Universal Display Q1 2023 Earnings Call Transcript

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May 3, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, and welcome to Universal Display Corporation's First Quarter 2023 Earnings Conference Call. My name is Paul, and I will be your conference moderator for today's call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Operator.

Operator

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference call over to Darice Liu, Senior Director of Investor Relations. Please proceed.

Speaker 1

Thank you and good afternoon everyone. Welcome to Universal Display's Q1 earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer and Brian Mallard, Vice President and Chief Financial Officer. Before Steve begins, let me remind you today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the express written consent of Universal Display is strictly prohibited.

Speaker 1

Operator. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time sensitive information operator that is accurate only as of the date of the live webcast of this call, May 3, 2023. During this call, we may make forward looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties operator and our actual results may differ materially.

Speaker 1

These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Operator. Now, I'd like to turn the call over to Steve Abramson.

Speaker 2

Thanks, Darice, and welcome to everyone on today's call. For the Q1 of 2023, we reported revenue of $130,000,000 operating profit of $45,000,000 operator and net income was $40,000,000 or $0.83 per diluted share. Macro uncertainties continue to linger and weigh on near term demand. Operator. However, we remain confident in the long term growth path of OLEDs.

Speaker 2

In addition to the significant IT adoption cycle that is expected to commence next year, OLED activity is increasing in several segments of the consumer electronics landscape. Operator. Last month, Samsung Display announced a $3,100,000,000 investment to retrofit on its assigned plant to a Gen 8.6 OLED IT facility and it has been reported that other leading panel makers are planning to invest on new capacity as well. Fueling this new CapEx is a nascent OLED IT market. According to OMDIA Market Research, on 470,000,000 displays for IP products were shipped last year and only 9,100,000 units or 2% were OLED.

Speaker 2

OMVIA forecasts that due to leading OEMs broadening their adoption of OLED in their product portfolio, on the call. IT OLED panels will reach 12,900,000 units this year and will double to 25,400,000 units next year operator. And by 2028 OLED tablet and notebook panel shipments will reach 74,300,000 units. On. Foldables is another area of growth and excitement.

Speaker 2

DSCC forecasts that foldable smartphone shipments will increase 45% year over year in 2023 to 18,600,000 units. DSCC expects to see at least 37 different foldable models on the call today. We will be conducting a call to our call today. We will be conducting a call to our call today. We will be conducting a call to our call today.

Speaker 2

This is an increase from last year when there were 19 different foldable smartphone models from 7 different brands. IDC, another market research firm, projects a 5 year CAGR of 27.6 percent for foldable phone shipments on this call as units reached 48,100,000 units in 2027. Switching gears to automotive. According to OMVIA, the automotive industry has emerged as a key market for displays, becoming the 5th largest display application market in terms of shipments as of 2022. OMVIA forecast that shipments in the automotive OLED display market will serve to 6,900,000 units in 2027 from 770,000 units in 2022, on.

Speaker 2

Thanks to OLED display's rapid response rate, low power consumption, lightweight and slim design. In just the past 3 months, on Samsung Display signed an agreement with Ferrari to develop OLED displays for Ferrari's next generation models. LG Display is reportedly planning to supply a 30 inches OLED panel for electric car maker Lucid's upcoming models. Buick showcased its first electric SUV, the 2025 Electric E5 in China with a 30 inches curved OLED dashboard operator. And Hyundai Mobus developed the world's first 30 inches rollable OLED display for automotive applications.

Speaker 2

Operator. And for large area OLED panels, LG Display announced that we'll release a 77 inches on transparent OLED product by the end of this year and Samsung Display announced its hybrid QD OLED panel yield now exceeds 90%. We work closely with our customers as they map out their new product introductions for the coming years operator. And we are developing new OLED technologies and materials to support their product roadmaps. We have crafted a comprehensive approach for the invention of energy efficient, on high performing phosphorescent materials.

Speaker 2

This includes our machine learning, synthetic, mechanistic, analytical and process chemistry expertise, all created and driven by our global team of scientists, engineers and technicians. We are continuously discovering, developing and delivering next generation reds, greens, yellows and hosts operator to meet the ever changing and ever evolving specifications for energy efficiency, operational lifetime and color gamut. As a pioneer in the OLED ecosystem with approximately 3 decades of experience and know how, we are leveraging our 1st mover advantage and continue to be at the forefront of the OLED materials industry. With respect to Blue, we continue to make on. Excellent progress in our ongoing development work for our commercial phosphorescent blue emissive system.

