Universal Display Corporation (OLED) Earnings Call Transcript & Summary

I'm going to moderate this session with Darice Liu, IR Head of Universal Display Corp., one of the most important OLED supply chain companies. Again, we're going to have mainly the Q&A session. Okay. Over to you, Darice. Yes.

Well, thank you, Simon, and thank you, Bank of America, for inviting us to your conference. You may have noticed, I am not Brian Millard. Our CFO, unfortunately, due to unforeseen circumstances, was unable to attend. He does send his regrets, but I am happy to answer all questions. Before I make my remarks, I should just give a quick safe harbor statement. I may make forward-looking statements. Actual results may differ. So we ask everybody to review SEC documents before making any investments.

Great, Darice. Before we get started, just in case, would you introduce yourself? When did you start at UDC? And what you are currently doing?

Okay. So I started with Universal Display Corporation about 12 years ago, actually. I head up communications, including investor relations. It has been a journey. I started at the company when our green phosphorescent emitter was just adopted by Samsung for the very first time. Back then, the top 3 OEMs for display -- OLED displays were Samsung Electronics, Nokia and BlackBerry. So things have changed a little bit since then.

Wow, BlackBerry.

BlackBerry was the early adopters of OLED displays.

That's great. So that's the history. But we should look at the long-term trend first. So people are talking about AI data center. Of course, some people are talking about display technology. So what could be the long-term growth catalyst for UDC?

I think the overall picture for displays and AI really is the added functionality and performance to consumer electronic products and what that then necessitates, which is energy efficiency. When you add more performance, more functionality, whether it's 5G, where it's AI, you need more efficiency because those added benefits consumes more power. And so you need efficiency elsewhere. And one of the things we've been doing for now 30 years is continuously inventing and developing new materials that are much more energy efficient. And so an energy-efficient display is key for more functionality and more performance if you want your battery life to last as long as your older products.

Okay. Then the -- these days, a lot of data is getting more trained, and then the chip maker is focusing on the inferencing. Then we need a lot of content to be seen through the display. But we still see a lot of the LCD panels. So how come the OLED can replace LCD and why OLED can be more energy efficient?

So when you look at the display market, there are 3 large consumer electronic segments that display makers, whether it's LCD or OLED makers, all target. It is smartphones, IT and TVs. Within the smartphone market, we are at 51% penetration rate at the end of 2024. We're at 4% within IT and about 4% within TVs. Display makers, just like you saw within the LCD cycle, have a tendency to focus on a certain size initially and then move on to the next size. In the LCD crystal cycle, you saw them go from small to medium to large. We are essentially following those steps. At 51% penetration of smartphones, the next stage and where you're seeing a new multi-year CapEx cycle really begin to form is for the medium-sized market for IT, and to some degree, automotive. And so from there, you're starting to see more panel makers. For folks who attended COMPUTEX or Mobile World Congress, you saw more and more OLED displays being showcased. I was at SID Display Week 2.5 weeks ago. It was more and more IT displays and actually the most automotive OLED displays I've seen in my 12 plus years of going to Display Week. So the medium-sized market clearly is a focus for panel makers. And with the new fabs that are starting to come online slated beginning next year, with Samsung's Gen 8.6 that's slated to come online in Q2 of 2026, BOE slated for Q4 2026. Visionox has not yet announced a time line, but based on their groundbreaking that started in August of 2024, most are estimating probably end of 2027, early 2028. All of that new capacity, which totals about $20 billion in investment, is all for the medium-sized market. And we believe that those plans are being formed because of what the OEM road maps are entailing for OLED adoption.

Yes, that's a great point. A lot of the tablets and laptops are still based on LCD. But the panel makers, they are investing a lot for the 8.6G for new OLED capacity. That capacity will be used for the larger volume of the OLED panel production from 2026.

