Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Well, good morning. This is C.J. Muse with Evercore ISI, senior analyst covering semiconductor, semiconductor equipment space. Welcome to day 2 of Evercore ISI's Inaugural TMT Conference. Pleased to host Universal Display today. We have Sidney Rosenblatt, Chief Financial Officer; and Darice Liu, Senior Director of Investor Relations and Corporate Communications. Sid, welcome.

Thank you very much for inviting us, and we're pleased to be part of this.

Well, great to have you.

I figure I'd start off with Voldemort, but -- the name that shall not be named, meaning blue. So with Samsung's recently published paper, folks -- around the company's blue host IP developments, claiming that the company is fairly near actively adopting a blue phosphorescent emitter, how do you view the adoption of blue across all OEMs once the commercial emitter is available? And more specifically, will Samsung be the only one able to benefit from its host IP? Or will the host material become commoditized as we've seen across other phosphorescent hosts?

Well, that's a long question, and obviously, it is the one that I fully expected to be the first question because there has been quite a lot of conversation. Obviously, we've been talking about the progress we've been making on blue phosphorescent emitters for a number of years. And this is -- essentially, the Samsung paper that you're referring to was at Display Week of about 3 or 4 weeks ago, where a Samsung researcher published a paper about using -- developing blue host materials for blue phosphorescent emitters and at the end of the paper, acknowledged that the phosphorescent emitter that they were using was Universal Display's. This is the same researcher who, last August, presented a paper talking about progress on blue phosphorescent emitters, and it also stated that the phosphorescent emitter that was being used was our phosphorescent emitter, which is the first time that anybody, including us, talked about us shipping developmental quantities of material blue phosphorescent emitters to our customers. So there's been a lot of discussion of when are we going to start shipping development quantities, and until one of our customers talked about it, we really were not going to talk about it. We did state that we are shipping these materials to a number of different customers, not just Samsung. Your question specifically relates to what they are talking about, and it is that they're working on a host material to try to optimize the blue phosphorescent emitter. And host materials are -- there's multiple different host materials, red materials and green materials. There are multiple suppliers of hosts. No one has overarching intellectual property on a host. You can develop the host, I can develop one, Darice can develop one. As long as we don't interfere with each other's specific IP on that molecule, then there are ways of folks doing different ones. We fully expect that eventually, it will be a commodity, which host materials are. Just to give an example, when our green emissive material was incorporated into Samsung products in 2013, we actually were selling host materials because there was not a lot of green host materials that work with phosphorescent emitters. We have been shipping blue phosphorescent development quantities to our customers, and I suspect each of them are developing their own host materials. This is Samsung specifically talking about theirs. We do develop host materials in our labs because we need to make a device that works, and the only way you can make one that works is by having a host and an emitter together so that you can see what the output is. We don't believe that this will limit the ability of others to incorporate blue phosphorescent emitters into their products, but they will not be able to use whatever this host that Samsung has specifically developed. They'd have to get it from some of the other host suppliers or have developed it themselves. That's a long-winded answer so I apologize.

Yes. No, that was great. So given that you're shipping development quantities to a handful of customers, curious if you can update us on kind of what you're thinking, hearing around the benefits of replacing blue fluorescent with blue phosphorescent. I think the thinking was perhaps 25% savings in power consumption. Is that similar? And I think, secondarily, the notion that blue dopant volume would be similar to that of green. So any update on those 2 fronts?

Yes. It's difficult to give a specific answer because, as I stated, we're shipping developmental quantities. And these materials are not the ones that are actually going to be the materials that are the commercial materials because, as we have stated multiple times, today, we don't have one that meets commercial specifications. So as an example, when Samsung adopted our green emissive material, they specifically stated that they got a 25% increase in battery life. We fully expect to see an increase, and for a long time, we were talking about that ballpark. But until we get the specific molecule and know what the structure is that the customers are going to use, they're going to be able to tell us exactly what that is. But clearly, you're going to get a benefit with phosphorescents because it uses 75% less energy to get the same amount of light out that a fluorescent emitter would. And in terms of quantity of material, we do sell twice as much green as we do red. Red is a material that in a display, there's not a lot of red that's in it because you don't use a lot of red in your color scheme. Because red is really not very friendly to your eye, so you don't have a lot of it.

