Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Krish Sankar from Cowen. I am the analyst covering Universal Display. And we are fortunate to have Steve Abramson, the CEO of Universal Display, along with Darice from IR team. So Steve, thank you very much for your time. Really appreciate it.

Thank you, Krish. Is this working?

Yes. So let me just start off by -- you recently had your earnings. Supply constraint seems to be a theme across the board. And kind of curious, you guys maintain your guidance. How do you feel about your outlook for the year relative to all the supply issues going on in the industry?

It's interesting. We're hearing a lot of supply chain issues across the board every day. There's something new, not necessarily in our industry, but in some industry. And then a week later, they change that. So we forecasted some significant growth in 2022 over 2021. We're still very comfortable with that guidance. Our 2 principal areas are smartphones and TVs. That's where the majority of our revenue comes from with our clients -- our customers' production. And smartphones, while you're seeing some stuff recently, there may be Apple may be flat or Samsung maybe down a little bit. Right now, OLED is about 45% of the smartphone market, that was 2021 number and 2022, they're talking about 50%. So again, we're not seeing a whole lot of change in that part of the forecast. And TVs, LG is still forecasting TVs to be up significantly over the years. So we seem to be pretty comfortable. From the supply chain parts that we have, we always make sure that we have enough inventory in place because we sold first to our customers who are the biggest OEMs in the world to make sure that we can always support them whenever they need our product.

Got it. Got it. So like you kind of highlighted about smartphones still holding up. There's been concern about like Oppo, Vivo, Xiaomi, like numbers coming down, but you seem to be kind of little insulated from it. Is it purely because OLED is going more into high-end smartphones, they're doing well versus the low end is kind of where the weakness you think is or…

I can't speak to that per se, but what I can see is OLEDs are trending up while the LCDs are trending down because people want OLED phones. And as the costs come down or the prices come down from our customers to the sellers, people want OLEDs. So they want more OLEDs, which is why the percentage of OLEDs are going up. They started in the high end and like those products are going into the middle end. And again, we're seeing some nice penetration. That's our customers part of the business, not ours. But so far, it's working out well.

And then on the -- you kind of highlighted how like OLED penetration smartphone going from 45% to 50%. If I'm right, I think the large panel TV is probably still around 5% or so. That adoption rate has been much slower. Is it purely because of price cost issue, you think? Or is it more consumers specific in terms of demand?

I don't think it's a demand. I mean, OLED TVs, if you put 2 OLED TVs next -- 2 TVs next to each other, OLED and pick an LCD, you're going to want the OLED. So back in the day, when OLED TVs were 3x or 4x, LCDs, it was a price issue. You hit 2x and all of a sudden, and this seems to be a conventional wisdom at this point. You hit 2x to start seeing a growth. Now the OLED TVs are coming down in price. You're seeing them go from 48 inches to 97 inches, but it costs a lot to build a plant. And LG figured out how to make white with color filter TVs because you can't -- the way they make cell phones is use a shadow mask, but you can't scale the shadow mask up to the Gen 8 that you need for the TVs. So LG figured out how to do what with color filters, and that's gone booming. They have the one plant in Paju, another one in Guangzhou. Samsung is now doing their QD OLED, which is blue conversion with quantum dots, and it looks great. So let's see what happens when that gets into the market. So I think it's more of a building up of supply and how are you going to make them moving forward, which is why -- one of the reasons why we've been working on our technology called OVJP, or organic vapor jet printing, which is basically you print the display in the gas space. You don't have to print it in liquid and use the same materials that we use in the smartphone. It's just a different technology. So it's obviously very complicated, and we've been scaling it up and working on it. But that has the potential to be a game changer in the TV market in a few years. That's not coming to next year.

So OVJP still is a couple of years out I think?

Yes. I used to -- have been in the technology development game for a long time. We have our own internal projections, obviously. Sometimes you meet and most of the times, you don't. Sometimes you get quicker, so sometimes you get farther out. So I like to use the few, but we're making a lot of great progress. We established a subsidiary in California in Silicon Valley during COVID to start scaling up the technology.

Got it. And then the other interesting technology, obviously, is blue. And I think earlier this year, in the January or February earnings call, you folks spoke about blue kind of getting to a point of commercialization end of this year. So, a, is that still on track? And b, how to think about pricing for blue relative to your red or green emitters?

