Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Great. Thank you, everybody, for joining us today. I'm Meta Marshall. I head up the networking space at Morgan Stanley. We are pleased here to have Universal Display here with us today. We have Steve Abramson, CEO -- President and CEO. It's a special treat. He hasn't done one of these presentations in a number of years. He usually finds somebody else to take this task. So we're excited to have him here with us today.

Maybe just kind of wanted to start with supply chain, just given how top of mind it is. You reported strong Q3 results, you reaffirmed your guidance for the year. But can you just talk maybe start talking about kind of what you're seeing, and the environment, what's been most disruptive? And any changes that need to take place to kind of how you're thinking about the year?

Sure, Meta. Thank you very much. The supply chain is, obviously, intimately tied in with the pandemic, and that's what's been the background for the last almost 2 years at this point. Just to go -- our prime directive during the pandemic was to keep our business strong and keep our people safe, and we've been able to do both of those things so far, and we're very proud of that. We've been growing during the pandemic. From a supply chain standpoint, we're not seeing anything significantly impacting our business. We are basically taking the principle that we're planning for the worst and hoping for the best. So we're ordering things earlier, if we can. You get some bumps in the road, but nothing that significant. We're building up inventory for our customers as well. This year has gone somewhat as we've predicted, as we planned in line with our guidance and in line with our business plan. So we're running an international company. Because we have an international company, we have people in Korea, in China, so they're able to go and talk to our customers on a regular basis, even if we're not able to fly out there. And we're, of course, doing meetings like this all the time, so -- which makes a virtual situation work pretty well because some people are on Zoom 11:00 at night or 4:00 in the morning or what have you. So I guess that's kind of where we're seeing the supply chain thus far for our part of the business.

Got it. And maybe just kind of a follow-up question on that. Clearly, you just kind of addressed the impacts it's having to you and what mitigating factors you're taking for your own business, but just in terms of how it may be impacting demand just given your customer is struggling with their own supply chain.

Well, that's always a good question because we know what our customers are selling. We kind of don't really know what they had wanted to sell if there were not a pandemic. So we all read about the chip shortage and other supply chain issues that may be playing into our end markets. We don't really, really know that. Our primary markets are smartphones and TVs at this point. And both of those markets are moving reasonably well. The TV market has been doing very well during the pandemic. The smartphone market has been holding its own.

Got it. Perfect. And so maybe that takes care of supply chain questions for now. Just -- can you update us on kind of what we're seeing as far as OLED adoption just kind of as we get into larger-sized TVs. And is it still costs that are the biggest bottleneck or complexity, just as it moves towards larger devices, just what changes we're seeing?

So I'm going to take that question and make it a little bit broader. So the industry started out in actually the aughts, the middle of the aughts in cell phones. There weren't even smartphones then. Samsung came along with the Galaxy smartphone in 2010, 2011. And that started the growth of the OLED industry. So it's gone from 0 or $1 billion in 2010, 2011 to over $30 billion thereabouts nowadays. Most of that growth has been driven by the smartphones because they became smartphones, everybody liked it. Samsung was with the Galaxy then Apple. Now you have a number of other brands as well moving into the smartphone market. They're predicting that the OLED part of the smartphone market will be in the range of 45% of the total smartphone market this year. Then OLED went down a little bit, and they basically enabled smart watches. I'm wearing one now, but I am not sure anybody -- everybody can see it. So smartwatches are a great market as well. At the same time, LG was focusing on TVs. So LG's TVs have been doing really well. They're talking about selling about, I think, 8 million TVs this year. But TVs, so smartphones and watches are made with what we call RGB side-by-side. You basically use a shadow mask and you -- people can't see my hands that well. But you basically use a shadow mask and you deposit the materials up through the shadow mask to create the pixels. What LG is doing is they're making white with color filters, so they do a blanket deposition of white because -- and then they pattern the color filters, because you can't really see -- you can't make a shadow mask big enough for a TV at this point. So one of the things that people are focusing on right now is smartphones are great. Everybody wants an OLED smartphones. They're in the premium market. They're going into the mid-level markets and possibly even the lower markets because OLED simply look better than LCDs. They have higher energy efficiency. They have a broader color gamut. They have better viewing angles, video is just perfect on them, and we're using our smartphones for more and more. So now they're moving up into the IT market, which right now is probably about 2% to 3% penetration on OLEDs. And some of our customers are really moving into the IT market using side-by-side pixilation, so RGB side-by-side. TVs, people are looking at different ways. Samsung, LG is still doing great on their OLED TVs. They win all the awards. They have 19-or-so OEMs. We have a bunch of OLED TVs, obviously. Our new facility has a bunch of OLED TVs, whenever any of our kids move into a new apartment, we buy them an OLED TV. You see the way this goes and then once they buy them -- once we buy them an OLED TV, they want all of the OLED TVs because they are so good. Samsung is now coming up with a QD-OLED TV, which they're talking about releasing probably next year, I guess, which uses quantum dots instead of color filters and uses blue light. So use of blue light, the quantum dots create all the colors of the rainbow. So that's a really exciting option, but it's a blanket deposition. What we have been focusing on for OLED TVs is a technology called organic vapor jet printing. So what we're -- what we want to do -- and the technology was invented a long time ago, it's been in deep R&D for a while. We've now created a subsidiary to commercialize it out in Silicon Valley. You take the same types of materials that's been used in smartphones and smart watches and the $30 billion industry, and we use those materials to actually print them in the gas phase, onto a substrate, so we're accelerating that. And we believe that that has a potential to be a game changer for the TV market because it can really go broad on the TV market and presumably reduce costs as well.

