbers, depends on the material, but fully expect to see that. So our customers are clamoring to get it. And Samsung last summer in a white paper talked about using our blue phosphorescent emitter in -- for R&D purposes, and stated, obviously, that they received it from us, but that the lifetime of the material still needed to get better. And we agree. We do not meet the initial commercial specifications today.

Given this level of interest, though, do you have more conversations with these customers where you're giving more regular progress reports or is it basically, hey, when we get to the performance levels that we need to get to commercial viability, then we'll be talking in earnest with these customers. I'm curious how much interaction is there about this progress? Or you guys...

It's significant. It is significant. It isn't -- we'll give you a call when we have it, and you'll find it at your front door. Our R&D teams work with the R&D people, work with all the folks in different areas at all the customers. And we have different teams that work with every one of our customers, pretty much have conference calls on a weekly basis and go through R&D progress, not just on blue, but all of our customers want better reds and different greens and different reds in that their drive schemes are different. They're looking to shift to color a couple of nanometers, one way or the other. So these conversations are not just related to blue, but they're related to all of our materials.

The other topic that we've talked about is -- and it relates to TVs, which you sound -- you guys sound pretty bullish even with the existing market, the way it stands right now, LG, BOE, scale and capacity. But just on the topic of Organic Vapor Jet Printing, the OVJP technology, as we think about this, you formed a joint venture while last June, what are the milestones that we need to think about as we -- as this plays out?

Well, yes, we formed a wholly owned subsidiary in California that job it is to scale up our OVJP technology. And a quick description of what it is, is folks have always talked about being able to have red, green and blue side-by-side displays for large area displays. Today, large area displays, TVs use white -- what's called white with a color filter. Where you coat the entire substrate with white and then you essentially use a mask that you would use to give RGB colors on an LCD. So it's a color filter that you would use. And folks would want to be able to put the red material where they want it, green where they want it and the blue where they want it, so that it's very efficient in that today on RGB side-by-side for mobile, you use a fine metal mask and you're coating the mask and you're wasting a lot of material. Only 2/3 of actually -- 1/3 of it actually goes on the display. Folks have talked about inkjet printing for 15 years back to Cambridge display days. And it's very difficult. And we have found -- we've worked on it for a long time with Seiko Epson. And so because of what these small molecule materials, we know how they react in vacuum, and we know you get very good lifetime. If you're going to turn them into a liquid to print them like using your inkjet printer you have on your desk, there's a lot of things you have to do to these materials, which damage the materials. These materials are very sensitive. When you think about the fact that we're talking about molecular layers, every molecule has to work and it has to work for tens of thousands of hours, and it literally goes through this state where it creates light 180 times a second. So we looked at it and said, maybe there is a way of taking it from a vacuum environment and a printing environment and putting them together. So Organic Vapor Jet Printing essentially takes materials that you deposit in vacuum and we use these proprietary print heads to deposit the red material where you want the red to go, the green to go where the green should go and the blue, very efficient in terms of material utilization and high-tech time and highly -- very highly reliable. So we have a pilot tool in our facility, but we make 6-inch squares, and we can make 4K and 8K resolution using this process in our labs. You need to get to a Gen-10 size tool and really for TV applications. And the team, which is headed by Jeff Hawthorne from Photon Dynamics, their job is to scale this up, to look at what's necessary, to go from a 6-inch square to a Gen-10, Gen-10.5 size substrate, and what is it we would need to do in terms of scaling up our technology. So that's really what their job is, and they're just getting started on that. We put together a team that's got maybe 15 to 20 people at this point, and their job is to look at what we do. We will continue doing the R&D, it's their job to design what the first alpha tool would look like.

So does this subsidiary, should we think about it -- I mean given that it doesn't sound like a lot of folks, in terms of resourcing this going forward, should we think in terms of -- there might be some increased resources that are going to have to be allocated?

Well, I think that initially, we're looking at what's necessary for the first step, which is looking at an alpha tool and trying to understand what the best way to commercialize this will be, whether it is with customers or equipment companies or both. It is something that you don't have to make that decision today, what you really need to be able to do is prove to whoever it is that this is a scalable process that will give you very high throughput and very fast tech time.

But realistically, the way also we should be thinking about it is that getting this technology on a true commercial path, potentially with an equipment partner, is still a number of years away, right?

There's no doubt. I mean we talk about 3 to 5 years away, and I think that is realistic to have something commercial in the marketplace for sure.

Okay. Actually, it's a question from the audience. So we don't talk about it a whole lot. You guys used to mention the lighting market. What's the level of interest activity level for OLED lighting? Is anything happening there that we should be thinking about?

Well, there still is small. There's a few companies that are making small quantities. It's a very niche market. We are seeing taillight applications, the Audi, BMW and others have OLED taillights and that gives you very robust design abilities by using these small little OLED light sources to give you designs that you can't do with LED technology. So -- but to some extent, you need an investment almost like Samsung did when they first started in 2010 and said, I'm willing to spend the money to build a Gen-5.5 size substrate and be able to ring out all the costs and get it into the marketplace. And to be honest, nobody has done that yet.

Okay. And just as a follow-up to the OVJP topic that we were talking about, somebody asked, it's a good question. Not sure you really have the data yet. There's just question about is there a difference in the display performance, potentially for the larger OVJP produce displays versus traditional large OLED displays and maybe there's not enough, we just don't know yet?

