Universal Display Corporation (OLED) Earnings Call Transcript & Summary

All right. Well, welcome, everybody. I'd like to welcome everyone to this morning's fireside chat with Universal Display Corporation. Joining me on stage today is Brian Millard, Chief Financial Officer. Brian, welcome.

Thank you. Great to be here.

Do you want to maybe do a quick intro and safe harbor?

Sure. Yes. So just a quick safe harbor housekeeping. So I may make some forward-looking statements today as part of my remarks. Our actual results may differ from those statements. We would encourage everyone to look at the company's SEC filings prior to making any investment decisions. So as a quick introduction about the company, for those of you that aren't familiar with Universal Display Corporation, we've been around for nearly 30 years. We are a key innovator in the OLED materials space. We make phosphorescent emitters, is really our core business. And that's both selling phosphorescent emitters, and that's the layer that actually gives off the light in an OLED display as well as we license our intellectual property to customers who use that in applying their -- in making their OLED displays.

Awesome. So Brian, jumping right in. One of the questions you always get, what's the status on commercial phosphorescent blue? It's going to be a major power saver when it comes to market. So what can you tell us about the commercialization of that and when we can expect to see that come to market?

Yes. So as background, we have red and green material -- phosphorescent material that we have commercialized to date and that's being used in OLED displays worldwide by our customers. Phosphorescent blue material, no one has brought to market, and we have been inventing phosphorescent blue material for a number of years now. And we believe we're very close to having commercial material available in 2024. So we expect to have commercial material that meets those specifications in 2024. We continue to see improvements in the performance of our material, each generation of them. We did -- we've continued to see also increased interest in sampling from our customers of that material. So through September of this year, we had $4.3 million of sales. That's not in and of itself a massive number, but it's clearly a positive trend that we see moving forward as our customers continue to increase their interest in the material -- purchasing it in increased development quantities so they can perform experiments on their end. And I think it's just continued evidence that we remain on the track to have commercial material available in 2024.

And how should we think about the longer-term revenue opportunity there?

Yes. So I think there's -- one, I think the benefits of phosphorescent blue are, it's expected to increase the displays energy efficiency by 25%. So that energy efficiency unlocks a lot of opportunity for our customers to be able to increase the energy efficiency of the displays they sell to the end OEMs. That energy efficiency can be applied in a number of ways, whether that be longer lifetime of the device on a single battery charge or maybe a smaller battery or other power-consuming features being able to be put into the device. And on a long-term basis, we think that phosphorescent blue really should replace fluorescent blue. There's no reason why when phosphorescent blue is available, someone would want to continue to use a fluorescent approach. So we think it has a lot of opportunity in the years ahead. And from a quantity perspective, today, right now, our red to green material usually -- has roughly a 2 green to 1 red ratio in a display. And we think that in the future, when we have a phosphorescent blue, the quantities are phosphorescent blue should be very similar to the quantities of our green today. So in a future kind of ratio, you'd expect that to be 2 green, 2 blue and 1 red. And so there's a real significant opportunity there from a quantity perspective as blue gets introduced as well as -- from a price perspective, we don't really have an answer yet on that. We don't have pricing set for blue with any of our customers. So we need to go through that process and conversation with each of them as we approach the commercial launch.

Makes sense. Well, let's dive in now into kind of the end markets. There's been rumors that we'll start to see OLEDs in different IT systems, tablets, laptops. What can you tell us about the adoption of the technology in some of those end markets?