And what would be kind of the time line for some of that printing technology?

So we established a subsidiary during the pandemic. This year, we're focusing on creating the building blocks for an alpha system. We're making sure we're reducing risk as we scale up because this equipment will ultimately be very expensive, so you want to reduce the risk. So now we're creating the building blocks out in Silicon Valley for the alpha system. We're talking to customers about their needs, desires and wants, talking to partners to see who would be the best partners. And then commercialization would likely be 3 to 5 years away depending on how everything works in together. You'll be having prototypes out there before that time but that would be the -- probably the commercial time frame.

Got it. We got a question from the audience just on progress of blue in -- they're saying maybe you sounded a little bit more muted on it last quarter. Certainly, you were just talking about Samsung doing stuff with blue next year. So just getting a sense of where you feel like progress is on that.

Well, if people thought we were actually muted, they took the wrong message away. We're actually more excited about blue and continue to be so. We're continuing to make excellent progress, which everybody knows, that's our statement now. But we're talking to customers, we're engaged with them. We think that we've been making some really nice progress towards commercialization. And the industry really needs and wants blue across the board, it provides better energy efficiency. Once we get the first blue molecule in there will, of course, be continued improvements to that. So we're very excited actually about where we are on the blue project.

Got it. Okay. That's helpful. You just spent a little bit of time kind of talking about how you still feel like there's penetration that can take place in the smartphone market, kind of down market, just in that people like OLED screens more. So just how should we think of the interplay of kind of the growth you see or volatility in the smartphone market just as you balance out kind of increase in penetration with kind of increase in number of devices that move to -- or just the number of overall devices?

Well, it's a great question. What we've been seeing with OLEDs, in general, and smartphones are at the cutting edge of that is the trend continues to go with more OLED. So we're now at 45%. We -- I frankly expect, ultimately, almost all the smartphones to be OLED, but trends don't go straight up. So there's -- sometimes can have a jagged edge or the like. We see more of our customers getting involved with OLED smartphone displays. We see prices have continued to come down. Costs have continued to come down. So we see significant growth continuing in the smartphone market. Timing is always going to be a key, but we think OLEDs will be able to take over from LCDs in basically all the relevant markets over time. Timing being the crucial aspect that is difficult to predict.

Yes. Got it. I guess we touched on kind of the TV market and some of the innovation that's going down to kind of -- or going on to bring that price point down. But where do you feel like we are in that price point conversion where the price of OLED or OLED production can kind of come down enough that you see more adoption in the TV market. Is there a crossover point that we should think of? Or is it going to be kind of similar to what you know on the smartphone market or there's going to be some step functions to that?

Good question. I'm a firm -- to go to your last comment first, I'm a firm believer in step functions and other than rocket ships, things don't go straight up. But for the TV market, I remember when LG first started doing TVs in the early years of the previous decade, 2013, 2015 and the like. And they were coming in pretty high. The conventional wisdom was when you hit 2x the price of an LCD TV, you'll start seeing penetration and that kind of happened. And then we hit 1.5x the price of an LCD TV, that would happen as well. And that's happening, and that's one of the reasons that with LG, they're basically selling all they can make. So they sold 4.5 million last year. They're selling -- they projected 8 million this year. They opened up an additional factory a few years ago in Guangzhou, China to make more TVs. And what we're seeing now because the OLED TVs get all the best-of-show awards from TVs and technology conferences and the like. LCDs are now adding to their TVs, adding cost to their TVs to try to compete with OLED. So the LCD costs, what we seem to be seeing are going up. They'll put mini LEDs in the back -- to the backlights or the like or other types of things, which where they're trying to get to image quality as good as an OLED, while the OLED costs are going down, the LCD costs are going up. So we see this continuing growth in the OLED TV market. We'll see what happens with Samsung's TV. We're very excited about that. We're most excited about the OVJP, of course, when that comes in because we think that can be a game-changer.