Speaker 2

We continue to believe that we are on track to introduce on our all phosphorescent RGB stack into the commercial market in 2024. We believe that the introduction of our full suite on higher performance across a broad range of OLED applications. On the OVJP front, We are making advancements with our groundbreaking dry printing manufacturing process platform. 2 critical milestones that we are currently driving towards on the printing of all layers in the OLED device and achieving scaled print uniformity. We believe that achieving these milestones will be significant on their path to commercializing OVJP.

Speaker 2

To learn more about UDC, including our phosphorus and OLED and OVJP programs, operator. Please visit booth 828 at SID Display Week in Los Angeles later this month. Operator. Additionally, this afternoon, we announced the acquisition of Merck KGaA's phosphorescent emitter portfolio on a new multiyear collaboration agreement. The portfolio encompasses over 550 patents in 172 patent families operator and will complement and boost our strong global IP framework of more than 5,500 issued and pending patents.

Speaker 2

The new collaboration pertains to certain UDC green and yellow phosphorescent emitters for use with Merck KGaA's on transport and host materials to create advanced OLED stacks. On that note, let me turn the call over to Brian.

Speaker 3

Operator. Thank you, Steve. And again, thank you everyone for joining our call today. Looking at the Q1, our revenue was $130,000,000 compared to $150,000,000 in the Q1 of 2022. Results were in line with our expectations of a softer first half of the year compared to the second half.

Speaker 3

Our total material sales were $70,000,000 in the Q1 compared to material sales of $87,000,000 in the Q1 of 2022. Green emitter sales, which include our yellow green emitters, were $54,000,000 This compares to $66,000,000 in the first on the Q2. Red emitter sales were $16,000,000 This compares to $20,000,000 in the prior year's quarter. As it has been discussed in the past, material buying patterns can vary quarter to quarter. 1st quarter royalty and license fees were $55,000,000 compared to the prior year period of $60,000,000 Adesis' 1st quarter revenue was $5,000,000 an increase of $1,000,000 from the comparable period in 2022.

Speaker 3

1st quarter cost of sales in 20232022 were both $33,000,000 on this. This translates into total gross margins of 75% in the Q1 of 2023 compared to 78% in the Q1 of 2022. Cost of OLED material sales in the Q1 of 2023 were $29,000,000 translating into material gross margins of 58%. This compares to $30,000,000 and material gross margins of 65% in the Q1 of 2022. Impacting Q1 gross margins was a $3,300,000 increase in our inventory provision and $4,700,000 related to the underutilization of our new on the Q1 of the Q1 of 2019.

Speaker 3

The combined impact of these items is approximately 6% to total gross margins. 1st quarter operating expenses, excluding cost of sales were $52,000,000 In the Q1 of 2022, it was $55,000,000 The year over year decrease is primarily due to lower stock based compensation expense and the Fuji film patents becoming fully amortized in July of last year. We continue to expect 2023 OpEx to increase 5% to 10% year over year as we continue to invest in our people, in our Global Infrastructure and in our Innovation Engine. Operating income was $45,000,000 in the 1st quarter, translating into operating margin of 35%. This compares to the prior year period of $62,000,000 and operating margin of 41%.

Speaker 3

The income tax rate was 23% in the Q1 of 2023. We expect our tax rate for the year to be approximately 22%. 1st quarter 2023 net income was $40,000,000 or $0.83 per diluted share. This compares to $50,000,000 or $1.05 per diluted share in in the comparable period in 2022. We ended the quarter with approximately $845,000,000 in cash, cash equivalents and investments.

Speaker 3

Regarding guidance, we are reaffirming our expectation that 2023 revenues will be in the range of $550,000,000 to $600,000,000 and lastly, our Board of Directors approved a $0.35 quarterly dividend, which will be paid on June 30, 2023 to stockholders of record as of the close of business on June 16, 2023. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders. With that, I'll turn the call back to Steve.

Speaker 2

Thanks, Brian. Energy efficiency and sustainability are key foundational elements in UGC's core competencies. Our patented and award winning phosphorescent OLED technology and universal OLED materials can enhance the performance of displays and lighting products, on providing real power saving advantages for longer battery operation and portable electronics and less energy consumption on larger displays and lighting products. In our recently published 2022 Corporate Social Responsibility Report, operator, which can be found on our website. We estimate that our phosphorescent technology and materials in OLED smartphones on saves more than 860,000 metric tons of carbon dioxide equivalent per year.

