Universal Display Corporation (OLED) Earnings Call Transcript & Summary

[Audio Gap] U.S. semiconductors, semiconductor equipment and networking equipment stocks here at Citi. It's my pleasure to welcome Brian Millard, CFO and Treasurer of Universal Display. We also have friendly neighborhood IR, Darice in the audience as well. Thank you, guys, for coming to Citi conference.

Thanks, Atif.

I'll kick it off with my questions first. If you have a question, you can raise your hand any time, and we'll do more Q&A. Brian, just as a starting point, kind of state of the union on the OLED market, when you entered this year versus where we are right now, there have been tariffs and pull forward in some of the consumer end markets. So just kind of walk us through how this year has played out so far? And then the state of the OLED market?

Sure. Yes. So before I get started, I just want to give a quick safe harbor. So I may make some forward-looking statements today as part of my remarks. Our actual results may differ materially from those. So we'd encourage everyone to look at our SEC filings before investing in the company. So to your question on the markets, I think it's -- there's really 3 key segments that we track, smartphones, TVs and the IT market, which the IT market encompasses tablets, laptops and monitors. And this year, I think what we've seen -- we started out the year with a guidance of $640 million to $700 million. And I think through our -- through this period in time are usually playing out very much in line with expectations. There was a bit of a pull acceleration in the sense that April was a really big month for us with the tariff-related purchasing that some of our customers did -- after the U.S. announced its tariffs in early days in April, we saw accelerated buying from our customers in the following days. And we did see the first half of the year come in quite strong compared to our expectations. The full year, we do still think is going to be quite strong. And the midpoint of our guidance is $675 million at this point. So that kind of contemplates a flat first half, second half orientation. And as it relates to the markets, the IT market is the one where we think there's a lot of growth in the coming years as many OEMs introduce more and more OLED products into their IT portfolios. The TV market and the smartphone market are also growing. But the rates of growth in those are just slightly below what we expect for IT just based on the very low penetration rates today in IT and the expectation that many models are going to convert over the coming years. But as it relates to 2025, feeling good about where we are a little more than halfway through the year.

Great. When we talk to [indiscernible] and equipment makers, they have started to see an improvement in the spending for display. And so the question is on Gen 8.6 OLED fabs. There are activities going on? When do you expect what you're seeing in the market will translate to revenue opportunities for you to see.

Yes. So there's been a lot of announcements over the last few years of investments in these Gen 8.6 fab. So 3 of our major customers, Samsung, BOE and Visionox, all 3 have announced significant investments that they're making in this Gen 8.6 capacity, specifically for the IT market to meet the demand that I mentioned earlier. The Samsung fab is expected to come online, I think, around Q2 next year is the current expectation and the BOE fab in the second half of next year, followed by Visionox likely sometime late in 2027, I think, is the current estimates of that. So collectively, those 3 companies are spending $20 billion of investment in this new capacity because they know the industry needs it to meet the rising demand for IT products. So it's a really exciting new opportunity for us. And we think that this is really just the first of many announcements in the next few years. More capacity for -- largely for the IT market. So it's a great opportunity. We're really excited about the growth in capacity. And it's also important to note, many of these IT products that have been launched and that are expected to be launched are tandem structures. So that means they have 2 emissive layers in the display. And that's an incremental material sales opportunity for us because that's somewhere between 1.5 to 2x the material per square inch compared to a single layer, so -- and these fabs that are being constructed at the Gen 8.6 scale, all will have the ability to manufacture tandem displays through a single manufacturing process. So a lot of opportunity both in terms of just the general Square area as well as the tandem effect above and beyond that for the IT market.

Great. Let's start with the mobility market. It is the most kind of traded in terms of OLED adoption, but there's some exciting form factors like foldable phones that are being talked about next year. So when we look at the mobility market and the foldable phones. First of all, we would be curious where you think is the penetration rate for OLEDs in the mobility market. And then for something like a foldable phone with increase in area, how big of a driver that could be to add incremental demand?

