Universal Display Corporation (OLED) Earnings Call Transcript & Summary

Good morning. Welcome to the 28th Annual Needham Growth Conference. Our next presentation this morning is going to be fireside with the CFO of Universal Display Corp., Brian Millard. Also here with us today from the company in the front row, Darice Liu, who many of you know, Senior Director of Investor Relations and Corporate Communications. So both of you, thanks for coming. Welcome.

Thank for having us.

So my name is James Ricchiuti, by the way, senior analyst in the Equity Research Department at Needham covering companies in the advanced industrial technology space. So let's start. Folks know the story, but Brian, maybe just for the audience, give us a picture, kind of a current picture of the OLED market in terms of where we are with penetration rates at the moment in some of the key markets.

Sure. Yes. So before I get too far, I just wanted to do a quick safe harbor statement, so I may make some forward-looking statements today as part of my remarks. Our actual results may differ materially from those forward-looking statements. So we would encourage everyone to look at our SEC filings performing and the investments in the company. So in terms of the key end markets, there's really 3 primary markets and then many others behind that. But in terms of the 3 key markets being smartphones, TVs and the IT market, smartphones today, we are more than 60% penetrated. So there's been nice continual growth in the penetration rate in the smartphone market over the last few years. Certainly, all the premium smartphones today have all the displays as well as the mid-tier models. And we're even seeing many of the low-end smartphone models convert to OLED as OEMs continue to look for ways to upgrade their products and introducing an OLED display being a great way of doing that. The smartphone market, a couple of things that we're really excited about this year in terms of the foldables being a new form factor that's going to drive more momentum for the smartphone market hopefully, we expect a refresh cycle as part of that. And for our business, it's very compelling because we sell materials that are used to make the displays and there's more surface area in a foldable product compared to a single layer conventional smartphone products. So lot of exciting things, many OEMs continuing to introduce more and more foldable models and that being very exciting for our business. The smartphone growth, we do project continued growth off of the 60% penetrated that we are today. So room for that to continue to grow as even more mid-tier and low-end models continue to convert to OLED. The TV market is also a major market for us. OLED TVs are roughly 3% of the overall TV market at this point. So also quite low in terms of penetration. Our customer who participates in the largest way in this space is LG Display with their OLED TV product. And they continue to project growth in that business over the coming years. And -- and that's a great opportunity for us because the size of those displays is quite large compared to a single unit of a smartphone. So as more and more TV penetration and adoption continues to increase, that's a significant benefit to us. The IT market, which encompasses tablets and laptops and monitors is the third key market for our business. That is one that has the most significant momentum at this point behind it in terms of growth in the coming years off of very low penetration, only about 5% penetrated today in the IT market. And our customers are putting a lot of investment in that space in the coming years or currently coming online actually starting this year, some of the fabs that I'm sure we'll cover and that being a significant growth driver. So many OEMs are planning to introduce OLED displays into their IT products, and we've seen that over the last few years with the iPad Pro going OLED, many different -- whether it's HP or Dell or others who have introduced OLED products into their portfolios and that expected to gain even more momentum as this new capacity comes online.

Yes. And segues into the next couple of questions. You touched on capacity. Before we get to that, though, it's probably topical week removed from CES. And we did see a handful of OLED-related announcements from some of the leading companies in the market. I'm wondering, the announcements that you're seeing, is that -- is that really supportive of what you're also hearing from some of the third-party forecast that you guys -- those forecasts that you look at, particularly on the IT side.

Yes. No, it is. I think as you mentioned at CES last week, there were a significant number of new IT products, laptops predominantly, but also tablets that were showcased with OLED displays in them. And that's evidence of what we expect in not just '26, but the coming years as all this new capacity comes online. Our customers are making this significant investment in new capacity because they know there's a market opportunity there with their OEM customers. And I think last week at CES, that was certainly evidence of what we've been hearing from the broader industry for some time now. And we've been talking about the IT CapEx cycle and IT growth for a number of years. We've seen it increase off of 2% penetration a few years ago, now to 5% today, and the expectation that continues to grow significantly in the next few years.

