Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the 26th Oppenheimer Tech Conference. In this session, we have the pleasure to host the CEO of Universal Display, Steve Abramson. And UDC just reported their 2Q earnings last week with better-than-expected results. And we are eager to hear more about the company recent developments and the future outlook in the following fireside chat. Steve, welcome to our session.

For investors who have not followed Universal Display in the past 3 years, how has the story changed? And what's the elevator pitch you would make today?

Okay. Possibly 2 different questions, but I'll go step by step. So since the pandemic, the world changed, and nothing changed at the same time. So before the pandemic, 3 years ago, we were selling red and green to the entire industry, continuing to make progress. The pandemic hit. We saw a lot of bounces up and down in terms of the consumer electronics industry and the like. But during that time, we were able to continue to grow our company. We got new reds and greens. We made significant progress on blue. We formed a subsidiary in California to help commercialize OVJP technology. We recently announced that we were on track -- recently is now a year or so ago that we're on track to commercialize blue in 2024. We didn't travel that much. So I don't know if that was a good thing or the bad thing. We learned how to use Zoom and Teams like everybody else. But now that the pandemic is over even though the virus is still with us, business has resumed. And now we're all traveling to Asia, traveling to China and the like. We also, during this time, established an additional facility, manufacturing facility in Shannon, Ireland. The elevator pitch is OLED is a display technology for the present and the future. We have a key technology, which is the materials that light up the display, and we believe that it's a secular growth market for the long term. And ultimately, all displays will use OLEDs from small watches all the way up through large TVs.

So in the past -- apologies. There's a slight networking disruption here on my end.

No problem.

Can you hear me okay?

The world may be round and we may have made a lot of improvements in the last 3 years of the pandemic, but we still have these issues with the protons and the electrons flying around.

Indeed. So I think for longer-term investors as well as analysts, historically, you outlined OLED fab capacity growth as the leading indicator of how much more material the world will need in the longer term. So if we look at maybe the next 3 to 5 years, the capacity -- new capacity being added to the world overall supply is at a lower rate, and we are seeing fewer fabs being built. So if you speak to an investor today trying to guide him on the longer-term growth, is there any other metrics you would point us to?

Well, that's a very good question, Martin. I think while fab growth is slowing in part, it's because a lot more people have gotten into the industry so they have their fabs. And currently, because of the current macro environment, many of these fabs are being underutilized. So there's an opportunity for growth even without new fabs. But in addition, we're seeing, especially for the IT market, which ranges from tablets all the way through to monitors, we're seeing the growth of larger-sized fabs, gen 8.5, gen 8.6. And those can make more -- much more cost-effective IT products because of the larger substrate. So what we think we're seeing is kind of a temporary lull because the factories still have some added -- some capacity they can utilize but also seeing the plan for the gen 8.6 fabs, which will basically be able to make about twice the amount of square meters of a gen 6, which is even though it's only a 0.5 or 0.6, which is pretty huge. And that can help our marketplace positioning as well. Again, continuing to take market share from LCD, which is really the competition at this point.

Understood. So aside from the number of new fabs we built, we should also looking at rising utilization of current fabs as well as the difference of new fabs or the size upgrades of the top -- of the fabs you've built.

Sorry, Martin. Yes, those are the potential abilities to grow the market. And that's what we see moving forward.

And in reference, IT applications, I assume that's most of the new gen 8.6 fabs are intended for. So IT market is a very large market. But do you see any other end markets as meaningful drivers for OLED demand?

Well, that's a good question. So the OLED started with smartphones. They then went to TVs directly, which was an interesting play, and that worked out really well because everybody who has an OLED TV wants one just like -- and proselytizes about it, just like everybody that had an OLED smartphone did that. Then they started doing smart watches, which, frankly, created a new product category. IT goes from tablets through laptops, through monitors. We're also seeing automotive being a big market, both for interior of the automobiles, basically, because everybody wants better displays. You start with -- you asked a question about the elevator pitch. The fundamental elevator pitch on OLEDs in general is we're a visual people. We react to visual stimulus. OLEDs are the best visual stimulus in the world. So people want to use OLEDs. So we're seeing more and more products using OLEDs. The automotive industry itself is a difficult industry because they have to last a long time in the car. So it shows the elements of some of the OLED displays are very mature, and they can last a long time. We're also seeing OLED lighting being used in the taillights of cars. So again, another seed that is being planted because light-emissive products will want to use OLEDs as their -- more manufacturers start focusing on those areas. You had asked earlier about drivers. I think OLEDs, one of the drivers of OLEDs is the more OLEDs you have out there, the more people see the OLEDs, the more they want OLEDs, the more the OEMs will manufacture products based on OLEDs. It starts out, of course, as with many technologies in the high end, and then it moves down into the medium end. It's where I think we're seeing with smartphones and TVs right now. And ultimately, we think all display technologies will be OLED. I can't tell you how long ultimately is, but that's why we're building a sustainable company to help realize that dream.