Good questions. First answer is, yes, we are still on track. We're still on track to meet initial technical specs by the end of this year and have a full RGB stack in 2024. Pricing is a different issue simply because we don't know what the final molecule is going to look like yet. And so depending on the final molecule, what type of cost down approaches we can implement, how we can manufacture it, that's probably when we're going to be coming up with the pricing on blue.

Got it. And I mean, historically, the issue with blue has been the lifetime, right? So now is it fair to assume that since it's going to be commercialized, the lifetimes are of acceptable levels for customers? And if so, do you think this is going to be a smartphone application or a large panel application?

So we've cracked a couple of codes. I mean, this is, I believe, Nobel Prize quality work. I'm so proud of the team. They've cracked a couple of codes. Sometimes, it's just a lot of slogging ahead. Sometimes you have an amazing insight. So we think by 2024, we're going to have the lifetime necessary for commercialization. We're on that path now. So we can see the road to it. All of our customers want blue. Every electronic application, whether it's wall plug TVs, iPads, smartphones, they want blue because it gives you greater efficiency, and it's going to be brighter. And that's good for all these electronic applications. So our customers have myriad of possibilities, and we're talking to them about which ones they want to focus on, how we want to focus and the like.

Got it. Got it. And then that brings the next question, which is, obviously, Samsung, I believe their contract probably expires end of this year, but also they don't have blue as part of the licensing compared to all your other customers. So kind of any thought process on how to think about Samsung contract extension plus or minus blue included in it.

We believe that ultimately, all of our customers are going to use our blue. We've been working with Samsung for over 20 years now. And we continue to renew our agreement. Sometimes we modify them a little bit. Sometimes we renew them before they're over, sometimes we renew them after they're over. But it's a really strong relationship because it's really a great company-to-company relationship from the top all the way down. So yes, we're going to -- we believe we're going to renew the Samsung agreement. We believe that we're going to incorporate blue into that. And the question is how exactly that's going to happen and there are some things that we're talking about now.

Got it. And last year -- not this last year, Samsung obviously had a presentation of the display conference talking about blue. Any blue that you come out with that's commercial one later this year and 2024, is that something that is specific to your customer? Do you think it can be applied to every customer?

We're working on plans to apply it to all the customers. So we've been spending a lot of time, money, probably have a 100 researchers or so on blue to apply it across the board. And we filed a lot of patents, a lot of different pass on how to get to blue. So our object is to make sure blue can work in all of our customers.

Got it. Got it. All right. Let me just pause to see if anyone had any questions. Also I'll continue -- go ahead.

[indiscernible] There has been a increasing chatter around fourth generation material coming off around [indiscernible]. Could you just comment on that? [indiscernible]

So when you say fourth generation -- the question was there has been chatter about fourth generation material coming around. I have a question back. What exactly do you mean by fourth generation?

[indiscernible]

Okay. Okay. That's what we're talking about. We've been doing phosphorescence for 25 years. And every few years, there's a new potential competitor. There was -- this isn't even the first go around for hyperfluorescence. So there was the original better fluorescence and then there's TADF and then they call it something else. They call it something else. Phosphorescence has 100% internal quantum efficiency. It's the -- we've been doing this. Our first material was in the market for 2003. I don't think anybody can beat our efficiency and lifetime. We have multiple products in the marketplace. It isn't that people have tried. They just haven't succeeded. So we've built with our first-mover advantage, our patent position, our amazing technical team, our relationships with our customers, our understanding of the design cycles, we think it's going to be very difficult for anybody to break into that.

So Steve, actually, on that point, kind of like when you look at the ecosystem, you have like Kyulux and those folks in Japan who use TADF, and obviously, you have like Cynora in Europe. You also have like Duk San Neolux in Korea. When you look at that overall landscape, who would you say is your closest comp?

Is comp as in somebody like us or comp as in capacity?

Competition like.

I'm not sure we really have -- our competitor is LCDs. So LCDs are the competitor. And that's what we've been focusing on. We provide one of the essential engines for OLED. And because it's a secular growth market, there's always people like TADF or hyperfluorescence, or people trying to do something in phosphorescence, but no one has been able to come close to where we are. And our -- we compete with ourselves. So our technical team understands that they need to design around ourselves. And so they do that. So in some respects, because competitor is ourselves internally to try to make sure that we maintain our marketplace position and continue to provide our customers with the best materials available.