Well, it -- RGB side-by-side direct view versus having a color filter to filter you lose light through the filter. So you have to drive the materials harder. So using RGB side-by-side will either give you a brighter display or you would not have to drive it quite as hard. So there is a difference in what it is. I mean today, white with a color filter is still the best TV ever. It's been rated the best TV every year since it's come out. So it isn't that it is in an inferior display, it's just that you may be able to make it, a, more cost-effective because you're not wasting material, either coating the entire substrate with 3 different colors to get white. And have to drive it harder to get enough light out through the filter. So there are benefits in terms of cost and what the display will look like using RGB side by side.

Okay. One of the other things that we used to focus on, and we don't talk about it a whole lot is just the contracts you have with various customers, these longer-term contracts, supply agreements, the customer list has clearly grown over the years. And I'm wondering from one year to the next, how many of these agreements come up for renewal? Or are they just spaced out so far where there's nothing coming up in '21 or in '22?

Well, there are something -- there is something coming up in '21 and '22. So...

Okay. That's -- maybe you can tell us about it.

In 2021, the Tianma contract is up. And at the end of 2022, Samsung's 5-year extension is up. Samsung has an option to extend it at their option for 2 additional years. And the LG contract, which was originally almost 8 years, that's up for renewal at the end of 2022. But they are pretty much the ones that we've announced to dates on.

And -- but in the past, these dates were not necessarily dropped at dates by any means, right? I mean we used to just see this get extended as you guys went through the negotiation process, right?

Yes. We clearly -- we've always stated that -- I mean we're going to provide our customers with the materials that they need. If you're negotiating in good faith, if it extends past the original date, it extends. That's fine. I mean to be honest, in 2010, the original contract was up in June 2010, it didn't get signed until August 2011. And so that was 13 months. The 2017 one was 1.5 months. So our lawyers and team will be working with our customers. We fully expect to continue to be working with all of our customers. We are a sole source of materials of the commercial OLED materials in the market, and our customers want to keep working with us and we want to keep working with them.

Now there's -- and I don't know to what extent this enters into negotiations or not, but we all keep hearing, reading about MicroLEDs and other emissive display technology as a potential threat. But I mean the threat of this is just what we've seen for some of these large area MicroLED screens, I mean these are large screens, but pretty hefty price tags as well. And so the question is, how serious do we view -- do you view this as a competitive threat years away, is it or not?

Well, I mean, you're right, the 110-inch MicroLED display was $150,000. So I mean that's a lot of money. And so I think that there's always -- it's a $150 billion annual business, the display business. And there's always stuff that's going to be in niche markets. They still sell E Ink technology. So we look at these. OLEDs are one of the few technologies, very similar to LCDs. The reason the LCDs have dominated this market for the last 40 years, they started out on watches that you can go from very small to very large. These other technologies have niches, either they're big or they're small or they're one or the other, OLEDs can go from a watch or a Fitbit or whatever it is you want to put it on to 88-inch commercial OLED TVs. So it fits in all the categories. So I think it is something now that's going to approach 50% of the smartphone market. It's going to continue to grow on the TV side. And our competition is LCDs. The stuff that's nipping at our heels, we'll look at. But as long as we continue to do what we're doing, I think OLEDs will clearly -- will be the technology of choice. They're very thin, they're lightweight. You can make them on [ preslec ]. I mean all the benefits of OLED really tell you that it's going to be the technology of the future.

Okay. We're winding this down, but I want to go to the balance sheet, which is obviously pretty healthy and talk about the cash that you have capital deployment. If you look at where you are today, you've done some M&A, but I don't know, is there a pipeline? Any -- is there much activity from an M&A standpoint?

It's -- just as you said, we're a pure-play in OLEDs, and there's not very many other folks out there. We've -- our acquisitions have been either IP-related or with CRO that we purchased in Adesis. So the purchase of Adesis has really helped us. And we do have some other CROs that we work with. If something comes up that makes sense, we want to be ready to act. If an IP portfolio comes up, and if not, clearly, as an IP company, you always want to have a strong balance sheet. The Board looks at capital return to shareholders, its philosophy is that they believe that as we continue to grow, our dividend should continue to grow. And they believe that, that is the appropriate way to give capital back to shareholders.

Okay. So cash set aside in the event there's something interesting that comes along, the dividend, certain amount, obviously, in the past, you've talked about, it's nice to have that cash when you're in negotiations with some of these large customers. I guess the question is how much cash is the right level?

I mean it's still a young industry, and I don't have an answer for you to be perfectly honest. It is something that we talk about and look at, but having a target amount that will just maintain is not something that we have done at this time.

Okay. I think we'll leave it there. Let me just take a quick look. I think we're -- there is a question regarding -- and if you're willing to just talk about OLEDs in computer monitors. Just somebody was asking about display burn. Does the display burn in OLED mean that it's not going to be widely adopted in computer monitors, is that -- I mean we have seen [ it ] being used in laptops.

Yes. There was always an issue of burning, and I think it was an issue early on. I think there's been a lot of work that's been done on the architecture side and even on the material side, so that we don't believe that, that issue was one that will make OLEDs not be adopted on the IT side.

Okay. All right. Sid, thank you. Darice, thank you. And thanks for joining us for the Needham Conference.

Thank you very much for the opportunity. Everybody, stay safe.

You too.