Got you. And I guess perhaps moving to the license part of blue. I believe all of your customers with the exception of Samsung have included blue inside their portfolio license agreements. I guess just curious, what was the challenge in getting blue back in 2018 in your negotiations with Samsung? And how should we think about upside once a commercial blue emitter is available?

Yes. That actually goes back to 2011. When we signed our extension in 2011 of the original agreement, which I think was in 2005, it was all 3 colors that they paid a royalty, 1/3 for each color that they adopted. And then in 2011, when we went to a different form of payment in order for us, at that time, to include blue, they wanted a specific date as when we would have it. And at that point, it was really -- we didn't even have green that was commercial at that point. So it was specifically taken out of the agreement in 2011. And again, when we signed the extension, it was "Unless you can give us a date certain that you're going to start shipping it to us," which we were uncomfortable doing, obviously, because it's still under development and how much the payment was going to be because, as you're aware, Samsung is a fixed amount. And if they're going to start paying an incremental fixed amount for blue, they wanted to be able to get it. So it was -- it is one that when we get it, we will then have to agree on what the payment schedule will be on the licensing side. And we also have to talk about price because our agreements -- our long-term agreements with all of our customers had prices for red and green emitters.

Got you. And I guess last question on blue. How should we think about the milestones once you have a commercially available blue? Obviously, backplane technology will have to change. You just talked about negotiating pricing and what the agreement will look like with Samsung. But are there other factors that we should be thinking about in terms of that precise moment when the material is good enough and we actually see commercialization?

It is something that will take some time. As we stated, that you need to redesign your backplane in order to drive a phosphorescent emitter because fluorescent emitters are used -- only use 4x the power. So if you just put a phosphorescent emitter on the same TFT, the blue would be very bright. So it will be in new products that are designed in, and then eventually, we believe it will be in all. You won't see any difference in the visual characteristics of the display. It is power. It is battery life on mobile devices. In addition, it is any heat dissipation or any heat management that you have to put in it. You can put less because you're putting less current through the device to drive the blue pixel. When you get to larger-area displays with TVs, you clearly have to do a lot more on heat management than you do on mobile size screens, which are much smaller. So you do get a benefit in terms of power efficiency. And for large-area displays, it is the fact that you get -- you can save enough money just on the heat management in it to pay for the difference in having to redesign the backplane.

Got you. Okay. I guess moving on to the TV market. Curious to hear your thoughts around how you're seeing the competitive landscape, whether it's WOLED to quantum dot-OLED, mini LED, microLED and obviously, the current mainstay LCD, where we're clearly seeing supply constraints and factories staying online longer. Are you worried about OLED's competitive positioning? How are you thinking about the TV market and segmentation shaking out over the next handful of years?

Yes. I mean our competition is LCDs. It's -- LCD is on the mobile side, but today, OLEDs are in the 30-some percent market share from smartphones -- for TVs of the TAM of 240 to 260 million units. Samsung or LG is talking about 10 million OLED TVs -- 7 million to 8 million this year, 10 million next year. You're only talking 3% or 4% of the market, and it needs to grow. It needs to do a number of things. It needs to be more folks in the market. But in terms of competing with LCDs, a lot of the things that you mentioned are bells and whistles on LCDs: mini LED, which is just a backlight technology for LCDs. LCDs are the market. There's 80-or-so fabs, and pricing is going up and down. They got fully depreciated fabs. And pricing for OLED is still the premium end of the market. You are seeing pricing for, I think, 55-inch OLED TVs closer to USD 1,000, which used to be -- started out at $3,600 and $10,000 before that. But -- so pricing is coming down. We're very bullish on OLED TVs. It has been rated the best TV ever every time it's rated. So -- and if you put it side by side next to any other TV, you can walk in the Costcos and you get hit with a 77-inch OLED TV as soon as you walk in the door. And when you compare it to any other TV in the store, there's really no comparison. But it is a premium price. We're not talking about a TV that's going to sell for $399 for a 55-inch TV. The picture quality between -- there's just no comparison. So we do believe that LG -- there's 19 OEMs today that are branding OLED TVS, and we think it will only continue to grow.