Got it. Yes. So I do agree with you on the notion that when you spread the awareness of OLED display, more people see the benefit and therefore, you -- will help with adoption. So for smartphones, it's very clear that OLED is the only display technology that enables flexible and foldable displays. But maybe for IT applications, automotive and even lighting, an average investor are not fully aware of the OLED's differentiation and benefits. Can you maybe walk through how OLED would differentiate and help the users to see that some of the functions and features are only enabled through OLED?

Sure. So we started out by saying that OLED is a self-emissive display. So you don't go through a lot of color filters and things to get to the product. So it's a clearer display, and people like clear displays. It's a more energy-efficient display. So you can -- if you have a smartphone, you can put more applications on the phone, and you don't have to charge it as often. It's very quick response time. So if it's a TV or a laptop or what have you, video is very good on an OLED display. The colors are crisp and clear. You have some people describe it as an infinite contrast ratio. So that gives you a better, crisper, clearer color because you have pure black because in an OLED display in order to get black, you basically turn off the pixels. In an LCD, you always have the light on. So you always see a little bit of light leakage in this. And as you said, it enables foldables. It basically enables smart watches. It's going to enable anything on a flexible substrate, which is a lightweight, unbreakable substrate. So if you drop your phone, it won't break as much as -- my daughters, they used to drop their phones a lot, and you can barely see the screen. They're very happy now that they, too, have OLED displays.

Got it. So I want to switch topic a little bit to your customer relationships. There are very few, maybe more than a handful of panel makers. And your revenue concentration is -- remains with 3 or 4 very large panel makers. One common question from investors is regarding your relationship with Samsung. How do investors get comfortable around your relationship with very large customers like Samsung? And Samsung itself have acquired material development companies in the OLED space and was reportedly doing then all material development. And now we are at a critical junction of blue being commercialized in the near term. So how do investors -- should the investor perceive your relationship, and how do we get comfortable?

Good question. I'll go back even further, and people used to say, "You guys are a small company in New Jersey. How are you doing business with the largest companies in Asia?" And the answer is, in part, perseverance and getting to know them. So I and many other members of my team have been flying to Asia for a long time. That's one of the things we actually missed in the -- when the pandemic was occurring, but we're kind of making it up in a vengeance -- with a vengeance. So we've helped Samsung develop this OLED industry from the beginning, and we worked very closely together. We've developed a really good working relationship of what materials they need, what specifications they need to have. And there are people who are working in material areas. All those material areas run through us. I mean, our IP position is very strong. You want to do an OLED material display, you basically have to go through us. So we have a very good collaborative relationship with Samsung. We have people on the ground in Korea. We have people on the ground in China, very good account representatives. And we're a small part of the entire bill of material, small but very important. And because we maintain this strong relationship, our materials are cost-effective. Our continued growth and progress in our materials, as evidenced by continuing to make new and different red and green materials as well as now the progress on blue, we've become a very -- we are a very important partner, have been for a long time with all of our customers. Our shipments are unparalleled. Our customer support is unparalleled. And so it works very well as a win-win situation with Samsung and our other very large customers.

Got it. And so moving on to more of a near-term market dynamic, especially for smartphones, what we have seen is over our smartphone market under -- with very significant pressure with year-over-year decline in units, and at the same time, we have seen more capacity of OLED panels coming online and resulting in a pretty severe price competition for OLED smartphone panels. So when we see market research noting that all the panels are dropping very significantly in price, should we expect a similar magnitude of revenue impact for UDC? How should we interpret the smartphone panel price dynamic and its associative impact on your company?