You'll start seeing -- Samsung will open up the very first Gen 8.6 OLED IT facility Q2 2026, followed by BOE in Q4 of 2026. Visionox will follow after that. There is a lot of chatter that the other panel makers are also looking into plans for IT CapEx.

Okay. That's a great point. So here we go. So maybe we can say it's 3 different revenue sources for the UDC, Universal Display, regarding the panel makers' new capacity. So number one, any quick recap or color on the license agreement, IP royalty revenue generation and then the material sales regarding the new plan?

So when we -- we have long-term agreements with our top customers, Samsung, LG Display, BOE, Tianma, Visionox and China Star. Those long-term agreements are actually 2 agreements. It is a materials agreement or commercial materials agreement as well as a license agreement. So those agreements, a number of them, we have publicly announced are around 5 years long. So those agreements, for the materials agreement, it is -- we provide, for right now, red and green pricing through the term of the agreement. No one currently has blue pricing, which I'm sure is one of the questions you have later on. The license side for the right to use our IP in one's OLED device, we negotiate each agreement differently because each customer is at a different stage with their plans for OLED capacity. Either they pay us fixed license fees, royalties or a hybrid of the 2. The hybrid of the 2 is probably the most popular. And so that is how we generate our main revenue lines. For this year, we've guided for the material to royalty licensing ratio to be 1.4:1. So material revenues will continue to be the dominant revenue stream, especially when blue comes into play because blue, we believe, will be a significant new material revenue opportunity.

Yes. But the management has been talking about the blue opportunities for over the past 2 years, but still caught on revenue...

More like 10 years but yes.

Okay. So when do you expect the blue can be the great contributor to the growth or revenue enhancement?

It's a good question. So I think we -- blue has clearly been a question, especially since LG Display's announcement. So the questions have increased since then. For folks who don't know, on May 1, the morning of our earnings call, LG Display announced that they were showcasing at SID Display Week a blue phosphorescent panel and that they were the first ones to verify commercial performance level of a blue phosphorescent panel in a mass production line. And so I was actually at SID Display Week 2.5 weeks ago. And what they showcased was a 13-inch tablet size OLED panel, which is your typical tandem OLED next to a hybrid tandem phosphorescent blue panel. And the images were great, same images so you can compare and contrast. The big difference was they had an instrument next to each one showing the energy efficiency difference. And you saw that the phosphorescent blue hybrid panel was more efficient than the typical panel. LG Display has noted they expect to see a 15% increase in energy efficiency with their hybrid tandem phosphorescent blue panel.

That's a great -- very great footprint to see the blue commercialization.

It was great for LG Display to announce that they've been able to verify the commercial performance level. Now it's really up to them and the OEMs. I think it's a little bit hard for us to say when the commercialization would happen. Unlike semiconductor companies who work directly with the OEMs, we're one-stepper move. We work with the panel makers who then work with the OEMs. So right now, it is with the panel makers and the OEMs on their discussions on where, for what product, with who and et cetera.

Yes. Maybe we can continue the blue theme discussion. How about the competitive landscape? Because some Korean panel makers can try internal blue color development, material development. Why not Japanese fluorescent material guys also can do some of their own phosphorescent blue? So what's your view? You don't see any meaningful competition in the blue color area, very UDC-specific area?

We think all roads to high-efficiency blue go through us. There are companies out there who are working on phosphorescent emitters. For phosphorus -- for blue, we believe all roads to high-efficiency blue go through us. And so whether it is a hybrid tandem approach, a PSF approach, a single-stock approach, we believe the road to phosphorescent blue goes through us.

What could be the technology barrier for the existing phosphorescent blue material suppliers, why they cannot upgrade their current production capacity or technology for the phosphorescent from the fluorescent?

