Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Great. Good morning, everyone. I am Sidney Ho, I cover semiconductor, semi-cap equipment and IT hardware at Deutsche Bank. The next company we have is Universal Display. Universal Display is a pure-play in the OLED display industry. They sell the raw materials used in each OLED screen, and they also collect licensing revenue. Today, we're very excited to have Universal Display's CFO, Sid Rosenblatt with us. Welcome, Sid.

Thank you very much.

Yes. Before we start, for those investors who are listening to the webcast through our portal, if you want to ask a question, there is a box on your screen where you can type in your questions. I will try to ask those questions as we go through our discussion.

So with that out of the way, maybe let's start with a few questions on the near-term market environment. You posted very good second quarter results and based on revenue from your 2 largest customers, it looks like there was strength on both the smartphone side and the TV side in the quarter. Has this healthy demand environment continued in the third quarter? And how have conversations with customers change as there has been a wider spread of the delta variant and more shut downs?

First, thank you for inviting us. And the second quarter actually was very strong, as you stated, with our 2 largest customers. And there are without talking too much about Q3 because we're still in the middle of it, it seems to be on track of where we expected but we -- there are -- as we stated, issues, one, clearly, COVID is becoming more and more of an issue. And in addition to that, there are still issues in terms of the chip shortage and the supply chain issue. So there still are a number of unknowns that could impact the Q3 and Q4 to be perfectly honest. But right now, we haven't seen anything that is unexpected.

Got it. So you mentioned the supply chain, so I'll jump right into that one. You guys seem to be doing a good job navigating that supply chain issues going on with a lot of electronics industry right now. What are the key areas that you are monitoring to make sure your business isn't disrupted? Is it just shut down in certain areas of the world, component shortages or something else? And maybe kind of related to this on the gross margin side, is higher pricing of Iridium, the biggest headwind you're seeing on the input side? Or are there other issues that we should be monitoring?

Well, there's a couple of answers to your question. One is in terms of the supply chain, we are part of the supply chain. So from our standpoint, we have not had any issues in terms of getting the raw materials that we need. As you stated, we have said a number of times that Iridium pricing because of COVID and the cost of mines in South Africa were shut down for a long time. Iridium pricing has spiked, it is starting to soften. We have a lot of it that we have purchased over the years on inventory to try to manage, a, to ensure that we have a continuous supply and b, to try to manage the cost. So I think we have done a pretty good job. But there are other issues in the supply chain and particularly with our customers. And what we get concerned about is we're a just-in-time supplier, we don't have guaranteed contracts that will ship certain amounts every month. And so we get estimates from our customers, but our customers also change them on the fly. And so if they run into issues, they will clearly stop buying from us if they can't produce because they know a, that we have -- we always have excess inventory on hand or finished goods and materials that they need; and b, that we can then turn around on a dime and start shipping again. So our relationship with our customers is very good, and we have done, I believe, a really good job of managing our inventory.

Great. Speaking of inventory, while your materials can be just in time, like you've just said, there are also been instances where customers have prebought materials. How are you thinking about customer inventory levels right now? And are there any signs that there is some inventory built to protect against some sort of disruption?

Yes. We've had a number of issues. One, I think at the end of 2017 when we were negotiating our contract with Samsung extension, it was clear that they were building up inventory in case there was a difficult negotiation. So let's just leave it there. And so we knew they did that. In addition, when there were trade issues with China, we had our customers in China that were buying a significant amount of inventory in case there were issues in terms of us shipping. We have not been included in any of the materials that have been prohibited from being shipped. Do I think our customers are being cautious and building inventory? I think so. I think that nobody knows whether trade issues will pop up again. I think that -- so I do -- I believe that our customers are probably keeping probably a little more inventory on hand than if everything was normal. But nothing is normal anymore. So because of COVID, I think everybody is really looking at their inventory and their production schedules and making sure that they have everything they need to keep producing.

