Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Okay. So how do we think about the adoption in some of the newer areas, notably the IT market, which includes tablets. There's been a lot of speculation about certain consumer electronics supplier that sells tablets, laptops, monitors. I wonder also just see if there's -- for those of us who weren't following it as closely what -- if there were anything at CES as it relates to what you're seeing on the IT market?

Yes. So as Jim said, there's really 3 key segments that we follow for the business. There are others, but there's 3 major segments that we monitor. One being smartphones, which, as you said, we're at 50% penetration right now in terms of global smartphones having OLED displays. That also has room to continue to grow. We've seen OLEDs in recent periods continue to penetrate that mid-tier smartphone market. The premium market for a number of years has all had OLED displays, but the mid-tier is starting to continue to adopt OLED displays in that segment. Next being IT, which, as you said, there's a lot of momentum from a number of angles that momentum that we're seeing in IT. One being a number of leading consumer electronics companies, one in particular that's expected to adopt OLED displays into its IT portfolio, I think starting with tablets and then rumored to be going into other IT products from there. And also on the IT side, there's an exciting opportunity from a material perspective, a quantity of our material that there's a tandem structure that's expected to be used in many of the IT displays. And that's really 2 emissive layers that would be in the displays. And so that's an incremental opportunity for our material -- the quantity of our material to be greater or pretty....

It's a good point. Brian, maybe just spend a moment on that for people who aren't familiar with that.

Yes. So the tandem structure is really an approach that certain OEMs and our customers are taking to address a lifetime issue in IT. So if you think about an IT product like a laptop, let's say, where you have a white background on for a significant portion of the day, that -- those pixels are on if you have an OLED display when there's a white background on. So in order to make sure that the display can last an appropriate lifetime and have the right level of brightness and lifetime, there's a tandem structure, which is, as I said earlier, is 2 emissive layers that would be in the display. If you think about the quantity of our material compared to a single layer, it's maybe not quite 2x the quantity of our material, but it's probably pretty close to that in terms of the quantity of our material that will be needed in tandem structure. And so that's an approach that a number of OEMs are taking and then our customers are therefore applying. And we think that, that's another significant opportunity from a per square inch perspective per square meter for our material to have a greater impact.

Is there any way to think about the IT opportunity and also just based on what you just said, as we think about the development of that market over the next 2 to 3 years, maybe in the context of what you generate in another market, the TV market, which smaller market for you, although with 1 big customer. Is there any way to think about that IT opportunity?

I think they're -- it's hard to really have a direct comparison between TV and IT because also the TV architecture, the way that TVs are manufactured is uniquely different, whereas the IT approach would be the red, green and blue side-by-side architecture, similar to what you have in a smartphone. And the TV process that's used, the most OLED TVs are made by LG Display, and they have what's called the white OLED approach. So they have -- they create a white -- deposit white material or a number of materials to get to a white color and have a color filter on top of that to create the red, green and blue colors. So it's a uniquely different architecture. So I'm not sure there's a direct analogy other than certainly larger displays like IT, if you think about a monitor or a laptop or even a tablet, that's much larger than a single smartphone. A number of smartphones from a square inch perspective would go on the size of a laptop or a tablet. So it's certainly a great opportunity in terms of increased size of displays and therefore, more of our material being needed. But it's hard to really draw a direct comparison from TV.

And before we go to more of a discussion on TVs, I wanted to go back to the comment that you made about the mid-tier market being an opportunity. And maybe talk to us a little bit of that because you guys have also a unique view of what's happening from a capacity standpoint. And there's been a lot of discussion even from some of the folks that are supplying some of their capital equipment used to manufacture OLED displays capacity additions in China, how that potentially could also fuel that mid-tier market?

Yes. Yes. So as it relates to -- the comment on mid-tier was on smartphones. And I think the smartphone capacity, there continues to be increased capacity added across the market. There's also enough capacity right now that we're not capacity constrained to be able to grow from where we're today. The IT capacity is actually a very interesting one, which in April of last year, Samsung Display announced a very large Gen 8.7 fab that they plan to build over the next few years for the IT market. And so that's a big opportunity. And that's clearly a $3 billion investment that they're making based on where they see the industry growing, the feedback that they're getting from their customers in terms of capacity needs in the future. And also in Q4 of last year, BOE announced a similarly sized fab that they're going to be building in China for the IT market as well. So those are both clearly signs that our customers are making significant investments in new capacity for the IT market, and that's reflective of where we see things going in the next few years.

Are you going to be in a position as the IT market develops too, you're sometimes a little bit further removed from the end product. But to give a little bit of color at IT revenue stream might look like whether we're going to be relying on third-party sources.