Anything on the TV front that's notable that was at the show either OLED related or just in general in the premium end of the market? Or just curious what you guys heard out of CES on that score?

Yes. So there's -- there were some new TVs announced by a number of OEMs. Yes. So LG has the announcements of a new TV architecture. There's also other types of models that are out there. I think the TV market is challenging from a consumer perspective because you go into buying a TV, there's a lot of different products out there. They all sound kind of similar in terms of the way they're marketed. So kind of sorting through what that is to what you need to purchase is challenging. The OLED TVs continue to win the best awards from whether it's consumer reports or CNET or others who rate TV performance, it is a premium offering in OLED TVs. And so I think the challenge has been historically, the price gap between premium LCD TV and an OLED TV. And that price gap has narrowed significantly over the last 5 or more years. And there's room for that, we believe, to continue to narrow such that, that will fuel more penetration and therefore benefit our business as our materials are included in those products.

I think we also heard or saw an announcement from Samsung on the crease-free foldable phone OLED panel. Talk to us about the significance of that, if we could, for a moment. You touched on the opportunity for foldables, but just curious about that announcement.

Yes. So a common issue or some people that issue that consumers have observed with foldables over many years is that if you repetitively fold a foldable smartphone multiple times over years, there's going to be -- there has been creases that form that can impact the visual aspects of that display. And so solving that crease and getting to that crease issue and getting to a place where it's either diminished or gone entirely has been something that all of our customers have been focused on. And Samsung announced last week, as you said, at CES, a crease-less approach and we believe that's great for fueling more one OEM confidence in introducing foldable products because of the crease issue being either mitigated or gone altogether as well as consumer adoption because consumers will have to worry less or not at all about there being an issue with increases in their products. So -- it's something that we know Samsung and others have been working on for many, many years, and it sounds like they've made a significant step forward with what they announced last week by having a crease-less technology as they called it.

Okay. So let's turn to capacity because that really, I think, is central to the story over the next 1 to 2 years. And we're talking about 8.6-Gen capacity investments that are being made in Korea as well as significant in China. And it's -- I can't gear toward the IT market. There have been some reports, BOE, their new 8.6 line is now expected to come on, I think, 8.6 line. I guess Samsung's line begins production. I'm not quite clear on the timing. It could be Q2, Q3. So it would seem that given these lines coming on that, that would represent an incremental tailwind for you guys. Talk to us, help us understand the impact of these lines. Just -- and maybe in the context of what you've seen historically, investments like this?

Yes. So as you said, Samsung and BOE, both announced more than 2 years ago, these new capacity investments for the IT market. They've been constructed and the tools have been installed for some time now. There's the expectation that Samsung's comes online in Q2 of this year seems to be with all the reporting is indicating. And BOE, as you said, there's been some acceleration in their time line where they're continuing to try and get their line up and running and ready for mass production and used as early as they possibly can. And all of this is pointing to these companies spending, the 2 of them are spending about $12 billion collectively on those investments. And -- when you put on other -- it's more than $20 billion across the industry that's been come online. There's a couple of things that happened. One, it's new productive capacity. That's certainly a benefit and tailwind to our business. We also have seen historically that occasionally, when new fabs come online, there can be inefficiencies, yield challenges as the tools get calibrated and the customers get used -- accustomed to using the equipment at scale. We'll have to see how much of that materializes with these 2 customers in 2026. But more importantly, over a multiyear period, this new capacity is new productive capacity for the industry and for our business where many OEMs need this capacity to be able to introduce OLEDs into their IT portfolios at scale. Our customers acknowledge that multiple years ago and made these investments for this new capacity, and it's just going to start to bear fruit this year for our business.