Yes. So there's really kind of a number of different segments that we focus on. Smartphones are right now about 50% penetrated with OLEDs. So globally, about 50% of smartphones sold have OLED displays. Televisions are right around 3% penetrated. And then the opportunity that we see, as you mentioned, is this IT market, which is tablets, laptops and monitors. And currently, that penetration rate is sitting around 2%. So clearly a lot of room to grow. And next year, there is -- an expectation that a number of leading OEMs are going to introduce OLED displays into their tablet series. And we think that, that's going to kind of kick off a multiyear adoption cycle of IT OLED into IT products. And that's beneficial, one, I think just based on the fact that we're sitting at such a low penetration today at 2% as well as the fact that those displays are larger in terms of square inches. So from our material perspective, that's a great opportunity for our material to be able to be covering larger display sizes and a lot of room to grow. And a lot of analysts, our customers have also recently estimated that in the next 5 years, that 2% penetration rate is likely to go up to something like 10% probably over a 5-year period. And so that's a lot of opportunity for us based on the penetration rate growth as well as the size of those displays.

And so kind of following on that, in the IT market, obviously, IT devices have a longer life span than smartphones. And so that might open up an opportunity for a different type of technology, which is OLED tandem. Can you talk about what tandem technology is and the opportunity there?

Sure. Yes. So tandem is an approach that a number of our customers are looking at and their customers as it relates to the IT market. And what that really is, is having 2 emissive layers in the OLED display. And so -- and the reason, as you said, is lifetime. So if you think about an IT product, if that's a laptop or a tablet where there's a white background on for a significant portion of the day, those pixels are on for the entirety of that white background being on -- your iPad right there has a white background right now. And so to make sure that the display can last an appropriate lifetime, having 2 emissive layers helps address that concern. And so from our perspective, that's an incremental material opportunity because if you think about having 2 layers of our material compared to one, that's clearly more material to cover that surface area. And we think that there's -- it's somewhere between probably 1.5x to 2x the material because the thickness of each of those layers may not be equivalent to a single stack approach that we have today. But it's clearly an exciting trend and one that I think we're very happy to see to come to market.

All right. Cool. Well, another exciting trend, there's now a lot of smartphone manufacturers coming out with foldable devices, probably the TikTok effect, people wanting to flip up their camera and take a video of themselves. So can you talk about what OLED -- how OLED plays in the foldable device category and what we could see out of that emerging opportunity?

Yes. So OLEDs are really the form factor for the technology for foldable displays. OLEDs are inherently rollable, foldable, stretchable. So the ability to have foldables only because of an OLED. And as you said, a lot of leading manufacturers, Samsung, as well as a number of Chinese phone manufacturers have started to introduce foldable smartphones. There's also foldable tablets that are being evaluated to come to market. And we think that those have a lot of opportunity because they're great for people that want to -- you're working maybe in a small environment, you want just a single layer. But if you want to fold open your tablet and you have more space, gives you more surface area. Larger displays, clearly beneficial for our business, having more square inches to cover with our material. And it's something that a lot of our customers are focusing a lot of time on, both on foldables as well as some of our customers are also looking at stretchable displays, which is another form factor that we see a lot of opportunity for.

Wow. I heard about the stretchable ones. Yes, that's cool. So another topic you highlighted during earnings was the automotive market. Can you talk about what are some of the trends in the automotive market and why people choose OLED versus LCDs for a car?

Yes. So a lot of the leading premium -- Mercedes EQS, for example, has an OLED display, OLED hyperscreen across the dash of that vehicle. A lot of the premium cars have started to introduce OLED displays. The -- again, that the foldability, or the rollability of those is nice to be able to have them extend across the dash. The power consumption being very low in an OLED display is also a key benefit, especially in the EV market where power consumption is key and making sure that you're minimizing the consumption of the battery for anything other than driving. And so we have seen a lot of OEMs introduce OLED displays. That's currently very low penetration, less than 1% of cars today are sold with OLED displays. But you're seeing a growing trend on a number of announcements in the recent quarters of manufacturers introducing OLED displays into automotive.

Yes. I mean, cars really are just turning into rolling computers. And especially, as you mentioned, with the EV market growing, it sounds like a big opportunity.

Yes, absolutely.

All right. Let's do some -- an acronym test.

Okay.

OVJP, can you explain that for the audience and talk about what that technology means for UDC?

