Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to day one of Citi 2021 Virtual Global Technology Conference. I apologize for the late start this morning. With us today, we have Sidney Rosenblatt, EVP and CFO from Universal Display. Welcome Sidney.

Thank you very much for having me today.

Sid, I'm going to kick it off with some big picture questions on OLED adoption. For the audience, if you have questions for Universal Display, you can click on the link and submit your question or you can e-mail them to Amanda Scarnati [email protected]. And we'll ask those questions towards the end of the fireside chat.

Sidney, where do you think OLED penetration smartphones is today? And how do you think it evolves over time? We are in the second year of 5G phone adoption, which is a driver of OLED in smartphones. So where we are on the smartphone adoption?

Again, thank you for having me today. OLED displays in smartphones, that was the first opportunity that OLED really had and started out in 2010 with the first Galaxy product. And since then, it's been adopted by -- across the board for high-end smartphones. So estimates today are approximately 600 million units in 2021, probably between 575 million and 600 million out of a TAM of approximately 1.4 billion units. And it really is, I would say, 90% of all high-end smartphones have OLED screens. You're starting to see adoption in midrange and even some very low-cost smartphones. Samsung and others have had some. But the benefits of OLED displays is, obviously, the picture quality and the fact that using UDC's technology makes these very power efficient, which has allowed batteries to either be smaller or allowed more functionality in the device. And particularly with 5G because 5G technology is very power-hungry, the benefits of having a power-efficient OLED screen in your device become more and more compelling as you move forward. So we're -- it is something that we believe that when you look into the future, I think you will continue to see adoption. Initially and even today, OLED screens cost more than comparable LCDs. So there still is a cost differential but the benefits of having great picture quality, 180-degree viewing angle and power efficiency are compelling that, as I said, most smartphones -- most high-end smartphones have it. I think you will continue to see adoption in areas such as foldables and that's an area that is new. This is really the second or third generation of some foldable products that are coming out. However, we, at Universal Display and me personally, think that, that is really an area that will really start to grow. It is, again, more expensive. The Galaxy foldable that I have was $2,000. I think its next generation is $1,800. That is expensive, but high-end premium smartphones are $1,200, $1,300. So the differential is getting to be smaller and smaller. For us, the fact that a Galaxy Fold or any foldable smartphone, you have a screen on the front and then you have essentially two screens inside that open up into one. That's a lot more Universal Display's material per device. So for us, the amount of material per unit goes up. The key for us is increased capacity because we coat the entire substrate. So as the market grows, as they have to add capacity to meet the demand, that's increased demand for our materials. But I do think that, that is an area that is ripe to really, really grow quickly.

Great. And where do you think the penetration is for TVs today? And how do you envision it trending over the next few years?

I think that TVs, it's very early as is -- with smartphones, we're probably at 40-some percent of the overall TAM. TV is very early. LG Display is the only manufacturer of OLED TV panels. It is -- there are a number. I think there's 18 or 19 OEMs that actually brand OLED TVs. But it is still -- LG Display is the only manufacturer of panels. It's estimated this year, just -- they're estimated to sell between 7 million and 8 million units. That's up from 4.5 million units last year. And I believe they've talked about 10 million units next year. The TAM for TVs is somewhere around 240 million to 260 million TVs annually. So it is really going to be 4% this year and continue and grow. I think what needs to occur, and you're starting to hear chatter of other OEMs getting into the TV business, is you need more capacity and you need competition because competition obviously drives price competition. So I think you will see over the next few years, others entering the market. OLED TVs have historically been rated the best TVs ever. And if you have one or if you see one in the store, most people just look at it and stare and think the picture quality is very real and natural looking. It's compared to LCDs, LED-backlit LCDs, which are very bright, but the colors look very bright. And with OLEDs, they're much more natural-looking colors. OLED TVs inherently switch on and off 3x faster than video rates. There's no ghosting. You have a 180-degree viewing angle so that you see the benefits of OLED TVs. I do think that you're going to see changes in the manufacturing process as this moves forward, as this technology and the market moves forward to get the cost down because I think it's important to get the cost down as the penetration continues to grow.

Great. And Sid, can you touch on where we are in terms of adoption in IT and auto markets? It's been kind of an upside factor for OLED adoption. And Apple is talking about some sort of OLED, whether it's micro LED or OLED for its iPads next year.