As far as it impacting you, does it hit you -- could it hit you as early as Q2, some of this? Or is it more in the Q3, Q4 time frame with the scale-up plans?

Yes. I mean, certainly the second half, when they -- assuming that all the commercial mass production occurs that's there, we'll have to see how much of the inefficiency materializes. Certainly, we hope our customers are very successful in bringing their tools online. To the extent there's challenges that can occasionally benefit us. But we assume there's going to be success on the customer's part and that they're going to be getting their tools up and running as best as possible.

Okay. The -- we are a couple of other -- you alluded to that the all-in number, a couple of other players in the market in China making investments. Maybe remind us of who those are in the 8.6 Gen area? And what's the time line on those? I think those are pushed out a little further, right?

Yes. So Visionox and China Star are the other 2. Visionox announced their investment more than a year ago and China Star last year, China Star broke ground in October of last year. And Visionox a month -- about -- actually a few quarters before that. So there's -- those 2 customers are also spending significant investment collectively across all 4 of those customers, Samsung, BOE, Visionox and China Star more than $20 billion of capital has been allocated to this new capacity. And so Visionox and China Star is expected in the '27, '28 time line that those come online. I think they still have a little bit of the equipment ordering to finalize for some of those fabs, but the momentum is already there in terms of the groundbreaking having occurred on the brick-and-mortar piece of the facilities. And then the equipment coming thereafter.

But is it -- there is some potential revenue opportunity for you guys in the back half of '27?

In '26, it's Samsung and BOE, '27 and '28, I think we need to see exactly what the time lines look like -- but I think it's probably more toward the end of '27 some of the recent reporting that we've heard out of what's expected for the Visionox time line.

Yes. And all of this is really geared towards what's the transition in tablets, which you alluded to as well as laptops but also monitors where you can see in some announcements in that area. And of course, one of the things that I get questions on, you guys have talked a little bit about it. But in this IT market, I wanted to spend a few moments just on the tandem architecture and how this plays into this particular segment of the OLED market, the IT market. So if you could maybe help the audience with that a little bit.

Sure. Yes. So tandem, if you look at smartphone to it's a single-layer approach where there's one emissive layer in that display. Tandem is a technical approach that's been used to date predominantly in certain IT products such as the iPad Pro is a tandem product as well as many automotive products that are out there. And the reason for tandem is, well, what a tandem is as 2 emissive layers in the display. So for our business, that's about 1.5 to 2x the quantity of our material per inch compared to a single layer product. And the rationale and the reason for the OEMs wanted tandem and our using tandem is -- it can allow for either greater brightness or longer lifetime of that display. And if you think about a, let's say, a laptop where you have Microsoft products open all day, you're using outlook and excel, you've got a bunch of white pixels on. One, you want them to be bright enough. And two, you want that product to last long enough, the appropriate number of years for the life cycle of that product. And if you have those white pixels on over many, many years, there can be a concern about lifetime in a single-layer product. So -- that's the reason why tandem products are needed. And similarly in automotive, where you have a vehicle that's going to last many, many years. You also want the displays in that car to last a suitable lifetime. And that's why tandem has been approach that's been used initially predominantly in auto and now recently more so in the IT market. There's going to be a mix in the IT market of tandem and single-layer products, and we've seen that where the iPad Pro has a tandem. It's expected that there are other products, laptops in market. Dell, I believe, sells both tandem and non-tandem products within their product portfolio. So we're going to continue to see a mix. And I think you'll see the premium offerings have the tandem display and more of the mid-range offerings likely have the single layer and there'll be a home for both of those products in the market.

Is there a point -- is there some -- at some point, would we potentially see this tandem display incorporated in a smartphone? Do you guys see that?

It's possible. There's been very, very limited releases to date of tandem smartphones. I think well less than like point-something percent of the smartphone market has a tandem product today. It's a technology that's certainly can be used technically in smartphone. There's no issue with that. It's really just, is it a cost-effective approach for the OEM because it is a more complex display to manufacturer and therefore, more costly for them to source from the display makers. But there's been a few models that have been out there, and I think we'll have to see how that evolves.