Speaker 2

Using an EPA calculator, this is comparable to carbon sequestered by more than 14,000,000 tree seedlings grown for 10 years. In addition to the continuous generation to generation improvements in our red and green phosphorescent materials,

Speaker 4

on the call. The introduction of our phosphorescent blue

Speaker 2

into the commercial market is expected to further increase energy efficiency and translate into added power savings, longer battery life, greater displays and lower panel temperature. We believe that our broadening phosphorescent portfolio will enable new product designs and applications and support our customer on sustainability initiatives driving growth for UDC and the OLED industry. And lastly, I would like to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long term growth and delivering cutting edge technologies and materials for the industry, for our customers and for our shareholders. And with that, operator, let's start the Q and A.

Operator

Thank you, Mr. Abramson. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question operator. Thank you.

Operator

Our first question is from Brian Lee with Goldman Sachs. Please proceed with your question.

Speaker 4

Hey, everyone. Thanks for taking the questions. Sorry, I jumped on late, so apologies if you already covered this. But did you sell And BOO Development for materials in the quarter, how much if you did and then how many customers, new account wise, were there

Speaker 3

Yes. Hey, Brian. Thanks for the question. So we did have sales Blue Materials, both host and emitter development sales in the period, a few $100,000 worth across a number of customers.

Speaker 4

Operator. Okay, great. And then second question just on the TV market. I know there's been a lot of back and forth in the press about LG and Samsung doing a deal on OLED panels for TVs. Maybe high level, can you speak to some of the implications that you see for the market and then also for UDC, any potential maybe to your internal views around the TV market this year given, if it's sort of go forward?

Speaker 4

Thanks, guys.

Speaker 2

Brian, as you know, we can't speak for our customers. We think the OLED TV market is great, OLED TVs operator. And the more Samsung and LG sell, the better it is for us.

Speaker 4

All right. Fair enough. I'll take the rest offline. Thank you.

Operator

Thank you. Our next question is from Krish Sankar with TD Cowen. Please proceed with your question.

Speaker 5

Hi, good afternoon. This is Steven calling on behalf of Krish. Thanks for taking my questions. First one if I could, Steve or for Brian. In terms of linearity in the Q1, can you talk about how on customer orders trended relative to your original expectations.

Speaker 5

And one point coming into this current quarter, how have your conversations with Customers been in and their sentiment, especially relative to any delays or push outs or positive in orders?

Speaker 3

Yes. Hey, Stephen. Nice, great question. So yes, in terms of the quarter, I mean, as we said in the release, it really did play out in line with our expectations. So there really wasn't Anything out of the ordinary that we saw in Q1 and the reaffirmation of guidance for the year is evidence that I think what we're seeing and hearing from customers for the rest of the year is also in line with those expectations and what we had originally planned.

Speaker 3

I think it's certainly expected to be a second half weighted story. We do expect the first half to be lighter, and I think you're seeing that in the Q1 result. But everything we're hearing from the customers is really consistent with where we were back in February as well.

Speaker 5

Okay. Got it. And just as my follow-up, Brian, just wondering about inventory days. So I know things like the dollar levels and also inventory days came down a little bit this quarter. But just

Speaker 6

in terms

Speaker 5

of big picture conceptually, your inventory days have been well above 12 months for a number of quarters now. And I guess just kind of looking back historically, the last time there was a big step up from I think the roughly 9 month February range to above 12 months was back in 2017 when premium smartphone started to adopt OLED panels. Operator. And so I guess my question is, the higher inventory days that you guys are running at, should we expect that to go back down towards the 12 month mark over time as As demand recovers or is there a structural change in your demand profile from customers because of TVs and I keep going forward where we should expect inventory days to maybe stay in this 12 to 16 month type of range. Thanks.

Speaker 3

Yes. So on inventory, there's really kind of 2 main drivers there for the increase you've seen in recent periods. The first being in our raw materials inventory, which is where The bulk of the increase has been. We have iridium, which is a key raw material for us and is included in a number of our materials. And so we have been building a strategic stockpile of that.

Speaker 3

We feel comfortable with the quantities of iridium that we have on hand, but that's been some of what you've seen in the increased dollar value in the last few years. Also on the finished goods side, we're a sole source supplier for our customers. So we need to make sure that we have the quantities on hand to meet their demands. But the increases that you've seen on that side have not been Certainly because of anything specific we're hearing from the customers, but more just our own planning. But we're always making sure that we're being disciplined and not getting too far ahead of the demand curve there and how we build up our supply.

Speaker 4

Great. Thank you.

Operator

Operator. Thank you. Our next question is from Sidney Ho with Deutsche Bank. Please proceed with your question.

Speaker 7

Thank you. I got a couple of questions. First one is on the acquisition of Merck's patent portfolio. Can you walk us through what you get that is not already covered by your IP portfolio? Does that accelerate your product development, let's say, the blue emitters?