Sure. Good question. From our perspective, the more products that have OLED, the better it is because we -- our business model comprises 2 pieces. It's the material sales. So the more products that gets sold that have OLEDs, the more materials we have sold into those products. And then we have license fees and royalties. So the royalties may be affected by the price-down strategies, but the material supply would actually -- it would actually end up being positive to us because we'd be selling more products. And we believe that's the direction OLEDs are going. We, too, we're subject to price pressures as well. So we, too, are trying to reduce our costs as best we can because we have some cost headwinds. We have cost headwinds as well. But in general, the more OLED products that are in the market, the better it is for us. So as the smartphones go into the mid-range, that would be good for us because we're a very small part of the bill of materials.

Got it. Yes, that makes sense. So next, I want to ask about blue, and it's one of the most focused area for investors since last year. Can you walk us through the key milestones your company will achieve before we see a commercial product with UDC's blue emitters?

Sure. Well, I will do so. It's -- so what we're doing now is we're developing the materials, both emitters and hosts. We're providing them to our customers for experimentation and development. We then get feedback from there and iterate on our materials. In addition, there are other materials in the stack, and no one's ever done a phosphorescent blue before. So all the materials need to line up. The energy's levels need to line up. Blue is a very sensitive material. That's why it's -- one of the reasons why it's been taking so long. So they need to make sure we, they -- the ecosystem needs to make sure that all these materials will work in the stack, will be able to be manufactured cost effectively, be able to go through all of the commercial testing and then come out the other end. So those are the steps that we're going through. It's iterative with our customers before it gets into a product. And then, of course, the customers need to figure out, well, what product do they want to put it in? And how is that going to work as well? So now a lot of these milestones are simply -- they're internal milestones that we do for every product with every customer. They're not the types of things that we can announce from time to time. If there are things that we can announce, then we will do our best to do so.

Yes. I think sometimes, we from outside in overlooks the complexity of how a device gets made and with new materials. We happen to have 2 more questions from the audience regarding blue. So I'll just take this opportunity to ask them on behalf of our audience. The first one is, will we see new blue emitters in a 2024 device? If so, which part of 2024 are we going to see that?

All good questions. And right now, we have said that our materials will be commercially available in 2024, commercial materials. Exactly how our -- we've avoided talking about how our customers are going to use it, when in 2024 it's going to be, what products in 2024 it will be because those are up to the customers. And that's a really customer issue. So what we can focus on is having our materials acceptable to the customers, then when they want to do their product, when they're going to do their product introductions, that is really up to them. So I can't answer those questions. I mean, ask the customers.

So in other words, your job is to get the material commercial ready in '24, but whether or not we see the end device in '24 is entirely up to your customers.

I didn't want to go exactly that -- the customer's decision of when to announce the product and when to introduce the product. It's our job to make sure the materials are commercial ready. That is true. So I don't want to overstep my bounds. I don't want to speak for my customers.

Understood. The next question regarding blue, also coming from the audience, is different markets require different minimal lifetime for materials. So has your blue emitter and host combination hit the minimal lifetime necessary for phone's or TV's markets?

What I will answer to that is we are on the path to meet initial commercial blue specs in a 2024 commercial launch. We are still in the development stage at this point.

Got it. Let's move on. So questions regarding your cost structure. You have maintained a pretty steady growth in OpEx, and there's roughly less variability or volatility on the operating structure. Can you maybe talk about what are the more variable parts of your cost structure? And do you find operating margin at 40% a sustainable level?

It's a good question. One of the issues in our OpEx is -- on the material side is the price of some of our raw materials. As we know, raw materials have been going up. The price of iridium, which is the raw materials in some of our products, have gone from about $1,500 pre-pandemic to about $4,500 now. So that's a -- it's a cost structure, and we do have volume price agreements with our customers. At the same time, we are engaging in a fairly significant cost-down process as we do, but we're accelerating that in order to maintain good margins. And we have a lean operating structure. So as revenues start moving up again, we should be able to see additional margin from additional sales. So this year, we're guiding to 35% to 40% margins. We're -- we don't have a specific number that's a target that we release externally. But suffice it to say, we do our best to provide the highest -- to develop the highest margins possible, consistent with our business, consistent with our growth prospects, consistent with creating a sustainable business well into the future.

Got it. The next question is also associated with your cost structure. As we know, you have built up a new Shannon facility to satisfy future demand. How big is Shannon facility? And is that planned capacity a reliable leading indicator of your future revenues?