Yes. I think that what you're seeing is the first natural market for OLEDs was the mobile market. And I think that natural market was because power efficiency is very important for mobile displays. And LG moved into the large area displays because I think they wanted to have essentially a market to themselves. The natural progression of displays historically has been from small, medium to large. So as we're seeing more and more adoption on the small screens, on smartphones up to 40%, the natural place to move is to larger displays, which is the IT market. I believe that Samsung on their conference call talked about having -- introducing at least 10 new SKUs of IT products. That market, I think, is about 450 million units, and right now, it's below 1%. It's in some of the laptops that are used for gaming applications, mainly because of OLEDs because of their true black background and a lot of the gaming software uses dark backgrounds. And with an OLED screen, because you have a true black background and you only light up the pixels that you want to light up, the picture quality for that application is much better than anything else in the market. And I think you're starting to see more and more adoption. There's been chatter, as you said, that there will be an adoption of OLED screens for iPads. I can't really comment on that. I do know that we have heard that mini LEDs -- mini LEDs is an improvement to existing LCD technology. Mini LED is a backlight to an LCD. It is not its own technology. It's not a self-emissive technology. Micro LEDs are self-emissive technologies, but that's very young. And the applications for that, at least today, folks are looking at it, it's very small area displays or very large area displays. And to be honest, historically in the display market, there's lots of little niches for technologies. It's a $150 billion annual market. Not one technology is going to have every single TAM.

Great. Sid, I have a question on the impact of COVID on OLED demand. If I kind of step back and see what COVID did to consumer demand last year, the LCD demand went up as work from home, monitor demand increased. And did the recovery in LCD prices and investments hurt the OLED ramp plans? And you have been on this historical cadence of 50% 2-year capacity growth. Is that -- did that slow down because of COVID impact? And how do you see the growth kind of resuming for OLEDs?

Yes. I do believe that COVID obviously slowed down the whole demand side, and it slowed down, obviously, the supply chain side. And you still have issues on supply chain side on whether it's chips or whether it's just getting components or -- there are still lots of areas that the supply has not caught up with the market. And we had given guidance in installed capacity from the end of 2015 to the end of 2017 with -- we said excess of 50% growth from the end of '17 to the end of '19 with 50% growth. And from '19 to '21, the end of '21, installed base, we have stated that we thought it would grow by approximately 50%. We will update this on our year-end call, but where are we today? I do think that you are hearing some of the CapEx and installations being delayed. I don't think it is a disruption in the growth cycles whether or not it's a 3-month or more delay, that's a real possibility. But I think that the overall growth for the OLED market is intact. I don't think it impacted that. I do think there's obviously, some timing issues that have occurred across the board.

Thank you. Then when I looked at OLED materials demand, I always look at in terms of like 2 vectors. The first vector is the utilization of your existing installed base and how those fabs are operating; and the second vector is the new installed capacity, as you pointed out, which might have gotten impacted because of some supply issues. Where do you think is the utilization rate across all your customers? Are we back to pre-COVID level in terms of factory utilization for OLED fabs?

Well, if you just look at estimates of number of units of smartphones that are going to be sold with OLED displays, the number for -- I believe, for 2020 was 450 million units. And estimates this year are up to 600 million units. I don't think it's going to quite get there, but that's where the estimates are. So without having any new real capacity added, utilization rates, obviously, were up in addition to that. The thing that also impacts that is their yields. So if yields are up and utilization rates are up, I think the 2 of those are what's really impacting the growth on the smartphone side. For us, as I stated, we coat the entire substrate, so yields don't really impact our business. Factory utilization does impact our business. So -- And that's why we're talking about guiding this year higher than last year. I'm sure we'll get to that at some point on this call. But without going through that, I think that you are seeing that there is some. And then for us, what we need is new capacity that then will -- new installed capacity that will then spur the next step function growth for us.

Great. Sid, on the full year guidance, I think you guys have been very prudent and wise on the full year guidance over the last couple of years. I think before that, there used to be volatility in that guidance. And the question I get frequently is, are you being conservative on your full year guidance for this year, and are you concerned more about supply or demand?

Well, I think that we always get that question as you stated that looking -- when we gave our guidance at the beginning of the year, we looked at a number of variables that I think would impact our business, and it's both that we talked about. It is -- it was the demand side, whether it recovers as quick as folks thought. And then you've got the supply side, whether it's chips or whether it is COVID issues that may impact the factories. And you're starting to see because of the resurgence of COVID that there may be some disruption from COVID in addition to the fact that there may be some delays in getting equipment installed. For us, really, the real issue is the variables, which is demand and chips and supply to be perfectly honest. I mean we -- from the supply side, we have seen no disruption in our supply chain. So we, as a business, continued to have materials available. We are sole source to our customers. We always have to buy excess and we always will manufacture and we will also buy excess raw material inventory to always ensure that we can meet our customer needs.

