Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning. Welcome to the 24th Annual Needham Growth Conference. Our next session is going to feature a Q&A session with the CFO of Universal Display. UDC as our audience is no doubt aware has been around for a number of years, the only pure-play OLED company. Every smartphone with an OLED screen is produced with UDC's OLED technology, including the red, green, phosphorescent emitter materials and likewise. The OLED TV market where we've seen the industry's major manufacturer LG established OLED TVs as the premium TV technology. These displays are also enabled by UDC's technology. The company's revenues through the first 9 months of 2021, up about 42% or so, over $400 million, much stronger increase in profitability, operating margins, I think, north of, I think, around 42% through the first 3 quarters. So pretty strong financial performance. And approximately 57% or so of these revenues for the first 9 months came from the sale of materials, 40% from royalties and licenses. So with that, I'd like to just welcome Sid Rosenblatt, the company's Executive Vice President, and as I said, CFO. Sid, welcome. Happy New Year.

Happy New Year to you, Jim, and thank you, and Needham for inviting us, and we are happy to answer any questions that you have and might as well be efficient and get started.

Terrific. Why don't we start with CES, just because it's a little talked about, not quite the live event that we had hoped, but with back and forth between Samsung and LG. And maybe you could shed a little bit of light on that regarding the OLED TV supply agreement. I'm wondering what are the implications of the recent developments with respect to the way you're thinking about the OLED TV business in '22?

Well, I mean I think we saw at CES that there's a big increase in OLED TVs. And you've got LG that showcased a much broader range of TVs from, I think, 42 inches up to 97 inches. So they are really expanding their portfolio. You've seen that now Samsung is entering the OLED TV market with something that they call a QD-OLED, which is a hybrid OLED, which includes OLED technology and QLED materials. So we're seeing more and more interest in the TV market. Sony announced that it's going to add QD-OLED TVs to their portfolio. So we are seeing a significant amount of interest in the TV market, which is great because it's continuing to grow and OLED TVs have been rated the best TV ever. So it is something that -- we think it's very exciting for us because of the -- obviously, the square meters of glass are much larger than a smartphone. So it's very good for our materials business. And talking about the chatter between Samsung and LG of providing them, as you know Samsung, I think, addressed it at CES early last week when they said they're open to all options. I'm not so sure what that means exactly. But there's obviously been chatter about Samsung buying panels from LG and that was their response.

And as you have discussions with the customers, with the customers in China, how are you thinking about OLED TV penetration over the next couple of years?

Well, I think that right now, you're seeing OLED TV is estimated to sell about 8 million TVs in 2021. Estimates are about 10 million in 2022 and then going to probably 20 million in a couple of years. And the only way that you can really get to 20 million is adding new capacity. And for us, if you look customer A, B and C, our customer, LG, is our second largest customer, and they are the only OLED TV player until Samsung gets in now. So if you see a significant increase in the number of units, it's a significant increase in the revenue opportunity for us. I also think that you will hear more in the future of some of the Chinese panel makers looking to get into the OLED TV business because it is one that we think is the future of TVs.

And certainly, one of those customers over the years has more than established its presence in the LCD market. So it will be a natural transition for them, wouldn't it?

Yes, absolutely. I think pretty much all the LCD players eventually, I think, will. We believe that OLEDs are the best display technology ever invented. Obviously, there's still going to be some other small niche markets that folks will have. But I think that OLEDs as they continue to proliferate and the benefits of OLED are -- we believe that once you get the comparable yields and volumes that OLED TV should cost 20% to 30% less than an LCD. So eventually, we believe that it really will dominate the market from small to large.

And remind us, you touched on it, but if we see whenever the data comes out, 8 million or so whatever in '21 for OLED TVs, and we get to that 20 million units a couple of years out. Help us again, if you could frame for us, what does that mean for your materials business?

Well, again, our business is based upon square meters of glass. We coat the entire substrate. So for us, assuming that your yields are 70% or 80% on a substrate, if your yields increase to 80% or 90%, you're going to sell 10% or 15% more units. For us, we're not going to sell any more material because we coat the entire substrate, whether it's yielded or not yielded. For us, the growth is in new capacity that comes online. And so when there's new capacity, like I said, if you're going to go from 10 million to 20 million, you're going to have to add significant amount of capacity, whether it's exactly double or close to it. I think that's what we're talking about. So that would be that much more material that we would sell.

Got it. And in the past, I think you've talked about expectations around capacity. Is that something you would do in your Q4 call? Is that when you normally would do it?