Got it. And then maybe just a refresher. Is there a difference in how we should think of cost per square inch of OLED technology when it's going into a smartphone versus kind of a larger-scale device? And is it exponential or linear, I guess?

It's -- if I understand the -- there's not really a whole lot of difference. There's a difference in recipes and things that the different customers may have or the different materials they may use. But in general, it's cost per square inch, whether it's a smartphone, a smartwatch or a TV.

Got it. And another question that came in from the audience is just -- you just mentioned kind of some of these micro LED technologies that are being added to LCD TVs to attempt to compete. Is that something you think is more of a threat? Or do you really think that it's just kind of icing to try to make something look better than it is?

So you have mini LEDs, which are basically the backlights for the high-end LCDs. Then you have micro LEDs, which are even smaller. And what we're -- we've been watching that for quite some time because we take nothing for granted. And it does seem as though costs are more than one would expect or one would want in order to be able to commercialize. From a technology standpoint, they may be able to go very small or very large, but I don't think they can hit the sweet spot of OLED. So we think -- we do believe that OLEDs are the technology of the present and the future, we look around at micro LEDs and the like, and we really don't see a significant competitive threat to OLEDs at this point. But we keep on looking.

You're cognizant.

We're cognizant. Exactly.

Okay. And then clearly, panel, panel pricing has been going down for a long time. It seems to kind of be leveling out a little bit, but that's caused some caution around inventory levels with panel makers. And you saw a steep step down in your BOE revenue in Q3. Can you just kind of tell us where we are there or just some of the drivers of the lumpiness that we're seeing around panels?

Sure. Sure. Good question. While we're -- in general -- while we're a just-in-time supplier to our customers, and we certainly have the ability to do that. Sometimes, our customers have different ordering patterns. And this is just part of an emerging market. So the market is new, we'll see, for example, with BOE, they bought a lot in the first quarter of the year, and then they worked off the inventory. So we'll see from time to time customers buying lumpy, buying clumps of materials ordering them. But in general, we're a just-in-time supplier, and people are not really ordering for inventory on a regular basis. Because -- for, I guess, it's about 20 years now, we've always been delivering on time with quality materials to all of our customers. So they know they can depend and rely upon us.

Got it. And another audience question that we got was just around Samsung. You've mentioned it a couple of times about some of the technology that they have coming out in the next year. Is that something that you're excited about for like a revenue contribution next year? Or it's just you're mindful of kind of the technology and maybe we'll think about the revenue further down the line.

Well, it's an interesting way of saying that. So look, Samsung has been -- was our first big customer, is a very strong customer. We work very closely with them. We work very closely with them on the R&D side. And yes, the answer is we do believe that the revenue will continue to come from all of our customers as we move forward. I hesitate to speak about any particular customer because they are our particular customers.

Yes. But fair enough, we just have to pass on the questions. We talked a lot about OLED expanding into existing markets, whether that be TV or smartphone, but you've talked around R&D efforts to kind of create next-generation materials. Just how should we think of what the adoption cycle is or adoption market is for some of these new materials you're designing?

So our new materials relate to 3 specific aspects of the materials. There's color point, there's efficiency and lifetime. And so on color point, different customers may have different models that they want certain specific colors for. And we, at this point, have an inventory of materials and we have a lot of people working on them. So we can find things and then improve upon them. Customers always want an additional -- they want additional efficiency and additional lifetime. So that's -- that becomes the next generation of materials, and we're constantly improving our materials and releasing them to our customers in line with what our customers need for their next generation of products.

Got it. And I reluctantly ask a metaverse question, just given my name. But...

I didn't say a word.

Yes, exactly. But augmented reality, virtual reality, the metaverse is certainly kind of an applicable topic right now. Just how do you think that that impacts kind of the conversation around wearables, screens, goggles? And just could that be anything that's kind of needle moving for you guys as you think about that market?

I think that the augmented reality and virtual reality markets are going to continue to grow. Augmented reality, especially for people who need to do -- who need the instructions to use a book. So if you have the instructions on your glasses or goggles or otherwise, that would be great. I know a lot of people enjoy playing the virtual reality games and gaming is becoming huge. And OLEDs are the best technology for me. I mean, especially when you get to near-eye and the like, their fullness of color and their depth, it just really works well for the metaverse types of applications.

