Universal Display Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 22, 2024

There are 11 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Universal Display Corporation's 4th Quarter and Full Year 2023 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Dary Slough, Senior Director of Investor Relations. Please proceed.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to Universal Display's 4th quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer and Brian Millard, Vice President and Chief Financial Officer. Before Steve begins, let me remind you today's call is a 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 strictly prohibited.

Speaker 1

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 that is accurate only as of the date of the live webcast of this call, February 22, 2024. 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, and our actual results may differ materially. 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.

Speaker 1

Universal Display disclaims any obligation to update any of these statements. Now, I would like to turn the call over to Steve Abramson.

Speaker 2

Thanks, Darris, and welcome to everyone on today's call. We'll begin with a recap of 2023 and then provide insights into the vast array of opportunities that are fueling our and the OLED market's strong trajectory. Our 2023 revenue was $576,000,000 operating income was $217,000,000 and net income was $203,000,000 or $4.24 per diluted share. 4th quarter revenue was $158,000,000 operating income was $65,000,000 and net income was $62,000,000 or $1.29 per diluted share. While soft consumer spending in the smartphone and premium TV markets tempered our 2023 financial results, we continue to foster our strong partnerships, advance our strategic and operational initiatives, enhance our corporate culture and fortify our leadership position in the OLED ecosystem.

Speaker 2

During the year, we announced new long term multi year agreements with BOE Technology Group. We celebrated the grand opening of our new manufacturing site in Shannon, Ireland. This site broadens our global footprint and is designed to produce red, green and blue phosphorescent emissive materials. We further enhanced our global IP framework with the acquisition of Merck KGaA's phosphorescent emitter portfolio of more than 550 patents and 172 patent families. 2023 was also another year of continued recognition for our company.

Speaker 2

We were named to the Wall Street Journal's list of best managed companies, recognized by Newsweek as one of America's Greenest Companies, awarded a silver rating for corporate social responsibility from ecovatus and recognized again by the form of executive women as a champion of board diversity. As a pioneer and leader, we are at the forefront of energy efficient OLED material solutions and best in class enabling OLED technologies. We continue to make excellent progress in our ongoing development work for commercial phosphorescent blue emissive system. We continue to believe that we are on track to introduce a phosphorescent blue that meets commercial specifications into the market in 2024. We believe the expansion of our phosphorescent portfolio that includes red, green and blue phosphorescent emissive materials will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications.

Speaker 2

We also achieved multiple OVJP milestones during the year, including the printing of the world's first ever high resolution RGB side by side full led stack with comparable performance to vacuum thermal evaporation. Looking ahead to 2024 and beyond, we anticipate growth as we capitalize on the investments we're making and the extensive range of opportunities that lie before us, including the commencement of an OLED IT adoption cycle further penetration in the smartphone market, including the rise of foldables OLED TV growth, the burgeoning OLED automotive market as well as ARVR, wearables, gaming and signage. We are well positioned to enable the continued proliferation of OLEDs across the consumer landscape and to drive value for our customers. Market research firm, Omdia, foresees OLED growth in multiple consumer electronic markets in the coming years and forecast that smartphone OLED panel shipments will increase to 855,000,000 units in 2,030 with a CAGR of 5% from 2023 as more mid range phone OEMs design OLED as a preferred display of choice. We estimate that OLED penetration in the smartphone market will increase from today's approximately 50% to 65% in 2,030.

Speaker 2

For foldable smartphones, TrendForce forecast that shipments will increase from 18,300,000 units in 2023 to approximately 70,000,000 units in 2027, capturing about 5% of the smartphone market. According to OMDIA, OLED tablet shipments are expected to reach 32,000,000 units in 2,030 for a CAGR of 37%. OLED notebooks are expected to increase to 58,000,000 units in 2,030 for a CAGR of 51%. We have already seen brands like Samsung, Lenovo, HP, Dell, Asus and Xiaomi adopt OLED into their PC product portfolio and we expect the trend to continue. OLEDs make up an estimated 2% of today's global PC and tablet market, but by 2,030 that penetration rate is expected to increase to approximately 20%.

Speaker 2

Note that this does not include OLED monitors, which are currently less than 1% of the PC monitor market. OMDIA forecast that OLED monitor units will grow from less than 1,000,000 units in 2023 to close to 5,000,000 units in 2,030. OEMs increasing interest in OLED monitors were evident at last month's CES, where there was a strong shelling of new OLED monitors, including a number of models geared for gaming. In the OLED TV market, AMD is forecasting 12,000,000 units in 2,030 for a CAGR of 11% or approaching an estimated 6% penetration of the TV market. The automotive OLED market is a nascent opportunity where momentum is beginning to build.