So I would just want to make sure we're on the same page. So adopting phosphorescent blue doesn't mean any significant new CapEx. The tool set is still the same, vacuum thermal evaporation, because you're still using small molecule materials. Whether it's a fluorescent small molecule material or a phosphorescent small molecule material, you don't have to purchase a whole new equipment set for it. Just like when our phosphorescent green was adopted in 2013, replacing the fluorescent green, there is -- you still use a vacuum thermal evaporation tool or VTE tool. So there is no significant -- you're going to have to tweak it, obviously. You have new recipes, new mass sets that come into play, but the adoption of phosphorescent blue is not a significant CapEx factor.

Yes, yes. Maybe a little different angle regarding the blue. Some Asian material companies, they are working on the blue but may be different like host area or [ HTTR ] versus your [ top part ]. Would you recap why the materials or functions for blue differ maybe versus some other supply chain companies?

Okay. So an OLED stack is multiple layers. You're talking at least 11 to 13 plus different layers within the OLED stack. The heart of the OLED stack is the emissive layer. That's where the color is coming from, red, green and blue. So within the emissive stack -- and we can go into the other stacks in just a second. Within the heart of the stack, within the emissive stack, you have what you call emitters or dopants and host. The analogy that we like to use to describe how you can describe both of them is how do you make a glass of chocolate milk. You have a glass of white milk. That's a high-volume commodity portion of the equation. And then you have the chocolate syrup. You only need a couple of drops of it, but it's a key ingredient to making your end product. That's equivalent to the dopant or the emitter. So we provide emitters. That is our main material business of providing red emitters, green emitters. And then for blue, we plan to present the option of purchasing both the emitter and the host because whenever we invent emitters, we always invent corresponding host to create an emissive system to spec out our emitter. So -- but there are other players. Again, it is more commodity oriented, the host. So there are players out there who are our partners, who work with us that are developing blue host. And the other layers, whether it's transport layers, injection layers and things of that sort, those are the other layers that surround the emissive layer. We do not play in those layers, but there are other players within the market.

Yes, yes. Great. Obviously, people are talking about some China, U.S. tension, tariff for U.S. export control to China. So number one, would you recap your material product, the green and the red, how to manage the global supply chain from Europe, the U.S. and Asia?

So just a quick backdrop. So we are a fabless company. Our manufacturing partner for 25 years is PPG. Actually, we celebrate 25 years this year with them. We invent and develop everything in-house. PPG manufacturers for us. They manufacture both in the U.S. and now in Shannon, Ireland. We announced back in 2021 that we were opening up a third manufacturing site in Shannon, Ireland. The first 2 are in the U.S. That started mass production in July of 2022. And we've been making and shipping materials from Shannon, Ireland to all of our customers in Korea and China. Now not all of the materials are made in Shannon, Ireland. Right now, if you look at the overall business, probably it's 50-50. 50% are made and shipped from the U.S. 50% are made and shipped from Shannon, Ireland. But we do have a lot of room to grow within Shannon, Ireland. So if there's a need for us to expand our facility there, we can do so and actually are doing so.

Great. So at least the investors don't need to worry about any China -- heavy reliance on the local China materials or metals or rare earths?

Rare earths, that doesn't come into play for us. We're a global company. We're a global infrastructure. We're able to make and ship within the U.S. as well as outside the U.S. and Europe.

Yes. And then the -- obviously, people usually ask the U.S. tariff impact on the technology product. So any direct interrupting impact of the U.S. tariff?

So there's some direct impact. We get raw materials from all over the world. Some of it does come from China. It's not the dominant source of our raw materials, but we are a global company, so we have a global supply chain. It's not very significant, at least not this year. And with tariffs being reset, so far, things are okay. In terms of the indirect impact, as we noted on our May 1 conference call, we did see some stockpiling occur in the first week of April. As you may recall, there was -- with the tariffs being implemented and retaliatory tariffs being stated by China, our customers basically ordered quite a bit of materials in the first week of April before the retaliatory tariffs came into effect. And so as a result, we did see a surge in orders because of that. But since then, ordering patterns have come back to the normal pace. And also, we've seen the tariff situation reset a little bit. So things are -- as we noted on our conference call, we see the year in line with what we expected, which is why we reaffirmed our guidance.