So the Shannon facility is about 18 to 20 acres right outside Shannon airport in Ireland. The initial capacity we're looking at once it's built out is about 1 metric ton, and that could increase because there's lots of opportunities in that place to grow.

And is that 1 metric ton, could you -- when you put it into context, how many more metric tons will the facility hold in the long term that you have planned?

And that's the first design element. So we're not there yet. But it has a high ceiling. Let us just say that. The Shannon facility has a high ceiling in terms of what it can produce.

And how does that compare to your existing capacity?

Well, the Shannon facility is a multi -- we're playing on a multiyear, multiphase expansion of that. So it's larger than our current facilities. If fully ramped, it should at least double our existing capacity.

Also associated with the Shannon, so your production, the actual production of the material is being outsourced to PPG. How would you describe your relationship with PPG? And do you have or plan to have alternative sources of supply?

PPG is our exclusive manufacturer. We've been working with them for over 20 years. As you could see, we establish long-term relationships with our partners. So with the Shannon facility, it's our facility so we own it, but PPG is a manufacturer in that facility. So it's PPG employees that are manufacturing in that facility. We intend to have our relationship with PPG for the foreseeable future. It's a very strong relationship. And we have multiple sites. So while we only have one manufacturer, there are multiple sites, which is one of our backups in case there's a problem in any one site.

And do those multiple sites have different end market focus or customer focus? Or they are completely interchangeable?

Well, they're not completely interchangeable, but they're pretty interchangeable. So they all similar -- they have similar equipment. We've designed different ones for different things, but they're backups to each other.

Got it. So also related to manufacturing, I think it's well understood, and you have a very strong IP moat around the materials. But aside from IP, I think the manufacturing of the material itself is not an easy process to copy. Can you maybe talk about do you perceive the manufacturing parts as a significant moat? If so, why? And what are the challenges for new material developers trying to ramp up and serving high-volume materials to customers?

Sure. Well, we've -- I mean, we basically created the OLED emitter business. So we created the business of manufacturing these materials. So that gives us 20 years of know-how and trade secrets in how you're manufacturing these materials. Now these materials are extremely pure. In fact, they're -- organic electronic materials need to be purer than the materials that we put in our body. So how you make really high-purity materials is a very difficult process. And how you make high-purity materials in high volumes constantly and consistently so you can make money on it is even more difficult issue. And we're very proud of not only the IP moat issue, but the way we've been able to make manufactured materials of this purity consistently over time, and it always gets accepted by our customers. So that's -- it's a skill set of its own.

Got it. Oh, and previously you mentioned that you own Shannon facility. So there's a potential for you to take over the facility and operate independent of PPG. Is that correct?

Well, first of all, we -- right now, I think we're leasing the facility, but it's a lease with option to purchase. So we don't -- PPG is our partner. So PPG is our partner. It works really well with both companies. So we don't foresee any issues with that moving forward. In fact, I think because you have a big Fortune 500 company combined with an entrepreneurial company, we've really been able to take the best of both worlds. And that has been very helpful in developing this material market and selling into our major customers around the world.

Got it. I want to move on to OVJP. In the last most recent earnings call, you highlighted yet another milestone for this emerging technology. Can you maybe explain the milestone a bit more and then extend to let us -- educate us on what are the real benefits of OVJP once it becomes a commercialized manufacturing process.

So the object of OVJP is to be able to, frankly, print TVs cost effectively. And you get red -- and you want to get red, green and blue materials side by side. So your TV is as bright -- as we were talking about before, as bright and as crisp and as clear as any display. And OVJP will be able to do it more cost effectively because you'll have a smaller footprint, you'll have faster tack time, you'll have less steps. You can put more materials in one unit, for example, if that's the way one wants to do it. What we have shown recently in the last few months is we've been able to print red -- able to print an entire stack, red, green and blue materials with the host materials, with the electron transporters and the whole transporters all at a stack and get similar performance to VTE, so VTE being vacuum thermal evaporation, the way people are making products today. So we think that was a great milestone moving forward. And right now, they're making TVs which are great TVs. The OLED TVs are great, either white with color filters or blue with quantum dots. If you're LG or Samsung, we believe this is a very strong competitive technology that we'll be able to move the TV -- OLED TV industry forward.

Got it. And also, I think you highlighted that the business model for OVJP will be also IP licensing model. When we think about potential partners or collaborators with you to commercialize this, what are some of the examples of a potential partner for OVJP?