Yes. I think we -- I guess that's a great question from a kind of a forecasting perspective and the data that we get from our customers and insights. So -- we have a rolling kind of 12-month forecast that we use internally, and that's based on data that we get from our customers. And we obviously get some information from them on what they're working on from a long-term R&D perspective. We clearly can't be publicly sharing a lot of that. But yes, to the extent that we can give color, we absolutely always strive to do that. And then beyond that 12 to 24 period, we really do rely on a lot of third-party analysts who have a lot of information on the markets as well.

Let's turn to TVs. The OLED TV market, I think it's been fair to say a little slower to scale the way some of us thought it would. And particularly even in the past year, just this is more a function, I think, the overall weakness in consumer electronics. We'll talk about some of the R&D work that's going on in terms of maybe driving down the cost of manufacturing OLED TVs. We'll talk about that in a second. But put that aside, how confident are you that the OLED TV market, the company, a company are you that, that it moves beyond what's really been kind of a niche segment of the premium command to the market?

Yes. So right now, the OLED TVs have roughly 3% penetration globally. So 3% of TVs sold are OLED displays. I mean, as you said, it is still a premium price profile compared to an LCD technology. But it's also a premium quality display. I mean, if you walk into a consumer electronic store and you see an OLED TV next to an LCD or really any other architecture or technology, OLED displays clearly win out. And that's also evident in the fact that it continues to win consumer electronics awards year after year as Best TV. The price has come down. It's not in the stratosphere. It used to be thousands of dollars to get a 50- or 60-inch TV, and now it's a little more than $1,000 typically to purchase the TV of that size, an OLED TV of that size. So it still is premium. It's continuing to come down. I think that's -- what we need to do is, I guess, twofold. One, have that price continue to come down and also have LCDs continue to -- from a capacity perspective, be less prioritized by our customers and the broader market. And you've seen that Samsung Displays fully exited the LCD business. LG Displays exited it almost entirely at this point. And so the major display makers are really moving to OLEDs, and we would expect that trend to continue and to continue to go into the Chinese market as well. The Chinese market still is very focused on LCDs. And we think that there's opportunity in the next few years as the price can come down, consumers can understand to a better degree, the benefit of an OLED TV. And we see that as being a significant driver in the future.

And probably a good segue to what the company has been doing with respect to OVJP and maybe -- first, why don't you tell us a little bit about that, and then we'll dig a little bit more detail into it.

Yes. So we've had an R&D project for a number of years called as Jim said, OVJP, which is Organic Vapor Jet Printing. And it's a technology that we developed in-house, and it is focused on how to make large area displays like television size displays using the same process, the same architecture that you would have in a smartphone today. So right now, your smartphone is in your pocket has red, green and blue material on a side-by-side basis in the display. So how they make those smartphones is they have a mask come over the glass, they deposit the red, another mask comes they deposit the green and they deposit the blue. So that process doesn't work when you scale it to a very large size display because there can be issues with sagging of those masks and therefore, you can't get to uniform printing on a very large display using the same process that you use to make a smartphone today. So what OVJP is trying to do and what we've been successful at proving it, it can do is print using print heads to get to that same architecture of red, green and blue side-by-side using a dry printing process. And we've been able to scale that up. We set up a subsidiary in 2020 in California and have hired a number of equipment industry professionals out there to scale that up to a larger size. So we're currently at the Gen 4 size, need to continue to scale beyond that. And we've been able to print all layers, all colors using OVJP. And so we've been able to prove that it works at a certain size. And now it's a matter of how do we scale it beyond that, how do we also get partners, whether that be customers or equipment manufacturers to work more closely with us on furthering the R&D efforts there. But we're very happy with the progress that we've made, setting up that subsidiary in California was really key to moving the R&D forward. And it's proven to be a great investment that we made a few years ago.

Others have tried to develop OLED printing technologies. And I think there may even be one of your customers, TCL China Star has pursued this as well, what -- talk to us about what's happening outside of what you're doing and to what extent it would impact the market?

Yes. So there's -- I think some folks are working on inkjet printing. I think that's one approach. There's also a thing called using a photolithography approach that's been discussed recently. Some people call that eLEAP, it has a number of different names associated with it. Anything that can continue to expand the OLED TV market, we're in favor of processes that can do that. Some folks have had challenges. I think inkjet printing, I think it's been underway for a while. The eLEAP thing that I mentioned is a relatively new approach that some folks are working toward. And OVJP, we think, has a lot of opportunity as well.

What are the milestones we should be looking for on this?

I think it's continuing to scale the size that we're printing on, continuing to improve the print uniformity from -- which is not necessarily something we can -- from an investor perspective or outside to really see. It's not as tangible, but there are a lot of key milestones internally that we have for the team that continue to work toward. And so continuing to improve upon the performance of the system is key. And then from -- things that you would be able to see potentially are whether we partner up with someone more closely on OVJP and can build some of those strategic partnerships going forward.

Yes. And on the partnership question, it would seem like it would be an equipment company. But how are you guys thinking about if we get to that point, you've mentioned customers, equipment companies, what's a more likely scenario? How much interest has there been on the equipment side?