Yes. We normally in our Q4, talk about capacity from the end of one period to another. We started in 2015 to 2017, talked about in excess of 50% in 2017 to the end of '19. And so, we will continue to do that. So we will do -- again, we'll do the end of '21 to the end of '23 as a 2-year forward capacity outlook. And it's based upon our own internal data that's out there. And so, we will do that in our Q4 call.

And as you look back and how has that played out versus the reality of the market? Things have happened, as we all know.

Some years, it was below what the actual increase in capacity was, and some years it was above. I think if you look at the 6-year period that has passed from '15 to '21, I think the total increase is probably really close to what we said. Whether or not it was within each of the 2-year periods, that's a different question. And that's really out of our control. This is the equipment guys and this is the manufacturers of when they're going to expand. And clearly, COVID caused a lot of things to slow down when we looked at the end of 2019 to the end of '21. So I do think that there are some things that we're way beyond our ability to forecast.

And you know, I want to spend a moment or 2, just talking about some other newer applications, lot of speculation about AR over the past year, particularly with all the attention being paid to Metaverse. How should we be thinking about the display technologies that could be used in augmented reality applications? If the industry goes for micro OLEDs, how should investors -- I guess what I'm asking is, how do we think about the possible impact on UDC as we see some of these newer applications?

Well, I mean, I think that for AR, particularly since the display is so close to your eye, what you really need is picture quality. And OLEDs give you true contrast ratio. They give you high refresh rates. They give you form factors that can be curved. So everything you really would want in an AR display is what OLEDs offer as their basic forms. So I think it is the best technology for AR and VR. It doesn't matter whether it's AR or VR. And so that is something that's important. I mean, a number of Panasonic and a number of other guys that are using micro-OLED displays in their devices in AR/VR headsets. And so, you're seeing a lot more folks using OLED displays. But as I talked about a little bit earlier, for us, we coat the entire substrate. And when you think about the size of a micro display versus a TV, there's hundreds or thousands of them in a Gen-8.5 substrate. So for us, it is a good business because it is one that will get a lot of attention and having any new displays and new technology that has OLEDs in it is really important, but we're not going to sell significant amounts of materials if the customers are licensed customers and so you may get more license fees on it just because the ASP is much higher per square inch. But in terms of sheer volume of material, it's not a significant needle mover for us.

In aggregate, Sid, are some of these applications, if we put them all together, whether we're talking about AR/VR, we're talking about things like emerging. We're seeing a lot more IT applications, a lot more laptops. I mean if we -- automotive, we're seeing some premium car models with OLED screen technology. In aggregate, if we put some of these together, do they move the needle for you guys?

Well, yes, I think that all of the above, when you aggregate them all, it's clearly very important. When you look at just the overall market from a market standpoint, we're going to continue to see smartphone applications grow. Today, they're probably up to 45% of smartphones have OLED displays, all the premium phones, now some mid-range phones. So with this, I think what you're going to see is a new CapEx cycle come about because of IT applications, you're starting to hear more and more about IT and TVs. And those 2 markets are nascent. I mean, you're talking about 2% and 3% of the market between IT and TVs. So there's a lot of runway for OLEDs in these markets. And then you also obviously have AR/VR, and you've got -- one of the areas, I think, is important is foldables that you're seeing more and more. And I've always been -- and you've heard me say this, I mean I think foldables are really the future for devices. I mean, as they get to be less clunky and become more prolific, I think that you're just going to see more and more folks adopt them. Every time I take out my Samsung Galaxy Fold, people look at me and say, "What is that?" And so it is something that I think is really very important for the industry, and you'll see more and more of that. And some of the other areas that you're going to see is you're going to see things like OVJP and things like that are we believe are going to help make this industry grow to hundreds of millions of TVs versus tens.

And we're going to touch on OVJP in a moment, but obviously, we'll talk about the blue elephant in the room. You guys do appear to be fairly confident about the prospects we're commercializing blue. I think we've all lost -- we tried to ask the question in so many different ways. But are there ways -- are there parallels in the way you're engaging with your customers to commercialize blue phosphorescent emitter? Are there parallels with the way you were engaging with them and what we saw occur with green emitters, which was, what, 9 years or so ago?