And how does improved manufacturing technology fit into your thinking of adoption? And I guess here curious to hear more about OVJP and the work you're doing as well as perhaps some of the other investments being made by equipment players to really try to drive to lower costs and better quality. Any updates there?

Yes. In terms of the -- manufacturing processes are always the things that bring price down, just like LCDs. LCDs were very expensive until they came up with a way of filling it all in one step versus multi steps. And then the price came down, and that's when you started seeing LCDs move into the TV market. OLEDs today, there's one manufacturer that has 2 fabs. These are white with color filters where you coat the entire substrate with multiple materials, get white and then you use a color filter. Some of the methods that folks are looking at and have looked at over the years are inkjet printing, where you then put red, green and blue dots where they're supposed to be using a printing technology. That technology has been discussed and talked about, and folks have spent a lot of money for a lot of years. And it doesn't work, and we think that it is -- there are so many challenges to inkjet printing these organic molecules that we don't think inkjet printing of red, green and blue is going to be anything at a commercial scale. There may be very small quantities that people can do, but at real commercial scales, to bring the prices down per square inch for a TV, we're looking at -- and we've talked about Organic Vapor Jet Printing. It is a printing technology. When you use inkjet printing, we're talking about printing wet materials, putting on a substrate where you want to have either 80 dots per inch or 160 dots per inch for 4K and 8K resolution. Having RGB, red, green and blue, liquid pixels deposited across large substrates, Gen 8.5, Gen 10.5 at a very high rate is really difficult. You need to keep the printheads flowing. You need to ensure that there's no cross-talk between the liquids, and then you need to dry them. And the way that you print inkjet printing is by using solvents to keep the print heads flowing. All of these things cause these organic materials to either change or increases the -- it decreases their lifetime. So we've looked at -- 5 or 6 years ago, we started a research project on Organic Vapor Jet Printing. This is taking the best of vacuum thermal evaporation, which is the way all OLEDs are made today; and a printing technology, except we don't make it a liquid. So we take these organic materials in essentially vacuum and we push them through a printhead and we deposit them on a substrate. This gives you -- we know how these materials react because there's -- will be 600 million mobile size screens made this year using this technology, VTE, vacuum thermal evaporation. And using a printing technique which deposits these so that you don't have cross-talk, we've been able to demonstrate in our labs 4K and 8K resolution using OVJP, but it's on a 6x6-inch square glass because our labs are R&D labs. So we're moving towards scaling up OVJP, hired a group in California that has experience in scaling up technology. And Jeff Hawthorne, used to be CEO of Photon Dynamics, is heading that group, and their job is to scale it up to whether it's Gen 8.5 or something that is similar to an 8.5 to prove to customers that it's fine on a 6x6-inch square, but they want to make sure that -- before they commit to anything, that it is a scalable process. So that's really where we are today.

Helpful. And I have one question coming in back to blue. Would customers need to make any major CapEx changes to adopt blue? Or can their existing backplane technology and equipment be used with blue?

There's no change in equipment. There's no additional capital expenditures. It essentially is substituting, in a vacuum chamber, your fluorescent emitter for your phosphorescent emitter, once you have changed the TFTs. But there's no extra CapEx.

Got you. Helpful. I guess maybe moving to capacity. Clearly, there's a priority today for LCD, given the uptick in panel pricing. Curious how you're thinking about OLED capacity over the next 1-, 2-, 3-year time frame.

Yes. We have historically looked at square meters of glass, the growth in square meters of glass because we coat all the substrates with our material as they're manufactured. So from the end of 2015 to the end of 2017, we talked about more than 50% growth in square meters of glass. From '17 to '19, we talked about 50%. And we've also said from the end of '19 through the end of 2021, we expect it to be approximately 50% growth in square meters of glass that will be installed. That doesn't mean they're turned on, but that's just based upon the announced and unannounced information that we have. Does COVID -- or has COVID impacted that? There probably is some impact. Right now, we don't think that it's a major impact. There's not cancellations or anything like that, but we do think that things may have slowed down. So is it 50% from the end of '19 to the end of '21 that's installed? It may be into the first quarter of the following year, but in principle, I think it's still intact.