Okay. And let's spend a few moments on the smartphone market and obviously, a lot of interest right now in foldables, products that have been out in the market and also potentially a new one, a new OEM joining the fray. Do you guys have a sense as to as you look at the foldable segment of the market, other than just maybe relying on some of the third-party research. Are you able to ascertain from your customers? How much of that is impacting your revenue? Or is it just a little too hard because you're too far removed?

It's difficult because the same type -- the same material from UDC can be used in a foldable and nonfoldable product. So it's a little difficult for us to determine when we ship to Samsung or LG or anybody else exactly the end use of that in which smartphones is it going into. And what's the form factor of those smartphones and so it's difficult. We do tend to lean -- we certainly have get information through our ongoing conversations with our customers on their road maps, how they're working with their OEM customers and what they're able to share with us. But we do tend to rely also on third-party data as well.

Okay. And just hypothetically, you see an announcement of a new foldable from a major supplier to the market coming out and in the second half of '26. When would you anticipate that beginning to work its way through the supply chain as it relates to you? Would it be as early as Q2? Would you see some potential incremental from that?

Yes. So our customers, typically, let's just say hypothetically, there's a September release of something. We typically see production, call it, our customers producing 2 to 3 months in advance of that and ordering from us, call it, a month or ahead of their production needs. So we would see some of that likely in Q2 if the -- for September hypothetical launches.

So we're all talking about what's potentially a more robust refresh in handsets. At the same time, there's been a lot of reports about a higher component prices, particularly DRAM. And I'm wondering, internally, do you guys monitor that? And to what extent does that potentially change? Could it change the overall outlook for demand based on what you're hearing?

Yes. It's certainly something we monitor closely as we do all factors that could affect consumer demand and pricing are monitored by us and factor into our forecasting process. So I'd say it's part of the equation, but we're not laser focused just on that in isolation, but we're looking at the total mix of information across the industry and particularly what we're hearing from our customers. And we are projecting growth across our customers next year based on all the information that we have at this point. So -- it's -- but it's certainly a factor, but I would say we're still looking at growth next year in 2026. We're already in 2026. So yes, growth this year.

It seems to be more choices in the TV market as it relates to the types of display technologies. And some people will look at all this and say, great product, great picture, I love it, but it's still more of a niche product. And the question is what takes it to the next level? Even though the reviews have been terrific for the most part. It's -- I'm sure you can say price, but just any other -- as you -- as the company thinks about the way the market is developed, it hasn't been quite as robust as some of us thought it might be.

Yes. No, very -- all very fair comments. I mean, I think that, as you said, it is a premium offering, a very high-quality display. It has been priced as a premium. And like we were talking about earlier, if a consumer is going to Best Buy or local consumer electronic store and they're in the market for a TV it can be difficult to discern exactly where they should go. And from a price perspective, that gap between premium LCD and OLED is still there. So we do think that there's not capacity -- it's not a capacity issue. I mean our customers have especially LG Display has additional capacity for TV units. So if additional orders showed up, they have the ability to meet those is our understanding. And it's really a factor of pricing, right, and scale and being able to get the economics to a place both for the display maker as well as the where that is the approach -- the pricing strategy can be modified such that it will fuel additional demand. And we're a very small portion of the bill of materials for our customers' products. So -- we certainly try to do what we can to -- on pricing to be reasonable people, but we're not going to be able to necessarily fuel that additional demand based on our pricing strategies.

So we've come to this part of the program where we're going to ask the requisite questions on blue. So we saw an announcement May last year from LG talk to us about that announcement from LG and the impact that it potentially could have.