Sure. So OVJP is Organic Vapor Jet Printing, and it's a print -- dry printing process that was developed by UDC. And what it's focused on is if you think about your smartphone that has an OLED display, that's a red, green and blue dry -- deposition process that's used to create that display. And the TV architectures that are on the market today for OLEDs are; one is LG Display has a white OLED television that they sell. And then Samsung Display, another customer of ours has a Quantum Dot OLED TV that they sell. And so that's using a blue OLED background with Quantum Dots to create the colors. What we -- OVJP is focused on is using a dry printing process with print heads to actually print onto a substrate, our material using a dry printing process. And that would enable a television -- a large-sized television to be able to be printed the same way that your smartphone is and have the same RGB side-by-side architecture. We've set up a subsidiary in California in 2020 that was focused on continuing to advance the technology. We've had a lot of key milestones in that being able to print all layers of the OLED stack and have it continue to improve also the print uniformity of the display. So a key -- number of key milestones and a lot of progress that we've seen. Still more work to do. We're still a few years away from having a commercial system available. But we've seen a lot of progress in recent periods and are also seeing interest from various people in the industry on partnering with us on that.

Very cool. Yes. And one of those milestones was a fully printed RGB red, green, blue OLED stack as well. So it sounds like you guys keep making a lot of progress there.

Yes, exactly. And so the team has a number of technical milestones, obviously, that we're continuing to work toward, but we're really happy with the progress that we've made to date and that we continue to make.

So one topic we spent a lot of time talking to our listed companies about is the concept of sustainability. And I know it's been a big trend in the consumer landscape -- consumer electronics landscape. Can you talk about how UDC is helping to advance sustainability in consumer electronics?

Yes. So it's a key focus. I mean, our whole business really is sustainability. When you think about phosphorescent OLEDs, they are significantly more energy efficient, roughly 3x as energy efficient as an LCD display for a smartphone. And so that in and of itself is an energy efficiency play. We continuously focus on the energy efficiency of our material, but we really view ourselves as being squarely in that space based on the energy efficiency of the product itself and the material. And we're always looking at ways we can improve that energy efficiency and have seen that. If you look at kind of a chart over the last few years, have continued to see the energy usage of the -- energy efficiency of our material improve.

So we need a Moore's law for energy efficiency around OLEDs?

Yes.

Yes. I think -- I mean, obviously, not just the energy efficiency, but then battery life for consumer electronics is going to be key there as well. So sustainable and a better consumer outcome.

Absolutely.

That's great. All right. Well, let's dig into the financial model a little bit. What are the most variable parts in terms of your cost structure?

Yes. So we have number of things. So our manufacturing network, we recently added a manufacturing plant in Shannon, Ireland. So that's a new element that came on to our manufacturing network, that's the site that we own. So it's a part of our cost structure. We have also 2 PPG locations in the U.S. PPG is our long-time manufacturing partner. So we have a lot of fixed overhead in that manufacturing network that as we grow in the next few years, we expect to gain operating leverage and be able to grow volumes through those facilities without needing to meaningfully increase the overhead associated with them. We do have raw materials that have varied in price. Iridium is a key raw material for some of our products. We have been purchasing that at a variety of different price points, but the price has fluctuated in recent periods. And then -- but we do have largely a fixed cost structure element in the sense that we have the manufacturing plant, the people associated with that, the plant and equipment associated with it. And we have underutilization right now in our manufacturing plant. So our Shannon site, as I mentioned, we acquired in 2021 and it's underutilized at the current state. We've continued to increase its utilization in recent periods, but have more to go to get to full utilization. And so therefore, that creates the opportunity for us to have growth in the business without needing to grow the cost profile.

And so as you kind of look longer-term, do you think 40% operating margins are sustainable?