Got you. How are you thinking about strategic priority for OLED investments? And are you seeing a difference by country?

Yes. I think you have seen that. I mean you've got China that has been very aggressive. BOE is now turning on its third OLED fab, and they have a fourth one that's being constructed. And each one of those fabs is 48,000 Gen 6 size glass substrates on plastic. And when all of them are up at full capacity, they will actually have the same output that Samsung has today for flexible displays. So there's a lot of capacity coming on there. They're being very aggressive. We have China Star, Tianma. So we've seen a lot of the growth that has been announced over the past couple of years has been in China. And even LG, their second OLED TV fab was is built in Guangzhou, China. Samsung has -- there's been rumors as Samsung is adding some capacity. There's been no real announcements by Samsung specifically of new fabs being built.

Got you. I guess perhaps moving to the license model. Curious what was the driving force behind LG's license extension 2 years before expiration. And does the new agreement have a royalty -- new royalty structure? Or does it cover new patents?

The impetus on that, I think, is the industry is getting more mature. And companies like LG and other customers are looking at it and saying, "We are spending and have spent a lot of money, and we would really like to know what -- A, that we have essentially guaranteed supply of material for a certain time certain and all of our contracts have pricing built into it. So if I am going to commit billions of dollars for fabs, I want to know what I'm going to be paying at least for a decent time horizon so that I can look at my return on investment." So I think it is something, because the industry is getting more mature, that you're seeing. When -- Samsung, when we first signed the first agreement in 2005, there wasn't even an OLED display. And then our agreement expired in June of 2010, and it took us until August of 2011 to sign the extension to that agreement. That was 13 months. And end of 2017, it was 1.5 months. Just because folks now are building displays, they want to make sure that there's an uninterrupted supply of material and that they know what their pricing scheme is. So I think it is a result of a more mature industry.

And so I guess the next question is, should we anticipate perhaps re-upping contracts with some of your other existing customers? And then the follow-up question to that is that this obviously has an impact on the 605, 606 accounting treatment. And is there any way to help us better understand what the impact the elongation of contracts will have on kind of near-term GAAP fundamental reporting?

Yes. Obviously, 605, 606 accounting has been, I'll say it mildly, a headache for everyone and the disclosure of it. I think pretty much 606 is GAAP today, and 606 has been GAAP. This is the third year. So we really just have to look at everything in terms of 606, which causes you to do a lot of estimates over the life of the agreement. If you sign a new agreement, you then will reevaluate your 606 estimates of how much you record for each gram of material that you sell. So if it is a new agreement, you then look at that agreement and do essentially -- if it's considered into agreement, you do everything going forward. If it is not, then you do that they have these cumulative catch-ups. But go back to the first part of your question. The Samsung agreement is -- ends at the end of 2022, but Samsung has a 2-year option to extend it. So Samsung essentially doesn't end until the end of 2024. And the LG agreement is essentially a 5-year agreement, very similar to what we've done with others.

Got you. I guess moving to the other markets, whether it's IoT, auto, IT, architectural. What gets you most excited in terms of incremental glass area over whatever time frame you're comfortable discussing?

Yes. I think that TVs clearly, in terms of per unit, use a lot more material. So obviously, we're bullish on the TV market continuing to grow. And the mobile market estimated about 600 million units in this year by Omdia and going up. And I think it's -- it will be probably 50% of the smartphone market over the next -- end of the next few years. The area that I think you're going to start seeing more and more growth is on the IT side. That market, whether it's tablets or laptops, gaming is one of the areas that they're focusing on because of the benefits of OLEDs having true black backgrounds and fast switching. That's about a 450 million a year unit market. And Samsung talked about introducing, I think, 10 new SKUs this year for the IT market. The automotive market is one in terms of there's displays and lighting. There's a number of taillights that are going to be -- that are on Audis and BMWs and Mercedes. It's a very small market. On the display side though, you're starting to see more such as, I think, Cadillac Escalade has a 33-inch OLED screen inside of it and a new Mercedes prototype electric car has the entire dash. It's 50-some inches with 3 separate OLED screens on it, very cool. They can be curved, the benefits of OLEDs. So they could be on flexible substrates. And you can segment it and gives you great viewing angles and some of the issues that -- in cars that you may want. It's a great market for our customers. It's a premium-priced market. There's just not a lot of Mercedes and Cadillac Escalades that are sold each year. It's not going to move the needle in terms of material that we sell, but it's very good for our customers. But I think the area you're going to start seeing growth is in the IT side.