Well, I think it's difficult to draw parallels in the industry as it was 10 years ago or 9 years ago versus where it is today. There was really just 1 OLED panel manufacturer and there was not a lot of OLED panels that were in the marketplace, and there was a lot of work that had to be done and everybody really -- they had to understand the material and how it reacted and how to deposit in and a lot of such things. Today, it's very different. A lot of -- there's a number of OLED panel manufacturers. They understand how these materials react. So I really don't think there is -- we can draw a parallel to what occurred 10 years ago to today. So we are working very closely with a number of customers. We have said that we are providing developmental quantities of materials to a number of customers for blue phosphorescent emitters today, and that each of our customers that we are talking to all of our customers have different specifications for their devices. They all have a way of differentiating to other and they all have different drive schemes and they all have different ways of emitting the light. So that one customer may want the blue to do X, Y, Z while another one wanted to do something a little different. I mean they still are pretty much in the same ballpark but each customer. So we work closely with all of our customers. And we're doing everything we can to get everything we can so that we can meet all of our customer specs.

And fair to say, it has the potential to be a significant revenue opportunity for you guys if you're successful with blue?

Yes. Yes. I mean when we look at the blue today, we're not saying that I have a blue that meets customers' specs, but what we look at is we're working there. And as we have said a number of times, we're making excellent progress is we can look at what we're doing today. And we do believe that in terms of the material content per device, if you look at back historically, you can see that we sell and we talk about this twice as much green emissive material than we do red emitters when you're talking it for mobile devices. And we think that the doping concentration of a blue emitter today is more in line with the green emitter than it is with the red. So it is -- if you look at it today, we sell 1/3 red, 2/3 green. It could be another 2/3 opportunity and you do the math that comes out to, is it 40%? It's probably the ballpark. I don't -- I can't say it's exactly because we don't have the material today that meets the specs.

How are you guys thinking about customer adoption? Clearly, the large players in the smartphone market, very interested in viable material. It's going to -- it's meaningful for them in terms of extending battery life and performance. But do you have some -- a point of view on how if you have a breakthrough, what the customer adoption would look like? Could you…

In terms of customer adoption, I think as we've talked about in the past, because the blue phosphorescent emitter uses a different amount of current than a blue fluorescent emitter. The blue fluorescent emitter, 75% of the energy is wasted as heat. So you have to drive it a lot harder to get the same amount of light out of it as you would with a phosphorescent emitter, which means that you would have to redesign your drive scheme for driving a phosphorescent emitter versus a fluorescent. It's just not a plug-and-play. So what you will see is the adoption of blue new models. So you will see them adopt blue and whatever generation is coming out of a smartphone or for a TV or wherever it is going to get adopted into. You're not going to be able to go back and just start making it using the old technology, using the old drive scheme. So it will take some time for the blue phosphorescent emitter to be in all the products in the market as old ones get obsoleted and go away, you have new ones that come on. So it will be a gradual adoption. I think once it starts, it will be pretty quick because once you have a blue phosphorus emitter for mobile devices, it's clearly an increase in battery life. When they adopted green, they talked about a 25% increase in battery life. We fully expect a significant increase in battery life with blue. And when you're talking about TV applications, I think it does help you in your bill of materials because blue fluorescent emitter is when you're driving them to drive to a mid light, you generate a lot of heat in the device. And to be honest, heat is the enemy of OLED materials. So you want to manage your heat very carefully because you don't want them to be that hot. So today, you use a lot of heat management techniques in TV. So if what you're -- because it's a phosphorus emitter that generates very little heat, any large device is going to generate some heat. But if you can do that, you can save a lot of money in heat management in the TV itself.

And that's a good point because I think too many times, we just get fixated on the advantage of blue phosphorus material for a portable device. And we kind of lose sight of the fact that we don't think about power efficiency, but I think the heat management benefit that you're talking about is significant.

Yes, we believe so. And I think our customers do also.

Remind us, Sid, what would happen to your existing license agreements with blue? Because you have multiple customers. Some of these agreements have to be renegotiated?

Well, most of our license agreements are portfolio licenses. So they get the rights to all of our IP. The one exception to that, as we've talked about in the past, is Samsung. So with Samsung, we'd either have to amend our license agreement or enter into new agreement for them to have the rights to blue. But with all of our customers, one that would get blue, the one thing they do not have is pricing or anything like that because we don't have that in the agreement. And we've talked about our long-term agreements, all have pricing for red and green emitters. But there's nothing in that for blue because it's to be done once we get a blue emitter that meets the specs and -- based upon what it's going to cost us.

Do any of these talks, for instance, with Samsung go in parallel as you're working on this? Or is it a case of we had the material then the talks really begin in earnest?

No. I think we talk to our customers all the time. I mean it's -- the R&D teams talk constantly, particularly if you're talking about blue emitters. I mean it's a very important milestone for the industry, for our customers. So there's constant talk there. And when you talk about what it is, whether or not the new pricing, I think we don't talk about pricing because as we say, we don't know. But there is a constant discussion with all of our customers at all different levels. We have great relationships with our customers. We've been working with Samsung for 21 years.