Got it. So maybe let me flip the question other way then. Obviously, legacy technologies like LCD is a competition. When you look ahead, emerging technologies like mini LED and microLED, kind of curious where you shake out on that relative to OLED?

Good question. So many LEDs are really just LCD backlights. They're LEDs -- one of the ways that LCDs was able to compete with OLED starting, geez, I'm probably get my time frame wrong, but possibly a decade ago was putting LED backlights. And then they did local area and stuff like that. But it's been LEDs that has enabled LCDs to keep up with OLEDs. So many LEDs from our perspective is just another incremental improvement in LCDs, and it's always good to have competition. So we'd like to see that because that drives us. MicroLEDs is a different technology, but it's still a research project. It still requires work. And our analysis indicates it's not going to be as power efficient as OLED. It may -- there's possibilities it could be a really big stuff, maybe for outside or really small stuff in a few years maybe. But we still can't see how we'll compete with OLEDs, given the infrastructure, given what OLEDs can do and given the performance.

Got it. And on mini LED, obviously, one of the other opportunities for OLED seems to be IT display panels. And that's also probably like just a couple of percentage penetrated, a huge potential. But it seems to me that if I'm a IT display vendor, mini LED seems to be a more cost-effective choice than OLED. So I'm kind of curious like what is the value proposition for OLED in IT display.

So the OLED value proposition has always been, one, it's a better-looking display. Two, it's more power efficient. It's really what you got. But it's electronic display, so you want a better-looking display. You want to be able to have the battery last longer. And price is really dependent on what our customers charge their customers, how that plays out. That's the other part of the industry that we play in. So we believe, ultimately, just to be clear, don't ask me, I'm just a CEO of OLED that OLED will be the display technology in the future. We went from 0% in smartphones to 45%, 50%. TVs is a couple of percentage points. We see that grow. IT, a couple of percentage points. But if that, we're going to see that from gaming. OLEDs in some respects is the perfect display. It's thin, it's energy-efficient, and you can deposit for a wide variety of products.

And just out of curiosity, as blue gets commercialized, do you think that actually helps OLED have like a more of a moat relative to micro LED? Or do you think they are completely 2 different animals to deal with?

No, I think it's 2 different animals. I think blue is going to provide additional energy efficiency, which will enable OLEDs to compete even better with the microLEDs that will come. So when you look out a few years and you say, okay, there's micro LEDs, there's OLEDs. When we look at that, we say, "Geez, microLEDs doesn't got a stand a chance against OLEDs because we've got a blue in there at the time frame. So we're going to be able to beat them on efficiency." And even then, they're just looking at either niche markets, big or small sizes.

Got it. Got it. And then one other question I get from investors, and I just wanted to ask this from your vantage point is that last couple of years, obviously, China is a big market for you, and BOE is a large customer, along with other Chinese vendors. And there's a slight correlation when there's higher China sales, you have slightly better margins. And is it because their efficiency or yields are lower than a Samsung or a LG, so therefore, they buy more materials? And if so, as their yield improves, is it a slight negative for Universal Display because you're going to consume less material?

Well, so Samsung started, then came LG, then came a number of the Chinese companies, and there's a learning curve with OLED. This is a new technology, using organic technology, different type of deposition process and each of the individual engineer and technical teams need to learn how to use that. And then each material is actually a little bit different on how you're going to use it. So there's a learning curve over time. So I think what you're seeing is probably more of the learning curve over time, both how you use the materials, how they yield their ultimate panels than anything else. I think that's really where it's coming from. So our object obviously is we want to sell more. We're a cost-effective solution. We're not -- we're an asterisk in the whole bill of material or a cost-effective solution. We enable the industry and we want everyone to use it and continue to use more of it.

Got you. And then obviously, your lead times are much lower, right? I mean, my understanding is that you can really like turn around some material -- few grams of materials in a week or 2. So how do you kind of like get the visibility on like comfort around like how to model for the full year or a few quarters out, given the fact that equipment, which might have long lead times, but materials like yours is actually really like short lead time?

Well, we're talking about 2 different things. So the development of our materials is very long lead times. So we're doing a lot of work in the labs now for materials that we expect to be available in 3, 4 years. So that is very long. For the short time, because we're a just-in-time provider with our existing materials and make sure we maintain the inventories so that when our customers order, we can ship within 24, 48 hours, whatever they need, if I got your question.