And when you reflect on that 450 million unit opportunity, how are you thinking about OLED panel makers bringing on capacity to meet that? Have you seen discussions talking about capacity needs in '22, '23, '24 time frame to support that? Or is it still too early?

I think it's somewhat too early. We -- at the end of this year, we'll talk about the end of '21 to the end of 2023. I mean the Gen 6 size fabs that are there today, they've got the ability to make up to 32-inch screens on a very efficient method. So the installed base, whether it's Samsung, whether it's LG, BOE, Tianma, China Star, they can address the market from small-sized mobile screens up to, as I said, 32-inch screens. So it is one that I think -- as it grows, I think each of the OEMs will look at the market and see where it makes the most sense to put their efforts.

Got you. So I think we've got 5 more minutes. I wanted to focus lastly on UDC Ventures and your balance sheet. So first for UDC Ventures, it looks like you made a couple of investments, Mythic AI, DigiLens. Can you remind us what your focus is within that portfolio and how you think about what investments you're making there? And any synergies within kind of your core business?

Yes. We looked -- obviously, we look at opportunities where they're directly related. But they're adjacent technologies where we think that they can -- as they grow, will impact the OLED business or use OLED displays in what they're doing. Even though they're not material centric, such as we are, in phosphorescent emitters, but it is something that we can help foster the industry around the existing industry grow, whether it's wearables or things like that. That's pretty much where we are focusing the initial investments by OVJ -- by ventures -- UDC Ventures. They will branch out over time and look at different opportunities. But right now, we are focusing on strategic investments, not investments that are true venture capital investments.

Got you. So for like Mythic AI as an example, focused on very low-power analog solution for AI, I imagine that's the edge and wearables, like you just discussed, and driving OLED adoption. Is that the thinking?

Yes, pretty much. That's why we looked at that investment specifically. It's not going to be a lot of material, but it's almost like the automotive industry. It's a very good industry, and it gets a lot of publicity.

Got you. And I guess how about on the balance sheet side of things? Your cash balance is growing nicely. You expect to grow quite nicely in the years ahead. So curious how you're thinking about capital allocation between dividends, buybacks, M&A or continuing to just hold on to a war chest.

Yes. There's -- you actually answered the question, probably in different order than I would have answered it. But I mean, clearly, as an IP company, you need to have a very strong balance sheet. You don't want to be in a situation where you end up in a dispute that's going to cost tens of millions of dollars. But -- unless you have the wherewithal to do it, you can't threaten it and say, "If you don't do XYZ, we'll sue you." You don't want to do that. We've never sued anybody. We've never been sued. But you want to make sure that you're not in the situation where you can't do it. So we will always have a very strong balance sheet. The philosophy of the Board today is increasing dividends as our cash flow increases. And they feel that, that is the best way to return capital to shareholders, is in the form of dividends.

Got you. So we've got 2 minutes left. Anything that we missed that you think is strategically important for UDC that you want to discuss?

Well, you've hit on the issues that always come up obviously. We get -- for the last year or so or 2, we keep getting questions about blue. I think we missed the point that this industry is growing, and there are 600 million smartphones that will have OLED displays. The display industry never grows overnight. There are significant capital expenditures that have to be made. So I get questions like what -- what's different today than it was last week. Well, it's very difficult for things to change overnight. Things overnight that change are factory utilization by our customers and the demand side. Obviously, with COVID last year, the demand just dried up. So right now, we're looking at and -- looking at the demand continuing to grow this year, which is why we have guidance of like $530 million to $560 million for this year above last year. So -- and a lot of that is dependent upon how quickly everything returns and stays returned.

Got you. Well, we've run out of time. So Sid, thank you. Really appreciate spending time with us this morning, and wishing you great health. And hopefully, next time, we can do this live.

That would be great. It would be great. I like seeing people in 3 dimensions. So thank you very much for inviting us.

All right. Be well.

All right. You too. Thank you.