Speaker 2

Continental Automotive notes that in addition to being aesthetically pleasing to users because of the brilliant deep black background for contrast, impressive white color space, a 180 degree viewing angle and slim design, OLED displays are also highly sustainable and energy saving. OMDIA forecast that OLED shipments for the automotive market will increase to 13,000,000 units in 2,030 for a CAGR of 42%. OLEDs are also being designed as car taillights. During CES, OLED Works showcased its latest OLED lighting technology for the automotive industry. From an OLED capacity standpoint, the proliferation of OLEDs in these diverse market verticals is expected to drive utilization rates up and prompt new OLED capacity to be built.

Speaker 2

We estimate that 2023 installed base of OLED square meter capacity increased by approximately 11% over year end 2021 as a soft macro weight on installed plants. Market research firm DSCC estimates that OLED utilization rates were an average 57% in 2023. As we look out, we estimate that year end 2025 installed OLED capacity as measured in square meters will increase by approximately 10% over year end 2023. This forecast includes Samsung's $3,000,000,000 investment in the first phase of BOE's $9,000,000,000 investment for the respective new Gen 8.6 IT fabs. These new plants are slated to begin production in 2026.

Speaker 2

We believe that we are embarking on an exciting new multiyear CapEx cycle and anticipate additional new OLED fab investment announcements. And on that note, let me turn the call over to Brian.

Speaker 3

Thank you, Steve. And again, thank you everyone for joining our call today. Let me review our 2023 results before commenting on our guidance for 2024. 2023 revenue was $576,000,000 a decrease of 7% year over year. Material sales were $322,000,000 Royalty and license revenues were $238,000,000 and Adesis revenues were $16,000,000 Our 2023 revenues included a cumulative catch up adjustment of $11,000,000 compared to $30,000,000 in 2022.

Speaker 3

2023 gross margins were 77% for the year compared to 79% in 2022. 2023 operating expenses were $224,000,000 compared to $222,000,000 in 2022. During the year, we continue to invest in a number of operational and strategic programs, including our phosphorescent admissive materials and OLED technologies, our groundbreaking OVJP manufacturing platform, growing our global team and expanding our infrastructure, including the purchase of our Shannon manufacturing site as well as investments in our Asia footprint and R and D Innovation Center. Our 2023 operating income was $217,000,000 which translates into operating margins of 38%. 2023 net income was $203,000,000 or $4.24 per diluted share.

Speaker 3

We ended the year with $800,000,000 in cash, cash equivalents and investments. Now moving on to our Q4 results. Revenue for the Q4 of 2023 was $158,000,000 down 6% from $169,000,000 in the Q4 of 2022. Q4 2023 revenue includes a cumulative catch up adjustment of $5,000,000 compared to $13,000,000 in Q4 of 2022. Material sales were $82,000,000 in the quarter compared to $88,000,000 in the Q4 of 2022.

Speaker 3

Green emitter sales, which include our yellow green emitters, were $63,000,000 in the Q4 of 2023, which compares to $67,000,000 in the Q4 of 2022. Red emitter sales were $18,000,000 which compares to $22,000,000 in the Q4 of 2022. As we have discussed in the past, material buying patterns can vary quarter to quarter. 4th quarter royalty and license fees were $73,000,000 which compared to the prior year period of $76,000,000 Adesis revenue for the Q4 of 2023 was $3,200,000 compared to $5,100,000 in the Q4 of 2022. 4th quarter cost of sales was $36,000,000 translating into total gross margins of 77%.

Speaker 3

This compares to $30,000,000 and total gross margins of 82% in the Q4 of 2022. 4th quarter gross margins decreased primarily due to the change in cumulative catch up adjustments between periods and customer mix. 4th quarter operating expenses excluding cost of sales were $58,000,000 This compares to $56,000,000 in the Q4 of 2022. Operating income was $65,000,000 in the Q4 of 2023, translating into operating margin of 41%. This compares to the prior year period of $83,000,000 and operating margin of 49%.

Speaker 3

The Q4 2023 income tax rate was 18%. Net income for the Q4 was $62,000,000 or $1.29 per diluted share. This compares to the Q4 of 2022's $65,000,000 or $1.36 per diluted share. Now turning to our outlook. Looking to 2024, as Steve mentioned, there are a number of key growth drivers for the OLED industry and for us.