Got it. Okay. And then maybe just kind of last large kind of major market that people think of for kind of OLED screens, is the auto market and all of the different screens that we're seeing inside of TV. Is that somewhere where OLEDs can actually differentiate versus LCD? Or just kind of what type of opportunity you're seeing in auto?

Sure. Auto, actually, I think on the inside, the interior market and the exterior market. So in the interior market, you can use flexible OLEDs if you want curved screens and the like. Some of the customers are doing that, which is something that LCDs can't do. They can be -- they're brighter and they have better viewing angles so you can see your maps or what have you better. And it's better for the design function. So the interior automotive engineers can design OLEDs in, and it gives them a larger design space. You can also use OLEDs for lighting, both inside the automobile as well as outside the automobile, and so one of the companies is using OLED lighting for taillights. And it gives them a feeling of depth and 3 dimensionality to a taillight that the existing LED technologies cannot do. So that was not a predicted market by us, but we love it. We think it's great. I think it's Audi starting out with their taillights in their TT, and now they're going into the A8 in this year. And I think they're probably going to continue to do that as well as the high end cars using OLEDs inside for display purposes. So we see automotive as a really nice interesting market moving forward, good long-term market.

Got it. I mean you just talked about kind of the foldable market in relation to autos. But just you've been a leader kind of as that opportunity has come into place. But is there anything that changes with the ecosystem, maybe their suppliers or opportunity when it comes to, I think, foldable opportunity?

Sure. Well, we see a foldable and flexible, but -- or conformable. The foldables and just do an advertisement, I have one here, of course, and I love it. So this is one of the original Samsung foldable phones, it's great. And well, for our purposes, it's not double the amount of materials, but it's almost because you have a front screen, and then you open it up and you have another plastic screen. So that works out really well. We actually were the first people to invent OLEDs on plastic many, many years ago. But that was then and this is now. So we're seeing the foldable market seems to be growing. That might be an exponential growing market, because we see a lot of people really interested in foldable. When I pull out my foldable, everybody wants to know where I got it from. It's kind of like the old Samsung, the original Galaxy phones, when I first pulled it out people saying, "Wow, where did you get that?" I'm seeing the same reaction from our foldable phones. So I think that's going to be a really nice growth market moving forward.

Got it. I see all of the commercials today with BTS advertising the foldable phones, and I figure anything BTS talks about is a hit. So you talked a little bit about kind of the vapor jet printing and manufacturing. Can you just better help us kind of understand that process and just any partnerships that are necessary to kind of achieve that?

Sure. So the process itself is using -- it's time, it's basically using the existing materials in an inert gas stream to print the molecules on a substrate. So you remember chemistry where you had gas molecules and they went everywhere? Well, our team has figured out how to get them to go in a specific place, extraordinary invention. It took a long time, but it's worth it. So we're now taking that and scaling that up to larger sizes to prove in some of the additional issues before you get to TVs. We're setting up -- we're talking to a number of people in the supply chain about partnering with us on this project. Partnering, obviously, can mean a lot of different things. And we're also talking to our customers about what they want to see in the project. So we're really talking to the ecosystem that would be developing and using this technology that can be a game-changer for TVs.

Got it. And then just maybe a last question for me. You guys have some kind of more meaningful increases in R&D spend. You've, obviously, talked about kind of a number of opportunities that you're pursuing. Just as we think about kind of the increases in R&D, where should we think about them kind of primarily being focused or just trajectory of that R&D spend.

That's fair enough. We are an R&D-driven company, and we are creating the future. And therefore, we are spending more money on R&D every year. We -- our materials, our phosphorescent materials group is probably the largest in the world, encompasses a number of different disciplines and subdisciplines, which is one of the many magics of it. OVJP over the last few years has continued to increase their costs. I don't want to make any projections right now on where that is going to go. But what we see is -- we see new materials coming into our trajectory moving forward. Then we'll see revenues from OVJP. Then we have some other things that are in R&D, something called plasmonics, which could be our next conversation, which can make OLEDs even more efficient. So we're looking at this organic electronics design space, of which OLEDs is really the first big product. And we're seeing what else can be -- can come out of that organic electronics design space, given the fact that we are one of the leaders in that space.

Well, I look forward to talking to you about plasmonics in the future.

I look forward to it as well.

Yes. So with that, we're out of time. I forgot to mention disclosures. So if anybody had any questions about research disclosures, they can go to morganstanley.com/researchdisclosures. It was a pleasure to have Steve here today. Thank you so much for speaking with us.

Thank you very much, Meta. It was a pleasure to be here. Have a good rest of your day.