Yes. So there's -- we've had a number of conversations with both customers and folks in the equipment industry. And I think there's interest. I won't necessarily say we're not on the cusp of necessarily signing something, but there's been interest from parties. And I think whether we go customer or equipment partner, I think it's really a combination of both because if we can get a customer very interested in the technology that also then enables some of the relationships with equipment partners to move on at a greater pace. So we're not -- we're approaching it from a number of different angles, not just one.

Okay. I want to also mention -- if we spend a moment on automotive. It's obviously much smaller in comparison to these segments of the consumer electronics market that we're talking about. But we have seen OLED adoption grow in that market, particularly with EVs, where we've seen it over the years also in OLED lighting. How does UDC view the automotive market just as it relates to both displays and lighting over the next few years?

Yes. It's a great question. It's one that we've -- I think over the last year, we started to pay a little bit more attention to because prior to recent periods, it had been some tail lights here and there, maybe a few displays. But you've heard us say in the last few conference calls that there's been a number of automotive manufacturers who have adopted OLED displays into the interior of their vehicles. Tail lights continue to become more penetrated. We've seen Audi, BMW, Mercedes, all adopt tail lights, OLED tail lights to variant degrees. On the interior, especially in the EV market, it's a huge opportunity because the energy efficiency of OLEDs, OLED displays relative to LCDs is great for EVs because you can draw less energy off the battery. Therefore, that unlocks additional range or other opportunities for the manufacturer. So we see it as being a key growth opportunity going forward. It was interesting last week at CES, LG Display, one of our major customers, they had, in addition to their traditional TV booth and showcasing their technology there. They also had a separate booth in the automotive hall at CES because they're really focused as is Samsung and many of our Chinese customers also in this automotive opportunity. And so being able to showcase some of the cockpit of the future of the vehicles was something that they wanted to prioritize. So we're very excited about it. We see this as being a great opportunity for OLEDs beyond, as you said, the traditional segments that we focus on.

Okay. Let's move to the financials for a bit. I think anyone who's followed the company for a while knows the attractive margin profile of the business. At the same time, you've had some headwinds in the past year as it relates to the underutilization of the Shannon, Ireland facility, which I think was about 140 basis points in September....

There about.

Or there about?

Yes.

All right. Does that become less of a factor in '24?

Yes. So I think there's -- on the margin side, as you've -- as you said, we have a very strong margin profile this -- sorry, last year for '23, we guided 76% to 77%, which is slightly off where we were in prior years. And we have an opportunity in the years ahead. We have a fixed overhead base. We have our manufacturing network in plant. We have Shannon. We also have 2 sites in the U.S. where we manufacture our product. And we have that cost profile in place. We have the opportunity to put additional volume through those manufacturing locations, gain operating leverage to a greater degree. And Shannon is a key capability for us. I mean as we think about the next few years and where we see the industry growing, the volumes of materials that we're going to need to produce to meet the industry demand, Shannon is a capability that we'll be able to, as I said, it put additional capacity into additional capability into, but that overhead base can remain largely the same. And so we think there's, from a tailwind perspective, absolutely an opportunity to improve from where we're today. Some of the headwinds we're managing, we do have volume pricing dynamics in all of our contracts with our customers. So as those volumes increase on a per unit basis, you would expect our customers to secure a better price per unit. And then there's also certain input costs, whether it be iridium, which is a material that we use in certain of our products as well as other kind of labor, et cetera, that have increases over time. So we're managing it very closely, but we expect to continue to maintain a very strong margin profile going forward.

But the business has, historically going back to '21, '22, been able to generate operating margins well north of 40%. Is there any reason to think that we can't see that profile longer term?

Yes. So for '23, we guided 35% to 40% operating margins. And going -- I can't give you a long-term guide here today on margins other than to say it's something that the management team works very closely to make sure that we're both on the top line side as well as the cost base that we're being very, very conscious.

Okay. And just on the balance sheet, what $800 million in cash, no debt. You've done some -- the company has done some selective M&A, including last spring, last April, acquiring the Merck KGaA OLED patent portfolio. I think that was about $66 million or so.

That's right.

How do we think about capital allocation going forward? Is there -- are there M&A opportunities? How are you thinking?

Yes. So we definitely want to grow the business. I mean, that's foundational. Growing the business from here, continuing to identify opportunities for growth and investment are -- is the key priority. We also have -- and whether that investment is M&A, as you said, or R&D opportunities that we see that we want to fund to a greater degree, having the capital available is important. We have returned capital to shareholders. It is a priority of ours to do that. We've had a dividend program in place for a number of years that we've increased annually, and we hope to continue to do that going forward. So that's kind of how we think about capital allocation.

All right. Brian, thanks. Thanks a lot.

Thank you. Thanks, Jim.