That's fair. Maybe switching over to talk about China. The China business, excluding the LG facility in Guangzhou, were down meaningfully in second quarter. I know this business could be pretty lumpy. But can you just talk about what you're seeing from those customers? How do you think about the potential for this opportunity to grow going forward?

Well, we do believe that China is an area that's going to have significant growth for us. Our largest customer in China, BOE has already talked about 4 fabs and construction of 3 of them are -- have completed, I guess 2 of them are already complete. Third one is almost. So I do think that -- and China Star, Tianma and other customers in China, I do believe that, that is where a lot of the growth you're going to see, and that's where a lot of the CapEx has been planned. So I do think that, that is an area. But it has been lumpy. One of the reasons, as we stated, are obviously are trade issues I think it's just the purchasing patterns of them. I don't think that any of them are stockpiling significant amounts of inventory that we have seen in the past. But as I stated, I do think that they are being cautious to make sure that they do have enough.

Okay. Speaking of capacity, you have provided 2-year forward OLED installed capacity guidance since 2015. Is that the right way to think about it going forward? Or is the law of large number starts kicking in? Just curious, I guess, industry revenue for display equipment has been sluggish for a number of years.

Yes. I think that we have -- as you stated, we did it from 2015 to the end of 2017, '17 to '19, and we gave from the end of '19 to 2021, and we expect to do it again in our year-end call. And we talked about approximately 50% installed base growth. That's not turned on, but that's growth -- have we seen slippage in that, I think there may be some because as you stated, the industry seems to be slowing a little bit on CapEx. But I think it's -- I don't think it is related to the demand for OLEDs per se. I think it is just the uncertainty on the entire demand side, mainly because of COVID and other supply chain issues. I still think it's the right way to look at it because for us, we coat the entire substrate. So if our customer yields go up, we're not going to sell any more material because we cope whether it's yielded or unyielded. It's new capacity, that's new revenue opportunities for us. And will it be 50%? I don't know what the answer is. We're looking at that right now. But you're right, the numbers get bigger and bigger and bigger and they grow 50% or more every 2 years, is probably something that we just have to look at. But when you look at the overall demand and when you look at where we think the overall OLED industry is going. I do believe that the OLED industry is going to continue to grow at a significant rate.

Great. Maybe you will jump into a couple of end market segments, starting with the smartphones. When you think about your growth over the next few years with smartphones, are you expecting unit growth in the premium sector to drive this growth? Or will OLED penetration into the mid- and low-tier smartphones drive this growth? At this point, how should we think about the premium and the bill of materials for an OLED screen versus an LCD screen?

Well, I think that I believe the number is something like 90% of the premium smartphones have OLED screens. So that and of the OLED market of the total TAM for smartphones is pretty saturated at this point, mainly because of all the benefits of OLED, which is picture quality and power efficiency. You're seeing more in the mid-range and even low end. So I do believe you're going to see growth in the mid-range and then even in the low end because there are -- there's a number, Samsung I think, has introduced the low-end smartphone also. So you are going to see that growth. I do expect the units to continue to grow.

Great. I would consider foldables as kind of premium phones. So there's clearly some momentum in that market to its foldable phones. Compared to a standard smartphone, whatever the regular smartphone, is the material opportunity of foldable phones just twice as large as if the total screen size twice as large? I mean, is it for you guys it's twice that opportunity?

Well, it is in terms of the actual unit content. So the foldables, the Samsung Fold or which I have, you're talking about a screen that is twice the size of the regular screen plus the one on the front. The issue for us is, in addition to that, it's new capacity that will mean new revenue opportunities for us. But the per unit content is at least double when the square inches of glass are doubled.

Okay. Maybe switching to the bigger screen, the TV. That still makes up a relatively small amount of TV in terms of OLED TV as a percentage of the total TV market. What do you feel as the key to wider adoption of OLED TV? Is it lower price points because of some new technology advancements like OVJP, or is it lower cost? Is there more supplies in the market? Or is this something like the value proposition for customers getting better as they are more programming in, let's say, 4K and 8K TV?