Let's turn to OVJP. A few questions. For those not familiar with the work you're doing in this area, tell us briefly about it and why it's important to see the accelerated adoption for large area OLED TVs?

For large-area TVs, today, the way that they are made is white with a color filter for LG and now Samsung is talking about a blue phosphorescent emitter using quantum dot materials to down convert red and green. Folks have always talked about wanting to have red, green and blue side-by-side pixels similar to what you use on your mobile devices for TVs to give you the best color gamut, the best refresh ratios, everything that you would want. In addition, it would be much more efficient using OVJP because today with mobile devices, they use shadow mask technology. And when you deposit your red material, you use a mask, can block out the green and blue. So you waste a lot of material on the mask. OVJP is a direct printing method that takes the best of both worlds in that you can print red, green and blue materials directly where you want them to be without a shadow mask. We believe OVJP will be very high throughput, high-yielding and efficient in terms of the material utilization and help our customers with their bill of materials and cost.

Is there anything you could say, any kind of update you could provide on just where you stand time line-wise with an alpha tool?

Yes. We're talking about putting together an alpha tool or a prototype tool that is something that customers could come in and look at and kick and see what the results are. As we stated in our facility, we can only use 6-inch squares. And you can make -- we can do red, green and blue side by side, and they say, yes, but is it scalable? So what OVJP Corporation is doing is taking the next step of putting together a system that will be able to show that this is a scalable process, whether you go initially the Gen-4.5 or something larger, you want to bring your customers in and say, you can go from 6 inches to 1 meter by 1 meter or 1.5 meter whatever size it is that they're working on, which then you can say, well, it really is a scalable process. The end result is you get the same result on the -- a 6 inch square as you do on this prototype tool that we're putting together to prove that the process works. So that's really what they're working on today.

And so if we assume you guys continue to make progress in this area, I think you've talked about a range of business models. So if we're seeing potentially commercialization of this technology, I don't know, 3 to 5 years out, what do these models look like?

Well, we're open to all the opportunities that we can. What's important for we believe, is to get this technology into the marketplace as soon as possible. We're working with customers. We're going to work with equipment companies. We're going to try to figure out what is the most efficient, best method to get these in because we really want to see OLED TVs go from 20 million TVs to 100 million TVs. And that's what this technology is able to do. So there is -- whether it's a joint venture, whether it's a license arrangement, whether it's a partnership, I don't know what the answer is because it's still very early. And we are really open to whatever path we think will get this technology into the marketplace as soon as it can.

In terms of the way we think about milestones though, first the alpha and then I guess you guys will be reporting on some of the reactions from that?

Yes. As soon as we are able to talk about it, I mean, what we will find out from customers, to be honest, is they'll come in and they'll look at this and say, we're going to need something that we can play with in our facility. So probably the next phase is what do you do? You don't need a full-up tool to do it. Can you send them? Can you develop a tool that is something that can be bolted on to their existing R&D lines or their production lines and then prove out this process? It is a printing process that is a dry printing process, not a wet printing process. It's essentially using vacuum to print as opposed to using solution-based materials.

Maybe moving off of that topic to some of the developments we've all been hearing about over the past number of months. Just UDCs had probably what about a year or so now to observe how semiconductor shortages, other component constraints have impacted some of the end customer demand. I'm just wondering if there are any observations you can share with us that would just be helpful the way, and so far as how we're thinking about '22?

Yes. I think that we looked at it at the beginning of last year, we talked about when we -- on our earnings call, we talked about uncertainties in the marketplace in terms of 1, COVID; and 2, supply chain issues, which were obviously, there was a lot more to chatter about, chip shortages at the beginning of last year, which all came to fruition. I mean, it's something that, obviously, all of us know has occurred. And we learn from everything that occurs and -- but when you look at it, completely out of our control. I mean that is really not in our sphere of expertise, but it is something that impacts our business. And we believe it did. And we think what we hear today, which is the same thing you're hearing, is it probably will impact 2022 also.

And you guys, as everyone knows, you provide your annual guidance when you report Q4 results. It's never easy to forecast, but I would assume some years were difficult than others. You provided 2020 guidance, we were just in the beginning stages of the brunt of the pandemic. 2021, challenge probably was forecasting the recovery also taking into account what you just said about, about component challenges. As you kind of sit here today, what have you learned over the last couple of years that maybe better inform you with respect to these inputs and the assumptions that go into the '22 guidance?