Yes. That's the point. The second quarter, usually the low season for the smartphone supply chain. And then even other IT product, usually second quarter, not strong. So how do you assess your second quarter business still in line with the seasonal weakening trend or a little bit above the seasonal trend?

So I think it's a little bit different for us, right? Because our customers are the panel makers, they -- it's not a one-to-one meaning they're going to make a product that's going to come into the market tomorrow, right? So it really depends on their fab operational plans. Their utilization rates remain high, then they're continuing to buy at the same pace. If they decrease or they increase, that then impacts their purchasing from us. So it isn't quite one-to-one with the end markets. Overall, for the year, we're still looking at $640 million to $700 million. And we will say, as we noted on the call, that Q2 in April, we did have a very strong month. But for the quarter, it's pretty much coming in line, maybe a little bit better than expected.

Okay. Yes. Some investors really expect foldable phones, particularly for the U.S. phone makers. So do you believe that can be the great catalyst for UDC? So foldable phone, people will get excited?

I think there is a lot of chatter with foldables, especially as it's rumored that certain OEMs will be adopting foldables for the first time. Foldables from a direct standpoint for us is great because it's more square inches. So more screens means more materials. And from a personal standpoint, foldables are great, right? Two-in-one products, foldable products. And it's something that you start to see a few -- not just Samsung, but you've seen Oppo, Vivo, Xiaomi and others introducing foldable products. At SID Display Week, we saw trifold. We saw rollables. We saw scrollables. So I think form factor will be an ongoing trend within consumer electronics. And as more OEMs adopt it, I think demand will also increase.

Yes. Looking at the -- another product category like tablet area because last year, Street expectations are very high, but toward the end of 2024, sentiment is a little bit muted. So what's your view on the very high end of tablet, which will be based on more and more OLED rather than LCD? Do you still believe the OLED demand for the tablet will be -- continue to be strong or so-so?

I think OLED adoption within the IT landscape, including for tablets, laptops and monitors will continue to grow. I think that's also part of the reason why these Gen 8.6 facilities are being constructed, is to meet the growing demand for IT. It will take some time, just like it did with smartphones, but there are definitely a number of OEMs looking to expand their portfolio of OLED within their IT product line.

Yes. Obviously, here in San Francisco, Waymo, getting popular. Have you tried? I already tried yesterday. It was very exciting. No driver, but Waymo really works right here. But I saw the very large screen, obviously, OLED panel. So what do you see in the overall OLED demand from the auto industry?

The automotive industry is very interesting. We talked about, within consumer electronics, the 3 largest end markets that display makers target are smartphones, IT and TVs because of the size of number of units. Automotive is interesting because there's about 90 million cars sold a year, but the number of displays within it is a multiple of that, right? When you talk about -- if you look at the full dashboard, for example, Mercedes flagship EV product to EQS, the market that as a 55, 56-inch hyperscreen. That's actually 3 different OLED displays. You have opportunities within side view mirrors, rearview mirrors, passenger seats. And so the number of display opportunities within a car is actually multiple. You're seeing -- I mentioned to you the Gen 8.6 for medium size. IT is definitely a primary target, but automotive is also an area that folks are looking at, especially EV makers. There's -- for 2 reasons. It's interesting for EV makers. One, an overall statement in terms of our car is not a box. If you can make a display on plastic and curve it to the design of a car, that is much more preferable. The second factor is energy and efficiency and EVs go hand in hand, and OLED is a key part of that. And so you've seen a number of makers, whether it's Mercedes EQS, the Mini Cooper EV product or some of the Chinese EV makers from BYD subsidiary to Zeekr adopting OLED for EV. It is something that is growing in interest.