Well, I think that OLED TVs have been rated the best TV ever, I think, for the past 5 years. And clearly, price is an issue when you look at TVs and LG, which is estimating to sell between 7 million and 8 million units this year and going to 10 million next year has focused on the premium end of the market. But the prices have come down dramatically. You can walk into Costcos today and buy a 65-inch LG OLED TV, 4K for about, I think, $1,700. And the 55 is anywhere from $1,000 to $1,200, depending on where you go. Under $1,000 price point is clearly something that I think everybody wants to see. That seems to be a psychological break point for people who are looking to buy TVs. But I think the premium end, if you want to buy the best of the best, then you're looking to have a large TV that gives you great picture quality, I think an OLED TV is what you're looking for. Will there need to be significant increases? Yes, because the TAM is about 240 million or 260 million units, and we're barely at 3% or 4%. And in order to go to 50%, 75%, there needs to be significant breakthroughs in terms of manufacturing and in terms of yields and throughput. One of the things, as you said, is organic vapor jet printing, OVJP. Right now, all OLED TVs that are in the market are what they call white with color filters, where you have you co-deposit a number of materials to get a white background that you use essentially a color filter to give you RGB, and folks are looking to do just RGB side-by-side similar to what you see on your smartphone. And OVJP is a process that is a printing process, but it's a dry printing process so that you can deposit red, green and blue materials directly on your substrate for large area displays and OVJP, we think is one of the areas that should significantly give you a breakthrough in your throughput and your yields and cost.

Wonderful. I would like to talk about OVJP in a minute. Maybe the last end market that I want to get into is the IT side of things. You've seen -- on the last earnings call, you seem to have taken a noticeably more bullish view on the IT opportunity for OLED displays in the near term for notebook, PCs, tablets and whatnot. How should we think about the incremental units or dollars that this opportunity could have in the short or the longer term?

Yes. I think that is actually -- that essentially for displays, that's the last large market opportunity. You've got mobile phones, you've got TVs and everything in the middle is in this IT market, which is, I think, about 450 million unit TAM. There are a number of premium end tablets or laptops that have -- and tablets that's Samsung's Galaxy tablet has an OLED screen. And what you're seeing, I think Samsung talked about at least 10 new SKUs of laptops that will have OLED screens. I think the benefits of OLED is you see them when you look at the TV, but we use our laptops and our monitors now, much more than we ever did in the past, particularly like we're doing right now. So you're looking at trying to get better picture quality on it. So one of the areas that initially started was in gaming because of the fast refresh rates and the true black background that an OLED screen has, but I think it's going to continue to grow in the IT side.

Great. Well, maybe we'll talk a little bit about OLED technology here, starting with my favorite topic, blue emitters. Obviously, you continue to make great progress on that development. But I want to touch on the competitive environment for blue as well. At a high level, remind us how long does it take from announcing a commercial blue to seeing the mature use in actual end product. And how should we think about this revenue opportunity when compared to your current business?

Well, it is -- as new materials are adopted just like in 2013, when our green material was adopted by Samsung. It does take some time because the displays today are all designed to drive a fluorescent emitter. I don't think I have to go through phosphorescence and fluorescence and what the differences are, but phosphorescence gives you -- only uses 25% of the power. So you have to redesign you're back plain, your TFTs. So it will be into next-generation products. And once you get a customer who says this material meets our spec, we're going to design it into our next-generation that could probably be 9 months to a year, maybe shorter depending on the customer. But once it does, once they say that has gone through the process and it meets it, and then they're going to design, it will be in next-generation products. You can't go back and just substitute one for the other.

Got it. Continue on the Blue. Some of your competitors claim that they have been making progress with alternative blue emitter materials, not phosphorescence. How are you thinking about competition there? And what gives you confidence that you will be able to bring this to market first. And last part of this question is, should we think of this market as a winner takes all or winner takes most? Or does it make sense to have multiple suppliers using multiple technologies?