Right, right. So it is the latter part of it, which is kind of like you turn around so quickly. So how do you get comfort on how to forecast for the next few quarters given such short lead time in business?

So one of the things we've been doing for the last decade is continuing our localization activities in Asia. So we have a team in Korea, which probably 20 people right now, which is pretty big, which includes an applications lab so we can talk to our customers and build devices and things like that. And we talk to them all the time. So it's a collaborative process with our customers because they want the materials as well. So they'll give us forecasts. Frankly, sometimes they very often will change the forecasts. But it gives you a sense of where they're going, what they need. We know what materials are using and what products so we can deal with it that way. We know each individual customer. And it's the same thing in China. We have -- in China, we have, I don't know, probably maybe a dozen people or so with different customers. We have an applications lab in Hong Kong where we're able to do the same type of thing. So we are really in the same boat with our customers, and we have to work together to make sure that they will always have the materials they need for their production, and they will have the future materials that they'll need for the growth in the market.

Got it. Got it. And then like the other thing I wanted to find out was, a, #1, on your inventory. Is most of the inventory for purchase of Iridium or what else is in it? And second thing is, I think last year, you announced how you're going to do -- that was for manufacturing away from U.S. to Ireland, I think PPG in Ireland. So has that started or not yet?

Okay. So inventory, there's a lot of Iridium in there, but there's also a few months of supply for our customers plus there's the major subcomponents that we talk about because -- from our perspective, I want to reiterate, we want to make sure that we're always able to meet our customers' demand when and if, I don't know if when and if -- when it occurs. So we'll build up our inventory because you never know when a pandemic might hit. So the pandemic hit, and we were okay from a business standpoint because despite the supply chain disruptions, we were able to add enough inventory, and we're able to work that out. The second half of your question, I'm sorry.

PPG in Ireland.

Yes, it's moving well. We -- I don't know if we've announced any time lines, so I can't say it publicly, but everything is moving on schedule.

Got it. Got it. All right. And then I just wanted to like touch upon back again a little bit on the technology. One is on blue and one is on OVJP. So first on OVJP. It's still like a few years out. Do you think there is any risk that the longer it takes to commercialize, there could be some other alternative, maybe not inkjet, maybe vacuum gets cheaper? I have no idea, like is there any risk of OVJP getting designed out by the time it comes?

I don't think so. And the reason I don't think so is you use the inkjet printing, which is a perfect example. When we first started in this business 25 years ago, when LCDs were just starting, it was OLEDs -- sorry for the history, but it was small molecule OLEDs vacuum deposition, which was us. And it was these polymers that were inkjet printed, okay? Well, they can never figure out how to do the inkjet printing, and this is 25 years ago. They're still working on the inkjet printing. And one of the reasons we focused on dry printing as you said, you're never going to get the performance you need when you use to solve it because you have to drive the solvent. When you dry the solvent, you lose performance, and then you're not going to be able to compete with vacuum deposit materials. Vacuum deposit materials, the problem with making large size is the shadow mask. And the shadow mask, when you make it too big, it sags in the middle. So people are working on that. God bless them, and hopefully, it's going to work in the IT market or whatever. We're all in favor of that. But from an OVJP printing standpoint, large areas, we think where we need to succeed as quickly as we can simply because we want to get it into the market. I don't think anybody else is going to be coming in with a competing technology. This is, two, is a very difficult technology. And it took them many years to get the gas molecules to actually stick on the surface of the plastic or the glass as opposed to bouncing around and not creating pixels of [ minds ]. So again, we are our own competitor. We're really trying to make sure we accomplish it within the time frame. And we're looking for -- we're now building test systems. The next step is an alpha system, ship it to a customer, then that gets converted into a beta system. And then you have the commercial interactions. We're commercial sales. We're obviously talking to customers now about what they're looking for, how to do it, modifying development and the like.

Got it. Yes, go ahead, Steve. Go ahead.

Steve, a quick question on potential future applications, specifically in automotive. I think we've seen a lot of advice, I guess, development concepts come from the mini and microLED camp. So kind of wondering like how does OLED position in the automotives given you need to have designed in the commercial systems in those future displays. Is that suitable for OLED design? And also in terms of extremely harsh conditions, how does that play into the [indiscernible]?