Speaker 3

We expect our 2024 revenues to be in the range of $625,000,000 to $675,000,000 We estimate that our 2024 ratio of materials to royalty and licensing revenues will be in the ballpark of 1.5:one. Total gross margins are expected to be approximately in the range of 76% to 77%. Operating expenses are expected to increase by 10% to 15% year over year with R and D and SG and A both expected to be up by 10% to 15%. 2024 operating margins are expected to be in the range of 35% to 40%. We expect the effective tax rate for 2024 to be approximately 20%.

Speaker 3

And lastly, we are pleased to announce that the Board of Directors has approved an increase to our quarterly cash dividend. A dividend payment of $0.40 per share will be paid on March 29, 2024 to stockholders of record as of the close of business on March 15, 2024. The dividend increase reflects the confidence in our robust future growth opportunities, 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. We believe that we are well positioned for long term market leadership and long term profitability in the growing OLED market. With our extensive experience and unwavering focus on innovation and execution, we are pushing the boundaries of what's possible, driving forward breakthroughs and advancements in our phosphorescent material and OLED technology roadmaps, fostering a corporate culture of inventiveness, integrity, inclusion and collaboration and are building on our robust first mover position in the OLED ecosystem. As we approach the 30th anniversary of UDC's founding, we are excited to reach even greater heights in the future and continue to make a lasting impact in the industry. 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.

Speaker 2

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

Speaker 4

Hey, good afternoon, everyone. Thanks for taking the questions.

Speaker 5

I had a question,

Speaker 4

I guess, just on the Blue commercialization trajectory that sounds like it's on track with your targets for sometime this year. Can you kind of give us a sense of 2024, it seems like a pretty critical year in terms of the blue becoming a bigger part of your business model going forward. What are some of the milestones, targets you'd like to achieve this year beyond just hitting commercial specs? So would that include like a contract with the customer?

Speaker 3

Performance of our blue material. We've seen over the course of last year continued performance each generation of material that we've introduced to our customers. So we're on the right path. We feel very confident with the But I think it's really continuing to improve upon those performance specifications. There's as you said, there's contracting details and pricing details, but we're confident that at the time those need to be sorted out, they will.

Speaker 4

Okay, fair enough. And then just embedded in your guidance, I know it's still a wide range, $25,000,000 to $675,000,000 Presumably, you're not embedding a lot of Blue revenue in that guidance range. Is that fair? And is I mean, are you even assuming any growth off the kind of high single digit millions of revenue you did in Blue for 2023. Any growth at all in your guidance embedded for Blue for 2024?

Speaker 3

There is growth assumed in Blue Development. We had $5,600,000 in revenues in 2023, and we do expect growth off of that number in 2024. But as you said, it's not a significant component of our guidance overall.

Speaker 4

Okay, great. And then last one for me, I'll pass it on. I might have missed it, but the two questions on gross margin. I guess, Brian, can you kind of walk us through the mechanics of how the $5,000,000 catch up revenue in the quarter impacts the gross margin reported by as much as it did? And then secondly, presumably, it wouldn't continue to repeat unless you have catch up revenue later in this year.

Speaker 4

So what sort of the targeted range of gross margin for materials we should expect in 2024?

Speaker 3

Yes. Good questions. Our 2024 guidance that we just stated on in our prepared remarks was 76% to 77% for total gross margin. So that assumes essentially 0 cumulative catch up revenue. And so there was a period over period flip in cumulative catch up revenue between 20222023.

Speaker 3

And as you said, in Q4 of 2023, we did have $5,000,000 of cumulative catch up revenue. And so those are the pieces to think about.

Speaker 4

All right, fair enough. Thanks a lot.

Speaker 3

Thanks.

Operator

Our next question is from Chris Hadar with TD Cowen. Please proceed.

Speaker 6

Yes. Hi. Thanks for taking my question. I have a couple of them. Brian, I'm just curious on your gross margin guidance.

Speaker 6

If I look at it over the last few years, your gross margin has been kind of like, I would say, has been coming down. Is this a function of some of your Chinese customers' yields getting better? Or is there something else going on? Why is gross margin more in the mid to high 70s versus historically been well above that?

Speaker 3

Yes. Hi, Krish. So on gross margin, there's a couple of factors at play. One is from a top line perspective, as we sell more units of material to our customers, there's volume pricing dynamics incorporated in each of our customer contracts. So, some of it is just the fact that as the industry grows, we're selling more volume.

Speaker 3

The per unit price does come down just based on those volume pricing dynamics, as well as some of our materials are more becoming more complex in nature. So some of the cost structure elements are also changing. So that's I think some of what you've seen over the last few periods is really as the industry scales and we scale with it, there has been a slight pressure on gross margin. But it's something we spend a lot of time as a management team focusing on both the top line aspects as well as the cost structure and making sure that we're being as disciplined as we possibly can.