Well, I'm laughing because you know us very well and a lot of folks do.

I do.

That for a number of years, we raised guidance and then we reduced guidance. So to some extent, it's been a roller coaster. Last year, our guidance for 2021 was $530 million to $560 million at the beginning of the year, which reiterated on each of our calls. And this is probably the first year in a number of years that we haven't changed our guidance at all during the year. And it's a couple of things. There's a bigger base in the industry we kind of know. But the things that impact us is how quickly some new capacity comes online that we're expecting, the chip shortage, whether or not the factory utilization is going to be there. So for this year, for 2021, we looked at it and we looked at trying to be realistic. And I think it ended up that some of the things that we talked about chip shortages and COVID still had a big impact on 2021. We'll be better in 2022. I certainly hope that we have learned a lot and there are still uncertainties. So it is -- we got it right now. And I think that everybody is looking at what could happen in 2022 and when.

Okay. I mean, we'll give you some credit. You've got better at forecasting the business.

Thank you. I won't give Darice's quote.

We have -- moving down the P&L, a little bit of -- not a creep upward in OpEx over the past year. I think it's reasonable given some of these newer growth opportunities that you're pursuing. As I said, I think the operating margin is around 42% through the first 3 quarters, pretty healthy. But I'm just wondering if you would just spend a moment just again, how does management think about operating margins longer term?

Well, in terms of operating margins, I mean, we are still a pretty lean company. And when you look at in excess, whatever the number is going to be for this year and having 300-and-some employees. I mean, we're going to be $1.3 million, $1.5 million per employee in revenue. So we are still a very lean company. We are going to do what we need to do because the industry is still growing, but we fully expect our operating margins to be over 40% in the long term.

Are you guys -- yes, we're hearing this from companies across the board. The folks that you employ are highly, highly skilled, well-educated folks. Are you having trouble in terms of either attracting new people? And to what extent are some -- are you seeing being impacted at all by some of the wage pressures and whatnot?

We believe that we are a company who really values our employees. And we believe that we treat our employees fairly. We have given bonuses to all of our employees, including cash and stock for everyone up and down the line since we started. So it is something that we think is important. We have probably hired -- I know at one point, we had hired -- we hired like 30 people at just at OVJP Corporation during the pandemic. So we -- I believe we've hired something over 30 or 40 people a year using Zoom, and we can -- they're very specialized folks, and we -- particularly if you talk about the scientists and a lot of them come through some of the university programs that we work with, so we can target folks to get. But we've been able to attract folks and keep folks, which is important for us. You can attract them, but then they just jump someplace else. So we have not had that. We have been -- I believe that we have been very proactive in doing everything we can to make our employees comfortable during the COVID crisis, allowing them to make sure that they are safe and that what we are doing as a company is to ensure that they were all successful. The company needs to be successful, but they also need to make sure that from a personal standpoint, they are successful.

And just real quickly, you had talked about the decision to open the new facility in Shannon. What kind of spurred that? And any kind of advantages that, that facility provides you?

Yes. We were looking for expansion after we did the last expansion in Barberton. Once we finished that, we start looking for the next one. We felt that it was important to -- since our customers are all over the world. And there were some trade issues with China that came out that we kind of expected that it would probably be very important for us that our next step would be to build a facility or get a facility that allowed us to operate internationally without any trade issues that may pop up between the U.S. and/or China and/or anyone else. So that facility is actually a great facility. I was there actually a month ago, the first time I've got an airplane in 2 years. And it allows us -- it will allow us to make red, green and blue emissive material in that facility. So it is one that was an existing pharma facility that essentially 90% of what they had there, we can use. So it will allow us to get it up and running really quickly.

Got it. And finally, so just on the topic of capital allocation. What are the factors that the company is considering at this point in time when it comes to dividends or buybacks or even possible M&A? I mean, you have done some M&A in the past, the CRO that you bought a few years back. Are there opportunities out there?

Yes. We're always looking for opportunities. It's something that is always on our list, whether it's IP or whether it is companies like Adesis or IP portfolios that we purchased. So that is something that we always keep our balance sheet very strong that if there is something that comes up, we're able to move as quickly as we want to. The other side of it is the company believes that returning capital to shareholders should be in the form of dividends. And we started dividends. And since we started them, we've raised them every year because we've made more money, we've had more cash from operations, and that is what we fully expect to continue doing.

Okay. Great. We're going to end it there. Sid, always a pleasure.

Thank you very much for having us, Jim. Take care.

You too.