Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Oppenheimer's Annual Tech Conference. In today's virtual fireside chat, we have the pleasure to host the CFO of Universal Display, Sidney Rosenblatt. And in the next 40 minutes, we'll have quite a wide range of questions regarding Universal Display's business products as well as your view on the market. Sidney, welcome.

Thank you very much, Martin, and thank you for inviting me today.

It's our pleasure. I would like to begin with some of the comments you made regarding the market as of your last earnings call last week. Can you maybe talk about what would you attribute the reduced annual guidance, comment on maybe market segments, geographic regions? Or is there any particular products that contributed to the weakness?

Yes. I mean that is something that we spend a lot of time looking at our guidance and looking at what impacted our business in the second quarter, and what we see coming in the future. And to be perfectly honest, the overall macroeconomic environment and the demand side really did get very weak in the second quarter. When we gave our guidance in April of -- in early April and May, I'm sorry, April looked like a great month, and it was right on target. And then things really in May and June just got much worse. And so we contact our customers. We spend time with our field team and we look at the overall macro environment, and it was across the board. I mean, pretty much our customers, our largest customer was down more than the others. But -- so I do think that the smartphone market probably was impacted more than the others, but it was pretty much across all the countries and across all of our customer base. So when we looked at the second half of the year, we believe that our guidance for the year of $600 million plus or minus $10 million is our best estimate of what it really will look like for the remainder of the year.

Got it. And from your point of view now, do you feel that visibility into the future is a little better or worse versus 3 months ago?

Well, that's a great question because as the market continues to grow and as OLED continues to make market -- increase market share, our ability to predict gets better. It is still very dependent on the demand side. We are a just-in-time supplier. We ship materials within 24 hours of when we get the orders. So even though our customers give us forecast for 1 month and 3 months and 6 months, if the factories aren't running, they're not going to order material. So we have better visibility, but to be perfectly honest, we don't have perfect visibility.

Got it. I want to move on the topic that where maybe you can talk about the longer-term vision or longer-term goal for the product, that is the blue emitter. Can you maybe clarify on the expected milestone we should see for the blue material for this year as well as for 2024. What does it mean to reach the target spec by customers by the end of the year? And how far away are those spec from the commercial-ready specifications?

Yes. I mean, we have obviously been talking about blue emitters for quite some time. Our red and green materials are in all of our customers' products. And having a blue phosphorescent emitter gives a significant increase in battery life. When Samsung adopted our green emitter in 2013, they actually stated in their keynote speech at SID, that they got a 25% increase in battery life. So we expect to get a similar increase. So it's very important, obviously, for mobile devices. And we have been working on it for 15, 20 years, but not at the rate and today we have more than 100 people, scientists working on developing a blue emitter that meets the commercial specifications that our customers want, which is color, lifetime and efficiency. And we're very comfortable today what we talked about on our call was that we can meet the initial target specs by the end of this year. And then in 2024, ship commercial blue emissive material. It does take some time for our customers to work with the material, and we have been shipping development quantities for a long time. Samsung actually published paper 1.5 years ago talking about our blue emissive material. And they have to work with the manufacturers. Once it meets the specs, they have to work with how manufacturer -- manufacturable is the material and then design products for it to go in. It will go into next-generation products. It is not a plug and play. You can't just pull out the old material, which is a fluorescent blue and put in phosphorescent blue. It does require your backplane to be redesigned.

In addition to redesigning of the backplane, assuming that's going to happen sometime in between 2022 and 2024. What else needs to happen before we see that commercial reality?

Well, I think it is the customers talking to their customers because our customers are the panel manufacturers, they then have to talk to the OEMs what product that's going to go in and make sure that these materials meet those specs for those customers. So there's a lot of work that has to be done. There's a lot of work that has to be done from our side is because we don't have it today. We do know we have a path to get to what the customers want, but there's still a lot of work that has to be done. And while our customers are working on designing it into products, we will have to work on scaling up the material. And blue emissive material is a complicated molecule. So we will spend the next 18 months working, obviously, on the invention side, but also on the scale-up of the materials to make sure that we can make it, we can make it efficiently and we can make it where we make money.

Got you. And that's a perfect segue into my next question is you famously adopted this fabulous model where you use a third party to produce material for you. How would you evaluate your risk regarding your contract manufacturer, PPG, how strong do you think the relationship is. And will the mass production of the blue material, the blue emitter, a brand-new material go through a separate learning curve for them?

Well, we've been working with PPG since 2000. The relationship is one that has been mutually beneficial. They like it. We like it. It's very efficient. We work in 2 of their facilities right now, one in Monroeville and one in Barberton, Ohio, and then we're now working in Shannon, Ireland, and there is a facility that we leased, but it was a pharma facility, and it is a very high-tech facility. PPG has a team there that is managing that process for us, and they will be the ones that actually manufacture the materials in that facility. And so having Shannon allows us to double our capacity, and then there's enough room there to double and double again. So it is -- it will end up being, I think, a very, very good place. We wanted to diversify where we made our materials, not just in the U.S. but outside of the U.S. We had trade issues with China in the past. And Ireland actually has good relationships with all these different countries. So having a facility there, I think, will be very beneficial. And PPG is very happy with it. And we have to give each other multiple years' notice before we end the relationship, and we have no intention of doing that.

Got it. And so you sort of referred to kind of the scope of the length of the development period for blue material in an earlier answer. Maybe what are the other metrics you can help us get a sense of the amount of investments either in time, dollars that you have invested behind the blue material in order to make that a commercial reality sometime soon?

I mean, to be perfectly honest, we spend almost $100 million a year now on R&D. And a significant piece of that has been blue development. We bought a thesis in Delaware and something about 70%, 75% of all the scientists down there are working on our blue emissive material also. So it has been a very significant investment in terms of dollars and in terms of resources across the board. So it is something that when we start shipping it, when we start working on how we are going to price it, we have to look at recouping our investment.