So right now, this year, we've guided 35% to 40%. And so we are obviously doing everything we can to maintain margins at the highest possible level, and that's both making sure that top line discipline in terms of contract negotiations and structuring as well as making sure that we're managing costs to the greatest degree. So we're doing everything we can to keep it as high as possible. There's volume/price dynamics certainly at play in the sense that as our industry grows, our volumes grow. You would expect our customers to secure a better price per unit. Certain input costs like Iridium have increased in recent periods, but then we also have the operating leverage play in the future as things grow as well.

Sounds good. And maybe let's double click on the relationship with PPG a little bit. Can you talk about how you've partnered with them historically and why you guys chose to acquire the site in Shannon, Ireland?

Sure. And so we've been -- had a relationship with PPG for more than 20 years and they have been a great partner for us. They manufacture our products at their sites in the U.S. We also do process development that works in certain -- really -- late stage R&D with them right before things go into commercial volumes and have had a really strong relationship, consistent delivery. When we acquired the site in Ireland, it was always with the vision that they would be operating it as well on our behalf. And that's been a really strong partnership and relationship. So we don't have any -- we have limited staff of our own in Shannon, kind of for oversight purposes and otherwise. But it's been a very strong partnership with PPG and they consistently deliver for us.

So kind of similar to the fabless semiconductor model?

Exactly. Yes.

Very cool. I do want to do a quick pause, see if there's any questions from the audience before we continue on. Got a mic coming.

Can you touch on micro LED and how is that a competitive threat? And how could it displace? And how do you think of that?

Yes. So our team, certainly micro LED has been in R&D for a number of years and a lot of players have put significant resource behind it in the industry. It hasn't really taken off in any significant way commercially. And our team, we certainly assess it. We're obviously keeping our eyes open always for competitive threats and alternative technologies. It's not something that we view as a significant threat because of the fact that there's really a complex manufacturing process associated with micro LED. And it's hard for us to see how micro LEDs could be competitive with OLEDs for things like smartphones, tablets, laptops. There's a very large 100-inch plus TV that you can purchase for, I think it's $150,000. That's micro LED. Or there could be something maybe the size of a watch that could be also a very expensive display, that could be micro LED, but we really don't see the opportunity for micro LEDs to take over OLEDs in a significant way.

Any other questions from the audience? Great. Well, then why don't we kind of wrap up and talk a little bit about capital allocation. You've got a significant amount of cash with no debt. So what's your stance on returning cash to shareholders? And what are your plans on capital allocation going forward?

So as you said, Jeff, we have nearly $800 million of cash on our balance sheet and no debt, so very strong liquidity and financial position. Our #1 priority, the management team and the Board is to grow the business. And so we're always looking for investment opportunities, whether that's in R&D and continuing to apply more resource and investment there or investment opportunities being M&A, whether that's acquiring a patent portfolio like we did earlier this year. We acquired Merck's phosphorescent emitter portfolio from them or even potential business acquisitions in the future. So that's the primary focus of us. We do look at returning capital to shareholders. We've had a dividend program in place for a number of years. We've consistently increased that dividend on an annual basis, and we aim to do so in the future as well. And we do periodically evaluate buybacks. It's not something that we've ever done in a meaningful way. We continue to believe that the dividend program is really the best way for us to be returning capital to shareholders.

Kind of a good steady but increasing return for shareholders.

Yes.

Very good. Well, any kind of final messages or thoughts you want to leave with the audience on the future for UDC?

Yes. I mean, I think we have a lot of strong growth prospects in the future and one that's the growth in the industry and where we see the OLED industry growing continued penetration of OLEDs into a variety of applications, whether that's mobile, IT or TV, as well as automotive and some of the other things we talked about. In addition to the industry growth that we expect to benefit from, we have our blue material that we expect to bring to market in the coming periods here. So that's clearly a key growth opportunity for us as well. And then we also have many interesting things also in the pipeline even beyond those things that will help us grow in the years ahead. So we're very excited about the future, and thank you all for your time today.

It sounds like the future is bright.

Thanks. Absolutely.