Okay. And in terms of your gross margins, what are the moving variables in your full year 65% to 70% material gross margins?

Yes. As we've stated, in terms of our gross margins, one of the things that impacts our gross margin is what we call developmental materials. And developmental materials are materials that have not reached a commercial stage. These are materials that we develop for our customers, and we have teams that work with each one of our customers to meet their needs. Each customer essentially has a different recipe for making a display. They all have their own proprietary ways of driving the devices and the color mixture and the color gamut that they want within each of the colors that they're using. And our teams will work with them and develop materials that meet their needs. These materials are available for all of our customers. But when -- as part of your license fee and/or royalty payments to us, you get our R&D department. We have the largest OLED R&D department in the world. We've spent -- on materials, we've seen -- our R&D spend this year will be almost $100 million. So these materials are very expensive to make. I will -- if you were our customer and you wanted this -- and your R&D team said, we want to make a device that does XYZ, can you send us small amounts of material that does that? We will do that. We will make 5 grams of it or 10 grams of it or 1 gram of it. But to be perfectly honest, they are very expensive when you make them in those quantities. And we have very little margin. But we look at that as these are materials that will become our future commercial materials. And at that point, before they get commercialized, we will spend what we need to spend to scale it up and bring out all the costs that we can so that we can continue to remain this -- keep this approximately 70% material gross margin that we've had for the past 5 years or so. So the impact of these developmental materials is somewhat lumpy. We may have a lot in one quarter, and we may have a little bit in another quarter. It really depends on what cycle our customers are. The other thing that we've talked about that impacts our gross margins is raw materials. We always talk about iridium as being the base for most of our materials. And because of COVID, iridium is a byproduct of mines in South Africa, and those mines were closed for 9 months. And the price of iridium went from approximately $2,000 a troy ounce to $6,500 or $6,600 a troy ounce at one point. It's starting to come back. We have actually been buying it for years and making sure that we always had excess iridium just in case something like this occurred. So we have never run into a supply issue and we have a significant amount of it in our raw materials on our balance sheet. But the spikes in costs get bled into the cost of your materials.

Great. Sid, moving on to a very topical topic of the blue phosphorescent adoption. Samsung had a very convincing paper presented at their SID conference this year. They are making good progress. What will it take for a blue phosphorescent material to become commercial? And what are the biggest hurdles in your view on blue?

Yes. That's a question that obviously comes up on all of our calls, and it is an important one for us because we have been working on blue phosphorescent emitters for a long time. Using red, green and blue, or red and green phosphorescent emitters has given essentially the OLED displays and smartphones a market. If it wasn't for the invention of phosphorescence, I don't believe you would actually see any OLED displays today. And the next color, since all visual displays use red, green and blue, is blue. And we've talked about it for a long time. As you stated, Samsung actually in 2 presentations at Display Week last year and this year, talked about progress that's being made on the blue emissive material. We believe it's important for the industry and important for us. For us, it is a whole new revenue stream for materials. Right now, approximately 1/3 of our materials are red materials and 2/3 of our material sales are green. We think it will look like green, so you're talking about having a significant amount of material that will then be sold. The way that I believe this will occur, though, is we work, as I talked about, developmental materials, we ship these to our customers. And we are shipping developmental quantities of blue emitters to all of our customers. They do not meet their commercial specs today, but when you start getting close, as Samsung talked about, your customers want to work with the materials, that's just the best that we have so that they can start thinking about how they design their price, drive schemes and how they can adopt it. It will be in new products. It's not something that's a replacement for blue in that you just take out the fluorescent blue and then put phosphorescent blue in. You do have to redesign your TFTs to drive it because it takes 75% less current. It gets the same amount of light out. So we are very excited about the progress that we've made. We have not made any predictions of when it will occur. We always get asked, "Well, when it occurs, what are you going to do? What are you going to say?" And to be perfectly honest, we don't know the answer to that. Historically, the way that things have occurred when new materials get adopted, customers talk about it before we do because we will never talk about something that is proprietary to one of our customers. And we never talked about Samsung or others having blue emitters until our customers talked about it.

Yes. And Sid, can you just update us in terms of your manufacturing plans down the road for blue phosphorescent? When it becomes commercial, could it be prepared in existing manufacturing facilities or you'll have to add more facilities?