Yes. So foldables are a really exciting opportunity for the smartphone market. We think that in the coming years, there's many OEMs that are going to continue to increase their quantity of foldable models. The smartphone market in the general sense is roughly 60% or approaching 60% penetrated with OLED today. So as you said, very strong penetration already at this point in time. . And foldables is an opportunity in 2 ways, we believe. One is just the square area and square inches of display in a foldable is somewhere between can be up to 2.5x the number of the quantity of square inches compared to a single layer. And so that's compelling for our business because there's more surface area for our material to cover as well as, we believe, as these foldables come to market, that should spur replacement cycles to a greater degree as more and more consumers are going to want to upgrade to these foldable -- foldable devices. So there's a few different angles through which we think it's really compelling. The smartphone market in the general sense, today, that 60% penetration is really 100% penetration in the premium smartphone market. Solid penetration, very strong penetration in the midrange. And even some low-end models that we've seen over the last few years that have adopted OLED displays as the price of those displays has come down and as OEMs look to continue to refresh their products on an ongoing basis.

All right. I waited to a question before to talk about blue. so let's talk about blue. I mean I think you guys shared some excitement earlier this year. You're starting to see more activity. There was announcement by LG. And -- so first of all, for the audience, I think it will be important to know why does blue matter? Why do we need phosphorescent blue in our phones? Where will it get the consumers? And then what's the latest progress on it?

Yes. So our core business today is really -- is phosphorescent red and green emitters. So red, green and blue being the colors needed to produce a display. And the benefit of phosphorescence is that it has 100% internal quantum efficiency. So it really uses 100% of the electrical current is converted into light. Whereas fluorescent, which is the alternative technology and the technology that's used today for blue is very energy-inefficient. Only about 25% of that current is converted to light in a fluorescent approach. So you have a lot of wasted heat emission and inherent inefficiency. So we've been working for many years to develop phosphorescent blue material. And the benefit of that would be when you include a phosphorescent blue into an all phosphorescent device, you would have about a 25% increase in energy efficiency of that display. So it's very compelling for our customers and the OEMs and consumers to have a more energy-efficient display that allows either smaller batteries to be used or the same battery with longer lifetime of the device as well as when you look at AI and some of these more power-consuming features that are being added to more and more devices, the ability to leverage more energy efficiency in the display to offset the power consumption needs of those new enhancements. So that's really the key benefit of not just blue, but our company's materials in general, is the energy efficiency that we provide. As you mentioned earlier this year, in May, LG Display, who's one of our major customers, they announced that they had produced a commercial performing device using our material and that they had validated that device or the production of that on a commercial production line at LG. So that was a really key milestone in our blue journey and ultimately getting our phosphorescent blue into market. The technology approach that they took was to use a tandem structure. So they used kind of a tablet size display that was a tandem. And for the blue color, they replaced one of the layers with phosphorescence and retained one of the fluorescent layers. So it's not an all phosphorescent approach, but it is an approach that they took to incorporate our material into a commercial device. And we're very, very pleased with how that's -- that they were -- they came out, they said that. And we're working with not just LG, but other customers as well on their development efforts. And ultimately, we'll see -- it's up to our customers at this point really to determine exactly how this product gets incorporated into a device with an OEM and ultimately serve to consumers. But this is a key milestone, and we continue to do work on our side to introduce new materials that continue to improve their performance that will unlock even more opportunities for our customers as they continue their development journey there.

Brian, just on the point that one layer is fluorescent and one is phosphorescent. Is that -- is cost a reason for it? Or is it performance? Or is it manufacturing flow? What is the reason why they're using one layer, not the other?

Yes. So LG noted in their release that they were able to get the energy efficiency benefits of the phosphorescent material from UDC and they were able to get the stability benefits of fluorescent. And stability is kind of code for a lifetime. There's 3 things that we assess when we develop new materials, which is what is the color? So how deep is the blue or how light is the blue and having that right commercial spec, which we've had for a while now, the color point at a good level. The energy efficiency of the material as well as the lifetime of the material. Lifetime has been the most challenging for phosphorescent blue. But we've seen that our customers, LG in this case, was able to incorporate the stability of fluorescence and the energy efficiency of phosphorescence and get a commercially performing device and be able to make that on a commercial mass production line, which is a great step.

All right. So it moved from lab to a pilot fab. And so what's the next step in terms of kind of volume adoption when we read about the next-generation iPhone, whether it's thinner, it's going to have lower battery life. So you definitely need tools like phosphorescent to extend the battery life if the form factors will become thinner. So what's the kind of the next kind of milestone that you guys are kind of watching for?