Well, I think that when you look at it just from a logical standpoint, phosphorescence gives you the most power efficiency. It gives you -- when they adopted our green material Samsung stated, that they got a 25% increase in battery life. So if you're going to look at some of these interim solutions, which are essentially taking fluorescent material and making it more efficient by using TADF or whatever it is you're talking about, these are only interim steps. The ultimate goal is to get a blue phosphorescence emitter. We believe that, that once a blue phosphorescence emitter meets commercial specs, it will be adopted across the board for new generation products.

Okay. Now maybe switching back to OVJP for a second. You've talked about the first major milestone with OVJP being an alpha system in 2022. Can you talk about what are the next steps to commercialize this technology, not necessarily the time line, but what needs to happen next? And also, can you talk a little bit about the benefits you have seen from forming the OVJP Corporation and how the technology plays in the future of the OLED TVs?

Yes. We're very excited that we formed the company. It's in California. Jeff Hawthorne, who used to be the CEO of Photon Dynamics, is running it for us out there. We've got about 25 folks and they're in their facility. They've got tool set up. And so we're getting ready to put together our alpha system and alpha system is going to be one that we can demonstrate to our customers that this SMD technology is scalable. And in our labs, we use 6-inch substrates. We can print 4K, 8K resolution, RGB side-by-side in our lab on a 6-inch substrate. Going from a 6-inch substrate to a Gen 8.5 or Gen 10.5 piece of glass is a significant amount of engineering and work that has to be done. So having this team working on that, what we intend to demonstrate is that this technology is scalable to Gen 8.5 on an alpha tool. The alpha tool will be in our lab, it will not be in the customer's lab. The next-generation tool would be a beta system, which in -- when you look at the equipment industry, it's normally something that will go to a customer, and that customer will be the test site for the first tool. It's essentially a precommercial tool, which when you look at the industry, a lot of times, it's just converted into a commercial tool at that beta system. So that's really the progression that we're doing. We're making a lot of progress on the technology side, and they are making a lot of progress in talking to customers and potential partners.

And that's still a few years away in terms of the production tool, sorry, the actual commercial production tool?

Yes. Once you get the alpha tool and you're able to demonstrate it and you -- and your customers can come and look at it and tell you what they like or what they don't like, then and say, its TAKT time is great, but we need XYZ or the TAKT time isn't fast enough. There's a lot of complicated issues that will have to be addressed before you can build a beta tool.

Got it. Now similar to the smartphone side, obviously, there are some competing technologies out there, whether it's quantum dots, Mini LED, MicroLED. Those seem to be most discussed as potential competitors to OLED. How do you think about these as competitors to OLED and TV and as well with the IT market?

Yes. I think that there's a lot of misconceptions about which ones are real competitors and which ones are just improvements to existing technology. A Mini LED is backlight technology. It's an improvement to LCDs. So it is -- and they continue to get better because there are approximately 80 LCD fabs in the world, and there's under 10 OLED fabs in the world. And you have significant investment, and they're going to continue to invest and try to improve it. It does make it a lot more expensive, makes it much more closer in price to an OLED. MicroLEDs are self-emissive. And that's a technology that folks look at as a competitor to OLEDs because OLEDs are self-emissive pixels and MicroLED are self-emissive red, green and blue LEDs. That technology, though, is very early stage. And most folks in the industry think it could be good for small area and large area. You can buy, I think, 110-inch MicroLED TV from Samsung for $159,000. So it's more expensive than an OLED. That's for sure. But we don't make 110-inch OLEDs either. But so -- but that is still a number of years away. And I think that most folks don't believe that it really is a competitor. And there's always technology that the $150 billion annual display business, you can still buy e-readers. You can buy E Ink technology, which 15 years ago, people said was dead. So there's always niches and opportunities in the display market.

That's fair. Maybe one last question on the technology side. You guys established UDC Ventures and I think, in 2019. Can you talk about what kind of companies or maybe technologies that you guys have been working with so far? Any particular investment you would specifically highlight that could be beneficial to Universal Display core business in the near term?