Yes. So the benefit of phosphorescent blue, I'll start there is energy efficiency as it is with our red and green materials. So by introducing phosphorescent blue and replacing fluorescent blue, which is used today for the blue color in OLED products. That can increase the energy efficiency of that product up to 25% of that display. So that's a significant benefit to the industry and not just our customers, but the OEM customers and ultimately consumers. LG display, as you said, back in May at one of the industry conferences, they did showcase an approach using a tandem structure and in one of the layers of the tandem product, they introduced phosphorescent blue using our material. And they noted that it was a 15% increase in energy efficiency and that they had qualified it on a mass production line and that it was commercially performing. What they didn't say is and we have an OEM customer who wants to introduce it in this quarter in this product. So we certainly know that there's a lot of interest from the broader market in using phosphorescent blue and higher-efficiency blue. We've been working with multiple customers for many years now on developing blue. We continue to do that. While the announcement by LG was great last year, we still have -- we're still continuing to develop new materials on our side that improve performance characteristics and therefore, unlock even more opportunities for our customers as they continue the path of introducing blue into products. So the promise of the technology is still as great as it's always been. The road has been a lot more windy than we expected it to be. If you rewind a couple of years ago. It's just taken longer to get to this point. But the path that we're on, we still believe is very much one that will yield success for us and introduction of our material.

Yes. And I mean the LG news was encouraging. But the pushback, I think that some we get from investors is Wall Street on the sell side, maybe get too optimistic about time lines for blue. And that's -- it's probably a fair question. But yes, you guys yourselves have been talking about this, expecting to hit commercial specs well prior to the LG announcement?

Yes, we had expected to achieve commercial specs in '24 and May of '25 was when LG came out with their announcement of a commercially performing display. So it was a delay. And admittedly, it's just taken longer for us. The -- it's been more challenging. I mean, as new technology introduction can be, there's been things that have come up that were unexpected that we've had to navigate. But like I said, we continue to feel like the path is the right one. And might there be another curve that we can't anticipate ahead? Possibly. But I think we have such know-how and expertise in OLED material development commercialization that we are confident that ultimately, we'll be able to get to the introduction of blue.

Okay. how disappointed would you be if we're sitting here next year? Still talking -- and I'm still asking the same question.

Yes. And I would have said a year ago that I was -- would be disappointed now. I mean I think that -- the interest level is there, right? So none of our customers have said, "We don't want that because of A B and C." Everyone is very much engaged in wanting to partner with UDC on high-efficiency blue and work with us. So that interest level is still very much there. And because there's that level of commitment and interest, we're confident we'll be successful. We've seen historically how we put time lines out there and have not been successful in fully achieving those. We're also -- we're in control of certainly the emitter -- the phosphorus in emitter is a key component of high-efficiency blue. There are other things -- factors that go into it in terms of other materials that are used in the display and other things that we partner with our customers to help in the best way possible. But -- there are also certain portions of it that are out of our control in terms of ultimately getting it into a product.

Okay. So last week, you announced another new long-term OLED material supply agreement with Tianma, which has been a long time player in the market, nice to see. Talk to us about where we are with some of the other contract negotiations. I'm thinking of LG was up for renewal at the end of '25. Remind me again, if you ...

Okay. Yes. So our contract with LG display, as you said, Tianma, we announced a new long-term agreement with them last week. So that's great. We've had a long-term agreement in partnership with them, which will continue and LG Display, our contract with them was up at the end of December. These contracts can often take longer than we'd like to get to the finish line. But we continue to supply LG today and as we work with them on finalizing the new deal.

Okay. And on Tianma, is there a provision of blue in that? Is that true of most of your agreements?

We're really looking at these as red and green new agreements because that's -- the thing that's right in front of us is negotiating the expiration of a red and green agreement. So focusing on that and then having separate conversations at the appropriate times on blue agreements is the way that we've been approaching the conversations with customers.

And that's clearly the case with Samsung, right?

Yes, Samsung, our contract with them isn't up till the end of '27. And so once we get into conversations with them next year, we'll have to see how we approach that.