Well, we're looking -- so we're looking for -- the potential partners will be large equipment manufacturers who have the ability to make large area deposition equipment and have good relationships with the customers who are in Asia. And so we're looking -- whether it's IP licensing, whether it's some type of collaborative relationship, there's a number of different ways that the commercial program can move forward. But we're looking for someone to really help commercialize the technology. We're really good at -- we were really good at developing the technology and taking it to a certain point. And now the question is having some larger manufacturers helping us commercialize the technology, do the sales and support the installation and the like. There's a lot that goes into installing new equipment and working with the partners to make sure that it works well in their fab.

Got it.

And then from a...

It is my understanding -- go ahead.

We'd like to make some money off of the equipment and basically sell materials into the equipment because that's where we can make even more money.

Yes. Makes sense. It's my understanding that there are also other approaches to printed OLED displays using different materials. And how would you assess the commercial viability of alternative printed OLED methods?

So the initial printing was originally inkjet printing for OLEDs, and they use polymer materials for inkjet printing. We looked at that 15, 20 years ago and said, "We don't think it's going to work because when you dry the solution, you inhibit the performance of the materials." So you will never get as good performance as you will with vacuum small molecule materials. So we undertook a very deep R&D program, including our university partners and the like, to see if we can actually print the same materials we use in VTE with a carrier gas. And we were able to do that. So that started the whole process of OVJP. So the competition is -- well, we started first is inkjet printing using a solvent. We don't believe that, that will really be a commercializable large volume program because the materials will not have the same performance as the dry printing well or, frankly, as the blanket deposition that LG and Samsung is doing. And they've been working on it for a lot longer.

Got it. So a follow-up on that, we have been tracking -- or it's pretty easy to track the performance of phosphorescent OLED materials based on brightness, lifetime and so on you have disclosed in the past for red and green. Is there any evidence of polymer OLED materials showing similar performance improvement over the years?

Not really, and a lot of the inkjet printing is now moving to small molecule. So I mean, the polymer small molecule thing was -- it was like a 20-year ago thing. We did start seeing if we could use small molecule in solvent, and we have. And forgive me, but I'm not quite sure what the current inkjet printing materials are, but it's very difficult to achieve the performance equivalent to vacuum deposition and very difficult to do that over time with large products and large areas.

Got it. Seeing one more question from the audience, and this is regarding QD OLED TVs. And the question is, will Samsung's QD OLED TV use your blue emitters as the backlighting solution?

You'll have to talk to Samsung. The only comment I would make on that would be not necessarily backlighting as the most -- [indiscernible] to emission. But other than that, you have to talk to Samsung. I can't speak for our customers.

No problem. So I think one of the last questions I have is regarding talent acquisition. When you think about what is keeping UDC in business for the past 20-plus years, can you maybe comment on how stable is your R&D team and whether or not are you having issues with getting a flow of new talents to support the ongoing R&D effort?

Great question. We have very low turnover rates in our company. I mean, people -- most companies say their employees are their most valuable assets. We live it. So we truly support our employees across a host of issues. And 20 years ago, when we were first trying to get people, they didn't really want to come to Ewing, New Jersey. But now they do want to come because we're 1.5 hours away from New York. And you can work with the finest organic electronics team in the world that has proven its sustainability over the last 2.5 decades. So we're now an attractor to great talent, which is really, really exciting. So we get the best and the brightest. Our guys, by the way, covers all people. Our guys are really good. They're really sharp. They love working together, and it's shown by the great creativity and advancements that they have. And that applies not only to Ewing, New Jersey because we're hiring people all around the world. We have people in Ireland. We have people in Asia, and it's an attractor to be working for UDC now. And it's a beautiful thing. It makes me very proud that we get to get such fine new employees working for us and making advances in that respect.

Thank you. And with that, we're about to wrap up this fireside chat. Steve, do you have any closing remarks you would like to make?

No, Martin. Thank you very much. I think you asked a lot of questions that are really good, really relevant to the investors. And just I'll end with an elevator pitch, which is when we started this thing 25 years ago, CRTs were still the technology of choice. Now OLED is the prime technology. We have been instrumental in driving that. We intend to continue driving that into the foreseeable future. So thank you for your support.

Thank you, Steve. I hope you have a good rest of the day and rest of the conference.

Thank you, Martin. You, too.

And that's a wrap.

Bye-bye.