Speaker 7

Or does that mean going forward you will be more active in selling host materials or just kind of strengthen your royalty and licensing business?

Speaker 2

This is really to expand and buttress our patent portfolio, our emitter patent portfolio. So we clearly have the leading position in phosphorescent amends. And when Merck's Patent portfolio became available. We felt it was a very good addition to our portfolio and it will broaden the tools at our team's disposal as we develop new and next generation phosphorescent materials and continue to build upon our industry leading position.

Speaker 7

Okay. That's fair. The second question is, if I noticed that for Q1, The revenue outside your 2 top customers are now 44% of total revenue, which seems like the highest that I can remember. Can you talk about the breadth of that revenue stream? And do you have any concerns that there is a lot of excess inventory at those customers, Especially given the persisting weakness we've been hearing from Chinese handset OEMs.

Speaker 7

Thanks.

Speaker 3

Yes. We continue we have a number of customers as you know beyond the top 2 and we've seen those entities continue to increase their share with us over on period. So, nothing really specific. I think there's also variability in our customers' buying patterns quarter to quarter that also contributes Some periods, the top 2 may be a little less than others, but it's not a structural change in our view. It's just kind of a little bit of a one off, I think, that you're seeing in Q1.

Speaker 7

Okay. Thank you.

Operator

Thanks. Operator. Thank you. Our next question is from Mehdi Hosseini with SIG. Please proceed with your question.

Speaker 8

Yes. Thanks for taking my question. A follow-up to the Merck topic. Should I take this patent acquisition as a sign that you are renewing efforts to drive revenue from the host and if not, then what's the main objective here?

Speaker 2

No, it's not we're not renewing efforts on the host. This is an emitter portfolio acquisition. It was basically to provide our team with additional pathways so that we can develop future materials, broader materials for our customers, for the industry and accelerate the ecosystem.

Speaker 8

Okay, got it. And I'm assuming that Yvonne, The acquisition of patents won't have any near term impact on your financials there? No, it was a $66,000,000

Speaker 3

purchase price. So we've that cash outflow has occurred, and we'll be amortizing that over a 10 year period. So there'll be roughly $6,000,000 of annual expense going forward.

Speaker 8

Okay. All right. And then just it's very encouraging to hear that you actually are recognizing emitter revenue or I'm sorry, blue emitter revenue. Should I assume that couple of $100,000 a quarter of revenue is enough for your customers to And your customers' customers develop the required semiconductor components to qualify the panels or would you have to sell them more as they retool and prepare for high volume manufacturing next year?

Speaker 3

Yes. So in terms of the quantities of Blue, it is an increasing quantity. I think what we sold in Q1, dollar wise is pretty similar to what sold for all of last year. So it has increased in Q1. I think those quantities certainly will increase somewhat as we get closer to a commercialization, but We feel comfortable with the 2024 us having commercial material available next year and the timelines and I feel comfortable with the pace that we're making with that as well as what we're hearing from our customers.

Speaker 8

Okay. I guess what I'm trying to better understand is if there is a lagging effect between the volume shipment from you to your customer and

Speaker 4

I

Speaker 3

operator. I mean, I think there certainly would be there's just kind of playing out the sequencing. Our customers, we need to do build panels, feel comfortable with the performance of those and then have conversations with theirs. So I think that there'll be increasing activity as we approach commercialization or commercial launch of a panel with our blue phosphorescent material in it.

Speaker 8

Okay. Thank you.

Speaker 3

Thanks.

Speaker 4

Operator.

Operator

Thank you. Our next question is from Nam Kim with Arete Research. Please proceed with your question.

Speaker 9

Hi, thank you for taking my question. Sorry, quick clarification on Mark, your IP acquisition Again, you just said you will enhance emitter patent portfolio. You also said in prepared remarks, And I also remember Mark used to supply HTL layer to for one of your customer. So I just wonder you are interested entering into any other OLED material business like HTL other than current EML layer business?

Speaker 2

No, Nam. This is just an Emitter acquisition.

Speaker 3

Yes, the collaboration agreement that we announced today as well in the release that we put out. That's focused on collaborating with Merck and providing our emitters so they can use those in their development of host and transport layers.

Speaker 9

Okay. Another question. I think none of your customer signed a contract on Blue yet obviously is not available commercially today. Should we expect additional royalty and licensing income on on behalf of additional material revenue and you have a commercial ramp on Blue next year. I just wonder if there will be any financial implication on additional licensing contract on Blue

Speaker 3

Certainly, our portfolio license agreements that do include Blue and certain customers specifically, our contract with Samsung or license agreement with Samsung Excludes Blue. So it just kind of depends on a customer to customer basis whether there is an incremental opportunity there.