Okay. I want to talk about the competitive environment for a moment. It's questions that come up. There have been more reports of local emitter suppliers in China. And I guess, the way it's sometimes described as a China for China application. But how widespread is this competition and is there a risk that it potentially can move beyond China?

Yes. So we have seen in the last few years, there'd be an increased competitive environment in the Chinese market. I think a lot of that is driven by local government desire to have local suppliers across not just display or OLED, but across the broader Chinese market, there's been a pressure for that. We -- the Tianma announcement last week, I think, is evidence of the fact that UDC continues to be the key partner for OLED display companies in the Chinese market. And there has been slight market share shift that we've seen. It hasn't had a significant impact on us, but we continue to focus on -- well, firstly, we have to continue to have the best materials and be partnering with our customers, and we're continuing to look at our support model in China. We're opening a new lab in Chengdu in the coming months to support our customers in the Chinese market more locally and also have the ability to hold inventory in China and supply them there. So we're looking at ways that we can continue to make sure that we're meeting our customers' needs and expectations in the Chinese market while acknowledging that there are competitors. And we believe because of our IP position on a global scale, having 7,000-plus patents that cover not just our materials, but a lot of technology that's critical to the commercialization of OLED displays. All of our customers in China also want to be our global players in the display market. And so having the right level of collaboration and partnership with UDC is important for their business as well. So we continue to focus on meeting customer expectations and exceeding them as well as continuing to maintain our technical advantage that we have.

Okay. We've talked about third-party research. And I think right now, you may have a better update for us, but the overall OLED market. I think the suggestion is that it could grow 6% or so in dollars, maybe in similar in panel demand in 2026 with the expectation of a stronger '27, which would align with the capacity increases that we've seen. But we've tried to go back and look at that data versus your revenues over the years, and it doesn't always sync up. And so I'm just wondering, directionally, is that a good way for investors to think about near-term growth to look at that data?

Yes. I think certainly looking at the area growth, right, because that's really what affects our business. The revenue -- industry revenue growth is less relevant, the ASP at the customer side. can affect that. But looking at area growth is certainly a good way of thinking about our growth opportunity. But there are things, as you said, that can cause us to grow more -- greater than the industry growth -- area growth and also some that can be slight headwinds to that. So -- on the tailwind side, tandem structures, as those become more predominant, that also is an opportunity for us because on the same per square inch, there's more UDC material needed for those products. So that's one of the key factors. And then on the headwind side, there can be just general efficiencies that our customers are able to realize occasionally in terms of whether it's how they operate their tools at their manufacturing line, the thickness of some of the layers to different customer recipes can change. And that routinely does fluctuate sometimes favorably, sometimes unfavorably, just depending on the period. And then we talked earlier about yield at the customer side, whether it's new fab turn on or otherwise that can be beneficial in some periods to us. So we'll share in a few weeks here when we do our year-end report exactly how we think that's standing up for 2026.

And we will wind it down, which is a question on capital allocation, balance sheet is extremely strong. You did a small acquisition of some patents, similar to what you did a few years ago. How are you thinking about the cash on the balance sheet and thoughts around capital allocation?

Yes, we do have a significant cash position, so around really $1 billion as of September and as you said, we acquired the Merck patent portfolio. We've acquired now 2 portfolios of IP from Merck. This portfolio is very much focused on device architectures and is one that as our teams are developing new materials and technology, having access to this IP just opens up more doors for us in the development cycle. In terms of capital allocation and more broadly, business, whether it's investing in IP as we have with Merck and others or looking at acquisitions that may potentially be complementary to our business. And then we have also prioritized returning capital to shareholders. We've had a dividend program that we've routinely been increasing and also a buyback authorization that our Board put in place last year. So multiple methods to continue to return capital as well as look for growth opportunities in the business.

Okay. With that, I think we'll end it there. Brian, thank you.

Thanks, Jim.