That's a great area. One more application area, guess what, TV. Sometimes I do see very large size of the LCD TV, very cheap, and also even the micro LED TV. So how do the OEMs can promote to the OLED TV, beating the LCD or micro LED TV?

I think with it -- so TVs, when you look at OLED TV, everybody says it's a great TV. And so it is -- OLED, without a doubt, from consumer electronics, is noted as the best TV for multiple years in a row. Right now, TV penetration for OLED is probably about 4%. It's really more for the premium segment. Market research firms do have that segment growing but at a slower rate, I think, because panel makers are right now focused on the medium size. I think eventually they're going to move on to the large size. But I think right now, the focus is medium size.

Yes, yes. All right. We discussed all the details for the industry. So how about if we discuss more company-specific things? So number one, when we look at the panel makers, their margin is very low, except one company, Samsung, showing very good margin. But your company margins is even better than the semiconductor sector average, I guess. So what's the magic thing or great thing? And how long it can -- a company can sustain such a high margin profile?

So our guidance for this year for gross margins is 76% to 77% with operating margin guidance of 35% to 40%. We have strong margins. We continue to expect to have strong margins going forward. Part of it has to do with the licensing business. But also part of it has to do that we continue to deliver various state-of-the-art materials to our customers. This isn't just a catalog business where I have one red and one green. We're continuously working with our customers hand-in-hand to invent and develop new materials for them, next-gen materials for them. And so that is part of the working relationship we have with them. And at the end of the day, even though our margin profile is high, we are a small portion of the bill of materials. Most analysts estimate that our total red and green emitter content per smartphone is about $0.10 to $0.20. And so we add a lot of value for what we are within the bill of materials.

Again, you don't worry about any cheaper materials coming from Asia or China. When you look at the, for example, EV batteries, some even display panel, lots of the product available in China at very low price. But your materials cannot be replaced by Chinese materials.

So I will say that there are always -- as the OLED industry grows -- as I mentioned, when I started, the industry was very small. We're now at over $50 billion in the OLED market. You're going to have more players wanting to get into the market. For us, our -- we expect to continue to be a leader in the industry. We're continuing to develop new materials and next-generation materials as well as next-generation technologies. And so our focus is to continue to be the leader. And with that leadership and maintaining our strong relationships with our customers, that has been what we've been doing for 30 years, and we plan to continue to do that.

Yes. Great track record. So a high margin and the time line growth with the OLED industry growth, obviously, you will have lots of free cash flow. So would you recap your maybe net cash position and then how you're going to return the lots of cash to the shareholders?

So we do believe in returning cash to shareholders. We instituted a dividend program back in 2017. We have grown that dividend every year since we instituted the program. We plan to continue growing that dividend as we grow. And then on our May 1 conference call, we also announced a $100 million buyback program. So that buyback program will be used as an opportunistic tool from the management company. And it is something that if the opportunity arises, the company will purchase stock back.

Yes. How about the -- almost the last question. If you still own a lot of cash -- and here in the U.S., we do see many startup companies who are some AI related. So maybe 2 follow-up questions regarding the M&A. To enhance your business opportunity in the OLED area, maybe how about inorganic growth or M&A activities? And then based on your great know-how, resources and partnership with Samsung, LG or Chinese companies, how about the other areas, some AI-related M&A, non-display related? Any consideration?

So we -- a couple of -- a few years ago, we formed UDC Ventures, which is our corporate venture arm. We have made multiple investments. Some of them are display oriented. Some of them are non-display oriented. We haven't publicly announced all the different investments, but we are looking at different opportunities where we can grow both organically and inorganically. The inorganic side is something that UDC Ventures looks at in terms of opportunities for us. But obviously, the focus is also organically through next-gen materials as well as with blue and new technologies.

Excellent. So everything sounds so great. Thank you very much, Darice. And hopefully, Brian can recover quickly. Thank you so much. We end this session. Thank you, guys. Thank you. Thank you very much. Yes, we covered everything. Thank you so much.