Yes. Right now, they are looking at opportunities that can either be that help our business or that are adjacent to our business. Right now, they've just made 2 small investments and both of them at some point, maybe using OLED in the technology but there's nothing that has been significant to them. We're obviously COVID has held back in terms of what folks can do and where they can go and see things. So I think you will see some more investments over the next year. But we would like to do it in an area that we think makes sense. We're not doing this as a straight investment for capital return. It is something right now that we're looking at that can help the industry.

Okay. That's fair. So as a reminder for folks on the webcast, if you have questions, you can type it in, I'll try to weave them in. Maybe the next section of the questions, I'll ask a few financial side of things. So looking at the full year guidance for calendar '21, obviously, a very strong results in the first half of the year. Demand looks pretty good. But you haven't really raised your full year forecast -- full year guidance for revenue. Is your guidance at this point more of a reflection about concerns on the supply chain or it is all uncertainty about demand dynamics due to the pandemic? Or is there something else we should be thinking about?

No, I think you touched on both. I mean, there are issues in terms of supply chain and the demand on COVID issues. And when we gave our guidance, I know folks looked at the first half being strong and when you do the math, you can pretty much say the second half is flat or up a small amount. And it is something that we were comfortable with when we did it in early August. And without talking about it right now, when I have our call at the end of October, I think it's 28 or 29 if there's a reason to update it at that time, we will do it. But there's still a lot of uncertainty in terms of supply of chips, there's uncertainty in terms of COVID and will things slow down. A lot of folks opened up, and now a lot of folks are looking at closing or changing the way they do business again. So there still is a lot of uncertainty, I think, in terms of the manufacturing and the demand side.

Got it. Well, there is an incoming question that I just read it out. Can you help us frame the unit economics for the blue emitters or at least a relative potential to the rest of your portfolio?

I'm sorry, could you repeat that?

Sure. So can you help us frame the unit economics for the blue emitters and -- or at least the relative potential to red and green?

Well, I think that blue is something that we believe is probably -- we sell twice as much green as we do red. And that's based upon the way that the light is -- these materials actually give out light. We think that blue will be closer to green than it is to red because of just what we know so far based upon the materials that we are working with, and we are sampling these blue materials to our customers, as Samsung talked about at the SID conference twice already. So it is the economics are for us, it is essentially an incremental approximately 40% material sales.

Okay. Great. Speaking of materials, your materials gross margin has bounced around the past few quarters, and you still expect it to be in the 65% to 70% range for the full year, which is below your normal range for the business. How should we think about gross margins and the impact from these developmental materials longer term?

Yes. It is something that, as we've talked about, developmental materials are materials that are the next-generation materials for us. And we are constantly giving them, and we get more and more customers, and we're developing more and more materials for our customers. These materials are expensive. We only make 10 grams, 50 grams, and we do not have very much gross margin on them. And it does impact our overall gross margin. But for us, this is the investment in the next generation and next-generation materials. And those materials, we believe, will be priced in the range. We've got pricing with all of our customers, but we know from our cost side that these should fit into our margin profile that we've always had.

Okay. Last question is kind of on the use of cash. You guys have been generating great free cash flow. What is the ideal cash balance need to support your current business? And how do you think about uses of excess cash? Would you ever consider share buybacks? And what is your strategy for M&A?

Yes. Well, we were always looking for opportunities. We have purchased a number of IP portfolios. If an portfolio comes up that we think makes sense, we would be very interested in buying it. We bought Adesis, which is a CRO that we were working with. And so we're always looking for opportunities. The Board's philosophy in returning capital to shareholders has been increasing dividend each year in dividends and increasing as we continue to grow. We do not believe at this time that buybacks make sense for us. We want to return capital to shareholders who support us.

Okay. Great. I think we just run out of time. Thank you for spending your time with us today. And hopefully, enjoy the rest of the conference.

Thank you very much for having us.

Thanks a lot. Take care.

Bye-bye.

Bye-bye.