Speaker 6

Got it. Got it, Brian. And then one other question, just want to follow-up. I understand the visibility is limited, but your spread in your FY 'twenty four revenue guide is a growth of 8% to 17%. Is it a bit to help us understand the puts and takes like what is baked into the lower end versus what is baked into the upper end or in the $50,000,000 dollars what could surprise us?

Speaker 3

Yes. I mean, I think we obviously have a base case that assumes growth across a number of segments. We certainly expect the IT segment to grow in 2024 based on some of the factors that play there as well as TV, mobile and automotive and others. So it's kind of across the board growth that we're projecting and I think the high side and the low side of that are really just based on potential other factors that might cause things to vary.

Speaker 6

Thanks, guys.

Speaker 3

Thank you.

Operator

Our next question is from Atif Malik with Citi. Please proceed.

Speaker 7

Hi. Thank you for taking my questions. I have a question on the full year guide. If I look at your high end of the guide, it's still below the high teens OLED materials growth that some third parties like DSCCR projecting. So I'm wondering if you can pull the curtain a little bit on what goes into your guide and why is it below the industry growth for OLED materials and are you just being conservative?

Speaker 3

Yes. So I wouldn't say there's necessarily conservatism baked into our forecast. We think it's a balanced guidance range and balanced forecast that we have. So it's really based on the feedback that we get from our customers in terms of what their expected demand is going to be as well as we look at the similar industry reports as you in terms of where the industry is going and also layer that intelligence on top of what we're hearing from our customers and our teams in the field. So when we kind of rolled all that up this year, we got to the range that we published in terms of our guidance for 24.

Speaker 3

We certainly hope you're right and it's higher, but at this point, this is what we're seeing as we roll up our forecast from our field teams.

Speaker 7

Great. And as my follow-up, we hear noise around some of your Chinese customers working with domestic private companies like Summer Sprout Technology and Changxi. And I understand you guys have long term agreements with your Chinese customers. But can you just talk about the competitive dynamics in China? And is there a risk of some of these domestic suppliers getting qualified?

Speaker 2

Well, we are seeing some localization coming from the Chinese government. They're trying to get some localization in the OLED industry.

Speaker 8

But

Speaker 2

what we're seeing is that customers want our full suite of current and next generation OLED materials and technology solutions, which is one of the reasons why all these major panel makers are working with us and have signed long term agreements because we work closely with our customers to understand all the specification requirements that they have today and into the future.

Speaker 7

Thanks, Steve.

Operator

Our next question is from Nam Kim with Acrete Research. Please proceed.

Speaker 8

Hi, thank you for taking my question. Couple of questions on Blue. Can you also explain rough timing of your commercial production this year? And also do you expect customer qualification to kick off this year or next year? And then I also wonder, do you expect your blue material to be adopted in IT first or

Speaker 3

commercialization timeline, I think our team is really focused right now on making sure that we continue to increase the performance of our material and get closer to those commercial specifications. We're again, as I said earlier, very pleased with the progress that we've made to date, continue to feel like we're moving in the right direction. In terms of when our customers may introduce that into their product portfolios, that's really up for them to determine, but we continue to feel like we're moving much closer toward the mark that our material will be considered commercial performance. So I think that's kind of as much as I can say at this point based on where things sit.

Speaker 8

Okay. And then I see some momentum picking up in China because Chinese OLED suppliers increasing their production for local smartphone vendor. Can you share your view on Chinese business? How much growth do you expect from Chinese customer this year versus last year? Thank

Speaker 3

you. Yes. So we're certainly projecting growth. We as Steve just mentioned, we have long standing partnerships with our customers in China. We provide best in class materials to our customers.

Speaker 3

Also with the next gen platforms as well as access to our current materials, we think that there is a strong partnership between us and our Chinese customers that we expect to be long standing.

Speaker 8

Okay. Okay. Thank you.

Speaker 3

Thanks.

Operator

Our next question is from Jim Ricchiuti with Needham and Company. Please proceed.

Speaker 9

Hi. This is Chris Greng on for Jim. Did you I'm sorry, I cut out earlier, but did you mention any progress updates with respect to discussions you're having around OVJP with potential partners?

Speaker 3

We did not, but as we've talked about previously, we're certainly open to partnerships with OVJP that could help us advance the project forward. We continue to believe that OVJP is the solution for large area television, large area displays on TV sized. And so we're open to various discussions and have had it and continue to have various discussions with potential partners.

Speaker 9

Got it. And SG and A stepped down sequentially in year over year, could you provide any color on that?