Operator

Okay, makes sense. Thank you.

Speaker 4

Thanks.

Operator

A confirmation tone will indicate your line is in the question queue. Our next question is from Jim Ricchiuti with Needham and Company. Please proceed with your question.

Speaker 10

Hi, good afternoon. This is actually Chris Gringa on for Jim. With respect to the cost materials, could you just elaborate on the puts and takes there, on particularly the inventory charge. And how should we be thinking about the cadence of on the impact of the Shannon facility as we go through the year. Thank you.

Speaker 3

Thanks, Chris. So on the inventory charge, we did record a $3,300,000 inventory provision in Q1. And That was really each quarter we have to take a look at our sales plan and in the quantities we have on hand. And as we did that this period, there were certain materials that we had excess quantities up and just to provide for us. So that's really a composition of that.

Speaker 3

It's something we have to do every quarter. Sometimes it's a really small number or no number. This quarter it happened to be $3,000,000 And then as it relates to Shannon, we had $4,700,000 in Q1 of underutilization. That's slightly higher than the run rate that we had last year. Operator.

Speaker 3

I think as we've worked with the team, I think there's going to be a slight uptick, maybe slightly more than $1,000,000 of underutilization costs this year, but still more or less in that ballpark of what we previously disclosed.

Speaker 8

And it

Speaker 3

should be pretty linear in terms of cadence over the year, at slightly more than $1,000,000 per month.

Speaker 10

Thank you very much. And you spoke about on the investments that you're seeing and the secular tailwinds, particularly in IT. I guess what else are you seeing that gives you confidence that you're going to see an acceleration in the back half of the year to achieve the guidance.

Speaker 3

Yes. I think it's a lot of it is what you hear from our customers in terms of the expectation that the second half of the year is going to be Better than the first half, so I think a lot of what we're saying is an echo of others in the ecosystem, which is also informed by our forecast information that we get from our field teams and our customers in terms of what they're seeing and expecting and planning for. And also some of that has to do with product launch cycles that are planned for the second half of the year, Which also demand additional quantities and material to meet those launches. So there's a number of factors that we're monitoring, but All that kind of informs the reaffirmation of our guidance range.

Speaker 10

Great. Operator. And just one more, if I may, on Merck. Are the emitters broadly relevant to consumer electronics generally or is there any particular typology or size that those emitters that newly acquired portfolio of he would be more or less relevant to.

Speaker 2

Well, we've been working in this field for a long time and then a lot of really smart people working on it. So, I would say it's broadly applicable across the board.

Speaker 10

Got it. Thanks very much.

Speaker 2

Thank you.

Operator

Thank you. Our next question is from Martin Yang with Oppenheimer. Please proceed with your question.

Speaker 6

Hi, thank you for taking my question. I dropped off

Speaker 3

for the last couple of

Speaker 6

minutes, so sorry If this has been asked before, can you remind us your expected ratio between material and royalty sales for the year?

Speaker 3

Yes. Hi, Martin. So we're expecting 1.5 to 1, so 1.5 materials to 1 royalty license.

Speaker 6

Got it. Thank you. Second question is on your license agreement with Samsung, it seems that you have eliminated language around minimal purchase agreements on the new material supply agreement that you entered since late last year. Can you confirm and also maybe comment on how that impacts your revenue recognition and cash flow going forward.

Speaker 3

Yes. So there's no change in terms of the structure of the contract with respect to minimum requirements from the old agreement to the new ones, that's completely unchanged. So if there's a wording change, it's just a nuance on our side as opposed to anything structural in the contracts.

Speaker 6

Got it. So can you maybe clarify on how going forward the revenue recognition, can will it attract a bit more closely with cash flows?

Speaker 3

Yes. So the revenue model is exactly the same and that we have to look at or recognize on a per unit basis as we ship material, both The material revenues as well as the royalty and license revenues and that's based on estimates of contract purchases over the full term. The payment structure is slightly different in the new contract as opposed to the former. The prior contract had quarterly payments And this contract has both quarterly and annual payments. Obviously, we can't go into the depths of the details on how those are calculated, but There is just a different payment structure that makes us feel like revenue recognition and cash collection should be much more closely correlated in this next this current contract.

Speaker 8

Got it. Thank you.

Speaker 4

Thanks.

Operator

Thank you. This concludes the question and answer session. I would like to turn the program back to Brian Millard for any closing comments.

Speaker 3

Thank you for your time today. We appreciate your interest and support.

Operator

This concludes today's conference call. You may now

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