Yes. So we're continuing to support our customers, and they are determining at what point they're comfortable having conversations with OEMs and having more technical conversations about product road maps, which we're not privy to, and that's really for our customers to be leading those with the OEMs. But the thing that we're doing is continuing to support them, continuing to improve our material performance, continuing to have joint engineering experiments with them on our material. And we're doing this -- there is interest across our full customer base in phosphorescent blue. I mean it's a very compelling value proposition for them to be able to include this higher-performing material in their devices. We know there's interest in the OEMs as well as the kind of the broader OLED ecosystem and display ecosystem in this material. So -- it's never fast enough, but we're pleased with the progress that we're making and continuing to help our customers enable getting this into the market.

All right. And I missed out the SID Display conference this year. Was there any update by any other customers like Samsung or others on blue?

There weren't any specific phosphorescent blue announcements other than LG at their booth. They did have at their public booth at the conference back in May, they had a conventional tablet size display and one that they had produced using phosphorescent blue. And they had power meters on both, and you could see that the energy efficiency improvement was about 15-plus percent using the phosphorescent material from us.

Right. So when it gets volume adopted, can you walk us through the impact it could have on your content per phone or your overall dollar content opportunity?

So we haven't fully -- we haven't nailed down pricing with any of our customers on blue. We have had various conversations over the last number of years on pricing. We believe that the pricing is a premium compared to our red and green material pricing. But we haven't fully secured those contracts. So it's very hard to nail down that piece of the equation. The -- and then on volume, it really depends on, is it an all phosphorescent approach? Is it a hybrid tandem like the approach that LG was public with? Is it something else? So it's really hard to put an exact point on it other than to say we -- even our red and green materials today are not a significant component of the bill of materials. So even with a premium price for blue per unit, we are not going to be a hindrance to adoption in terms of the way that we price the material.

Alright. And is it being evaluated across all your ABCD customers? Or is it 1 or 2 at this point?

We have projects underway with multiple customers, all of our major customers we work with on blue.

All right. And then on the licensing and royalty side, will this be incremental to the existing agreements that you have with these major customers?

So the materials is certainly incremental. On the license and royalty side, we have -- most of our customers are under portfolio license agreements, which incorporates access to all of our IP, inclusive of blue. Samsung's contract is the one that currently does exclude blue from it. And we're confident that when we need to reach a deal on how to layer that into their contract that we'll be able to make that happen.

All right. Let's switch to the auto market. it may not match the scale of smartphones and TVs, but OLED adoption in autos is gaining momentum. How do you view the long-term opportunity and adoption in that market?

Yes. Automotive is one that's interesting because it's really gaining a lot of momentum with our customers. Our customers, most of them have development projects and many have commercial projects already underway within the automotive sector. It's particularly compelling for EVs where energy efficiency is very important and OLEDs are a great way to take more energy efficiency out of that vehicle. The total auto market is roughly 85 million units globally each year. Today, less than 1 million of those have OLED products in them, but we're seeing more and more interest, not at in OLED products, not only in EVs, but also in traditional ICE models as more displays are incorporated in models, we're seeing more interest in high-performing displays like OLEDs.

Okay. And then on the whole geopolitical tensions, can you talk about you and your partner, PPG, how are you managing the supply chain? You have manufacturing in the U.S. and Ireland. What's the current production split and just kind of overall impact to the margin structure?

Yes. So we -- PPG has been our long-term manufacturing partner. It's been a 25-year relationship that we've had with them. So they manufacture our product at 2 sites in the U.S. that they own and operate and then site in Ireland that we own that site, but they operate it on our behalf. And the Ireland side has been really critical over the course of the last year or so. As we've been navigating some of the trade issues. It also added additional volume to our manufacturing network, which is important for the next few years as we see the volumes increasing across the industry. And we've been able to manufacture a product that's in Ireland and ship directly to China as well as supply our customers from the U.S. as well. And we're just having an increasing conversation as we introduce new materials of where is the best place to manufacture. It used to be a little more clear cut. And now it's a multifactor equation that we have to go into in terms of which customers are using it, how do we balance production? Do we make it in both facilities? Do we make it only in Ireland? And -- but we've been able to really successfully navigate the tariff situation thus far. Our customers' agreements are also generally structured that the tariff importing into their country is something that they're responsible for paying for. But nonetheless, we want to keep the friction of doing business with us as low as possible and make sure that we're helping be good partners and balance our production as best as we can.

Okay. Let me pause here and see if there are any questions in the audience.