Speaker 3

Sure. The biggest factor there is for the first half of twenty twenty two before we operationalized our Shannon site, we were recording the cost of that site to SG and A for the first half of twenty twenty two and that was around $5,000,000 And then so from mid-twenty 2 onward, those costs are classified in cost of sales. The other factor is we had some reduced stock compensation expenses year over year that are flowing through SG and A. Those are the 2 largest factors that are contributing to the decrease.

Speaker 9

Got it. Thank you. And maybe just one more sort of bigger picture. With the recent launch of Apple's device, the Apple Vision and the proliferation of some use case videos showing screens plastered and augmented reality across all the surfaces in the household, it would strike me as potentially a potential to display some maybe TV and even leapfrog some of the IT use cases for OLED. I'm curious I mean, it's early days, of course, but I'm just curious if you had any exposure to these devices or similar devices and if there's any concern whatsoever that it would pose risks to some of the growth rates that were cited earlier?

Speaker 2

We're watching the ARVR market. We find it very interesting. We don't think it's going to take market share away from any of the other panel makers. We think that there's many, many displays, many, many people and everybody wants displays in various ways for various use cases and they all seem the ones who use OLEDs in it. So we see the market growing ARVR is yet again an additional market that's going to grow and expand the market opportunities.

Speaker 2

We don't really think it's going to take any market share away from anybody else.

Speaker 9

Thank you very much.

Operator

Our next question is from Nida Hosseini with SIG. Please proceed.

Speaker 10

Yes. Thanks for taking my question. I apologize if I'm going to be repeating questions already asked. I joined the call late. For one follow-up for Steve and one for Brian.

Speaker 10

Steve, how should I think about the dynamics of your conversation with key customers, especially as Blue becomes commercially viable? I understand that there needs to be additional contracts to be signed. So what are the key catalysts or milestones that would trigger or help you with getting customers' commitment by signing the contract for the brewing supply? And I have a follow-up.

Speaker 3

Sure. Thanks, Mehdi. So on Blue and supply of Blue, we, as you said, don't have commercial pricing schemes in place with any of our customers at this point for Blue. And we at the point that we need those in place to be supplying them commercial quantities, we're confident that we'll be able to get there. And we've had varying levels of discussion with certain customers on that at this stage.

Speaker 3

And so I think that that's really the key thing is that once we get to the point where we need to have commercial pricing in place, it will be in place, but we're just not there yet since we don't yet have the commercial specification performance.

Speaker 10

Okay. And Brian, did you discuss how much of R and D Blue was recognized? Was there any revenue recognized in the quarter?

Speaker 3

Yes. So there was $1,300,000 in Q4 and 5 point $6,000,000 for full year 2023 of Blue developmental sales.

Speaker 10

Got it. And then just a quick follow-up for you. How should I model the OpEx in 2024 relative to 2023 OpEx growth?

Speaker 3

Yes. In my prepared remarks, I referenced a 10% to 15% increase in OpEx year over year. So that's the best modeling assumption for now. Okay. Thank you.

Speaker 3

Thanks.

Operator

Our next question is from Martin Yang with Oppenheimer and Company. Please proceed.

Speaker 5

Hi, good afternoon. Thank you for taking my question. If we adjust for the catch up payments on revenues, did material revenues still decline year over year in 2023? If so, what are the key factors that contributed to that year over decline?

Speaker 3

Hey, Martin. So the majority of the cumulative catch up adjustments actually flow through our royalty and license line, not our material sales line. So that wouldn't necessarily be the way to adjust for it.

Speaker 5

Got it. What are the key drivers for the year over declining material sales in 2023?

Speaker 3

Well, we had relatively flat volumes. Our volumes were down less than 1% period over period, so you can call that flat. We had then the remainder would be some certain price differences, customer mix also coming into play and then that'll be offset by blue development sales, which were increased relative to 2022.

Speaker 5

Got it. Thank you, Brian. And did any top customers hit volume pricing milestones in 4Q?

Speaker 3

So the way we do price the way that we have to estimate pricing based on our revenue accounting model is we have to estimate over the full 5 year term what the pricing is going to be on an average basis based on volumes and revenues. So there were every quarter there are changes in our assumptions related to that. But in Q4, they were normal course changes and those changes in assumptions resulted in that $5,000,000 cumulative catch up that I referenced.

Speaker 5

Got it. Thank you. Last question is, is there any 10% customers in 4Q 2023 other than customer A, B and C?

Speaker 3

No, just those 3.

Speaker 5

Thank you very much. That's it for me.

Speaker 3

Thanks, Martin.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to Brian for closing comments.

Speaker 3

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

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Universal Display Q4 2023
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