Well, we are in the process now. We announced that we acquired, with PPG Industries, a facility at Shannon -- in Shannon, Ireland, which is a pharma facility that was closed. And so we are in there today. We are starting to prepare this facility to manufacture materials. One of the reasons that we looked outside the U.S. for was, to be perfectly honest, with all the trade issues that had occurred for the past few years, it made sense to have manufacturing outside of the U.S. in case there were some additional embargoes or things like that, you would not have to deal with them if you're coming from a different country. So when we looked around the world, this facility came up. As we stated, we're building this facility, which will double our capacity for phosphorescent emitters, and this facility will be capable of making red, green and blue materials. We can -- we also can make green -- red, green and blue materials in our existing facilities in Barberton, Ohio and even Monroeville. So it isn't that we don't have capacity, we just are always looking ahead because we always have to double our capacity when we think we're going to -- way in advance of when we need it because, as I said, we're a sole source to our customers and we can never be in a situation where we can't deliver.

Sounds good. And then on the organic vapor jet printing, what's new with that project? Is your decision to create a subsidiary helping you to bring it faster to the market? And what are the milestones to watch for from here?

Yes. I think that it is -- it was important for us to get a team that was 100% dedicated to OVJP. So we formed a subsidiary. We now, I think, have 25, 26 or 27 folks in the Silicon Valley in California. We hired Jeff Hawthorne, who used to be the CEO of Photon Dynamics, to run that group. And to be honest, that's one of the things that probably took a little longer than we would have hoped because of COVID. But we literally have hired that team and moved into a facility and have done everything. And to be honest, most folks just met Jeff a month ago in person. So we were able to do this remotely, and it's not that easy to do, but just company-wide, I think we've hired, between our subsidiaries and ourselves over this period, something like 75 people during COVID, all remotely. So it has not impacted our ability to grow. But OVJP technology when you ask about TV applications, this is a technology that we believe will propel the TV market to go from single-digit penetration to 40%, 50%, 60%, 70% penetration over the years. It is a dry printing process. And today, all of the OLED TVs are what they call white with color filters, where you coat the entire substrate with multiple materials, which, when you combine them, become white. And then you use existing LCD color filters to give red, green and blue. Everybody would like to see RGB very similar that you see in all of your smartphones because it's cheaper. And using a printing process, you don't have to use a shadow mask. So in the manufacturing for smartphones, when you want to deposit your red pixel, you coat the entire substrate with red and you use a shadow mask, which then blocks out the areas that you don't want red and you waste a lot of material. A printing process, whether it's wet printing or dry printing, is one that folks looked at and said that you can now just deposit the red materials where you want them, the green materials where you want them and the blue materials, which is much more efficient than any existing technology. OVJP takes the best of both worlds. It uses vacuum deposition, and we know how these materials react in vacuum because that's the way all displays are made and we print the red, green and blue materials onto a substrate. We believe that will be much more efficient in material utilization, and it should have higher yields, and it should have very fast tack time. So all of those things are something that we believe will allow OLED TVs to really grow and take over the market. Some of the milestones that we have is we expect to have an alpha system next year, which will be a system that will be in our facility in California. We can bring customers in and show them that in our facility, we make displays on 6-inch substrates. And they say, "That's great, except we're going to make these on Gen 8.5 substrates," and going from a 6-inch piece of glass to a Gen 8.5 substrate is not an insignificant challenge. And the point of the alpha tool is to show that you can do that. The next step would be a beta tool and then production tools.

Great. Sid, I received one question from an investor on the stock performance. Actually, there are 2 parts. First, the stock has been flat in the last couple of years, while the sector has moved up. And we get the positive long-term view on OLED penetration, but what is the disconnect between the management view and the investor view? And part 2 is, if there are any plans of stock repurchasing versus the dividend focus?

Well, the Board has historically felt that our return of capital to shareholders should be in the form of dividends as opposed to stock buybacks, and think that existing shareholders should be rewarded. When we adopted the program, it was one that we intended to increase it as our profits and revenue increase, which we have done since we've instituted it. We only have about 47 million shares outstanding. And the Board, when they looked at that, look -- and we do address this at -- I'm on the Board, every quarterly Board meeting, whether or not we should do something different. It is something that comes up. And if decisions -- if things change, obviously, things change all the time. But right now, I think that our focus is still on increasing dividends. The stock performance is something that, obviously, we know that it has not performed like the rest of the sectors. We understand that. We try to do everything we can to get our story out to talk about the long-term future of the company and where OLED technology is going. I think that like you in this conference and things like that, try to tell what's going on. It's still very young. We're at 40% in smartphones. We're at single digit, 4% for TVs, and it's -- you can't even make it 1% for IT. So when you look at the opportunities down the road for OLEDs and for us, I think there is a very, very long runway that we haven't even addressed.

Great. Well said. Sid, we're almost out of time. I want to thank you for coming to Citi's conference.

Well, thank you very much for inviting us.