Sure. All good questions. So OLEDs was the first display, still the only display that can go in plastic, which means it could be bendable, means it can be curveable, it means it can go with the different shapes. So you're seeing now OLED displays in dashboards of the high-end cars, in the Nav systems and the like as well as seeing OLED lighting in tail lights of cars. So we're seeing that moving forward. Our customers are very interested in the future of OLEDs because they're already in the automotives and the automotive design cycle is very long. So they're looking at automotives, avionics and the like. From a technical standpoint, people are looking at microLEDs. We again think right now, they're focusing on very small and very large, neither of which fit into the automotive. So doing mockup displays is one thing. Doing actual product is quite another. Second half of your question, I forgot.

It's just the -- in terms like the harsh conditions [indiscernible].

OLEDs get as hard as you want and as cold as you want. One of the sales pitch -- I hate to go back and tell like an old man, but one of the sales pitches we used to do a couple of decades ago was when you go to your gas station in the middle of winter, the LCD display freezes because it's too cold. The OLED display doesn't have a problem with that. People used to have problems with their laptops being in the chunks of their cars in Arizona. OLED displays don't have that problem. I don't recommend putting anything, any electronics in the trunk of your car in Arizona in the summer. But OLED doesn't really have any temperature constraints.

And then the second question I had is on OVJP [indiscernible] products. I think the last one, you just probably mentioned the alpha tests [ product ] system is being in progress. Can you talk a bit about what the alpha test system in terms of actual development? Is that the one only sort of production stage [indiscernible] data as well? And is it a full [ outside ] system? Is it a [ component ] that we can validate technology? And then the customer -- like the future customers will be able to take that reminder or just to keep going, scale it up to the full [ system ].

Multiple questions in there. So let me start with -- the way we're looking at it is -- all good questions. So what we had done in Ewing, we did a 6-inch prototypes. In Silicon Valley, we're doing much larger. I don't think we've disclosed what size is this. But much larger, we call them test stands. So we're taking the major subsystems that are necessary to be commercialized for OVJP. We're testing them out in test stands. Once we've accomplished that, we then develop an alpha system, which is a chamber, a single chamber that will develop the technology further. You put that in our floor and/or the customer's floor. They test out the alpha system running through its paces. You then upgrade the alpha system into a beta system and then you either replace or upgrade that into a commercial system.

How large does it need to be, the chamber [indiscernible]?

We're looking -- I'm sorry. Well, we're looking for commercial between Gen-6 and Gen-8. So our focus is Gen-8 or Gen-10 for the ultimate technology. Right now, we're scaling up at less than that to develop the prototype.

So Steve, on that front, OVJP is actually kind of like a change in the manufacturing process flow because you're replacing vacuum with vapor jet. On the same side, when you do commercial blue, do your customers have to change anything in the manufacturing side? Or is it just additive just at the blue material replacing?

It will basically be additive the way we're looking at it. Whenever they do a change in new materials, they generally have to do some tweaks or redesign on the back plane, depending on how or what the materials are and what they look like. But it's -- for these purposes, you put them in, you take the fluorescent blue out. You put the phosphorescent blue in, the customers will figure out how you design with the other materials in the stock and how you do that. But it's more of a drop-in process. And they have to design the back plane makes other, I'll call them, tweaks for one of the better term.

Got it. And then one other question I want to check is foldable displays. Let's just say for argument sake, if I replace one regular smartphone with a foldable smartphone, is it fair to assume your opportunities double because you need twice the amount of material or it doesn't scale as linearly?

You know what? The answer is I'm going to show you a picture. So here is my phone. So this is the first foldable smartphone from Samsung. And this is what I'm doing this to answer your question. That's the first screen. In this case, that's the second screen. So I get -- I sell twice as much material for that stream as they do on that screen. But it's only one product. So we'll sell more materials on the foldables and that's including the new foldables that they're advertising and selling. It's foldable. By the way, if you don't have a foldable phone, you got to get it, it's great. I have to go -- sit in the doctor's -- well, I don't sit in the doctor's office anymore. But it's just like a kindle. You can read your books all there or if you get older, you need your eyes doing better. Or if you want to do it quickly, you can just look here like a normal old Nokia candy bar phones.

You're going to tell your friends at Apple to make one quickly.

Apple is one of the best companies in the world. I'm not sure if they're going to listen to me. We're [indiscernible] I think they know the value of a foldable phone.

Fair enough. I think we're almost out of time. I don't know if there's any other questions. If not, thank you very much, Steve. Really appreciate your time.

My pleasure, Krish. Thank you.

Thank you very much.