And Universal Display is always known as the experts exclusively phosphorescent emitter material, but there's one unique other emergent development project at your company, OVJP. How -- when I look at this new project, emerging project, how would you compare it to blue emitters in terms of maybe commercial potential, the amount of investments required or the potential life cycle of that project?

Well, it is very different in terms of -- it is an equipment -- it is a manufacturing process as opposed to developing molecules. So we are used to working on -- our teams have worked on developing materials to meet the customer specification to make displays. This is a very distinct independent process. And the reason that we did this is you've heard for years, if you follow the OLED industry that the process today, which is using vacuum chambers with evaporators and shadow mask technology it would be nice to be able to do this without a shadow mask and printing these molecules directly on your substrate. And it started out with a company called Cambridge Display in 2008, 2009. And because those polymer materials, polymer OLEDs were liquids, you would be able to print them. Well, a long story short, it doesn't work. And we always felt that it wouldn't work for a number of reasons. One, the polymer materials never had the right characterization to be very efficient in OLEDs. But two, the materials or small molecules of phosphorus emitters that we have are powders and the way that they're deposited as you heat them and they vaporize, and then this vapor sticks to your substrate. So OVJP is a process that takes the best of both worlds, taking it out of -- we use the vapor stream, but we don't have to use the shadow mask because if you use a shadow mask, you're wasting material on the mask. You have 3 separate chambers, a red, green and blue and you only put the red material where you want it and the shadow mask blocks the other materials. This is a direct printing process, but it does not use liquids. So we are printing this vapor stream directly on the glass so that you will have red, green and blue side-by-side displays for TV applications without a mask. And we had a group that started working on this 10 years ago as essentially a skunkworks project to see maybe we can do this and it has gotten to the point now where we have a lot of IP. We have a team in California, that is headed by Jeff Hawthorne, who ran Photon Dynamics, and he is an equipment guy and his job is to take laboratory work and make it manufacturable in their process so that you can go from -- we work on 6 inch substrates to go up to Gen 8, Gen 10 size glass. Right now, they're working on test beds that are Gen 4 size glass. And we've proved that you can print them, they're make working on different components of an alpha system that will eventually go into an alpha tool.

And I think the testing on Gen 4 size is a pretty important milestone for you. I remember years ago when you were still printing the materials on inches of wafers. So from Gen 4 to more commercial ready sizes, what's the -- how much is the leap there? Do you feel that the majority of the technical difficulties or hurdles has been overcome?

Well, going from a 6-inch substrate to a Gen 4, which is 1.5 meters, that's a significant increase. And part of what we're doing is to prove that this technology is scalable. Going, obviously, from a Gen 4 to a Gen 6 to a Gen 8.5 to a Gen 10 is another level of scaling. But I think that the way that we're working when Jeff's team is working is they think if you can go from one generation to the next, that it is scalable to the next and the next and the part of their process is even though we may be working on Gen 4, they're looking at how you go to the next generation.

Got it. Makes sense. I want to ask you about China. So you talk about the position of your manufacturing facility in Ireland. How would you evaluate the risk of maybe a U.S. led government export ban of your material to Chinese panel makers, how likely is that? And what are the ways you could protect yourself against such a ban?

Well, in the previous ones that had issues, the materials were not part of the process and not part of being banned. But we do know that our Chinese customers' purchasing pattern has always been lumpy, to some extent because of that, they will buy material in advance if they heard chatter that there may be something that would interrupt their supply. One of the other reasons, one of the reasons that we looked at having a facility outside of the U.S. is so that we can still ship these materials to customers. There's really no display industry in the U.S. So I don't -- this is me personally speaking, I don't think there's going to be a ban on because the U.S. still needs displays, the military still needs displays, and they are all made outside of the U.S. There's just not any manufacturers here. Folks -- the U.S. companies historically are not willing to spend as much money as it takes and look that far in the future because it takes a couple of years, it takes just to build a mobile sized facility it's reported $5 billion, $6 billion for each facility, and the U.S. companies just don't do that. There has not been a U.S. display industry for a long time. There's chatter that they'd like to make it come back here. But I don't think that, that's going to impact it because they still need to get displays, whether they get from Korea or from China or from Taiwan or wherever else they're being made, there is still a need for the U.S. to get displays.

Got it. Again, on the topic of China. So your Chinese customers in aggregate is now a pretty material source of revenues. But when they -- when we compare them to the Korean customers, I think they are at an earlier stage in terms of technology sophistication and experience with mass production. But as they move to become more mature, similar to where the Koreans are today, how would that change in their technology sophistication, mass production experience affect your business, either from maybe a revenue point of view or from a margin point of view?

Well, I think that having more manufacturers in the OLED industry is good for the whole industry because the more manufacturers that you have, the more competition between the manufacturers there will be and essentially that translates into price declines for the components, which then reduce the overall price of the product, which then can spur demand. So I think it's good for the industry that there -- there probably will never be much more than 10 or 12 manufacturers just like there is in the LCD business because it's so expensive to get into. And I think over time, whether it's the Chinese manufacturers or whoever, anybody who is new in the OLED business is going to have a learning curve. It is new complicated technology. It's very similar. LCDs took years and years and years to go from -- they were just on calculators, then watches. And then eventually, there was a number of steps that took them to laptops and then there were some breakthroughs that took them to get to TVs, but they've been around for 30-some years. So it is -- OLEDs, the first commercial product was in the market, the Galaxy S1 in 2010, and Samsung was the only manufacturer for years and years and years. You're starting to see more competition which we think is good for everybody.