Universal Display Corp \Pa\ Q1 FY2021 Earnings Call

Good day, ladies and gentlemen. Welcome to Universal Displays’ First Quarter 2021 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today’s call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

Thank you, and good afternoon, everyone. Welcome to Universal Display’s first quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Thanks, Darice, and welcome to everyone on today’s call. We are pleased to report that revenue in the first quarter of 2021 was $134 million, operating profit was $63.6 million and net income was $51.7 million or $1.08 per diluted share. Since our last earnings call, momentum in the OLED market continues to grow in small, medium and large consumer electronic applications. We are seeing a growing proliferation of OLED smartphones, ranging from premium and mid-range to low-end and foldable that have launched and are slated to be launched this year. OLED TV demand continues to rise. Omdia market research recently reported that the average price of a 55-inch OLED panel declined 8.1% year-over-year in the first quarter of 2021, while LCD panel prices increased 73.9% in the same period. As a result, the price delta between OLED and LCD TVs has further narrowed to $310 from $440. The OLED IT market is burgeoning with the launch of new products. Just last month, new OLED laptops including the Xiaomi Mi Laptop Pro 15 and Dell XPS 13 9310 were unveiled. And in the gaming market, there are reports that for the first time Nintendo has selected an OLED screen for the new Switch Pro due to OLED benefits of higher contrast and faster response times. The adoption of OLED continues to expand and is fueling the multi-year OLED CapEx growth cycle in which we are in. In March, Samsung Display announced it will aggressively expand its OLED presence in the gaming smartphone and laptop markets. Samsung noted that its OLED displays have valuable features befitting premium gaming content, such as fast response times, vibrant colors, and deep blacks.

Thank you, Steve, and again thank you everyone for joining our call today. Revenues for the first quarter of 2021 were $134 million compared to fourth quarter of 2020’s $141.5 million and Q1 2020’s $112.3 million. Our total materials sales were $79.8 million in the first quarter of 2021, compared to material sales of $62.5 million in the fourth quarter of 2020 and $66.6 million in the first quarter of 2020.

Thanks, Sid. Last month, we celebrated our 25th year as a NASDAQ listed company by virtually ringing the opening bell. It was an incredible milestone that we share with our employees, customers, partners, and all of our stakeholders. For 27 years, of which 25 years has been as a NASDAQ listed company, Universal Display Corporation has stood for vision, innovation, and reality. In 1994, our founder Sherwin Seligsohn learned about a novel technology called organic light-emitting diodes or OLED and foresaw its revolutionary path in the display and lighting landscape and so began Universal Display’s story. In 1996, when bulky CRTs were still in everyone’s homes, we took the company public with just a Princeton University research contract, no full-time employees, and one patent pending. It took us 17 years of breakthroughs, challenges, and triumphs to achieve our first profit in 2011, and we have been profitable ever since. Since our inception in 1994, we have invested approximately $700 million in research and development to advance our company from a startup to a leading player in the global OLED ecosystem, and we continue to invest heavily in a number of strategic OLED programs for our long-term growth. Our technologies and energy-efficient phosphorescent materials can be found in virtually every commercial OLED display and lighting product in the world. You can learn more about our phosphorescent technology, as well as our strong corporate stewardship and our recently published 2020 Corporate Social Responsibility Report, which can be found on our website. And finally, I would like to take this opportunity 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&A.

Thank you, Mr. Abramson. Our first question is from Brian Lee with Goldman Sachs. Please proceed.

Hey, everyone. Thanks for taking the questions. Kudos on the solid quarter here. I guess, in terms of guidance, just trying to understand a little bit about the thought process in reiterating guidance. You just did $134 million in Q1 revenue. So you are basically implying flat revenue for the next three quarters to get to the low end of guidance, maybe $140 million a quarter to get to the high end and we have typically seen Q1 be on the low end of revenue seasonally for you outside of inventory build period. So I guess the question is, is the guidance embedding a lot of conservatism here, is it due to supply chain risk or is there something about Q1 results that maybe aren’t going to flow through into higher growth in the next few quarters like we typically see, so just trying to reconcile a bit here.

This is Steve. My line’s okay. Is it muted?

I am sorry, is that better?

There you go. There you go.

So, Brian, regarding our guidance for the year, we believe that the range of $530 million to $560 million is what we expect. While the calculations may not seem to align perfectly, as mentioned in our previous call, we anticipate the second half to outperform the first half. However, the ongoing pandemic has caused supply chain issues, including with some semiconductors, so we believe it’s best to stick with our current guidance, which we are comfortable with.

Okay, just to clarify, there’s nothing particularly unusual about the Q1 pull-forward or inventory builds like we've observed in certain periods over the past few years. It seems there’s nothing noteworthy regarding the demand patterns you experienced in the quarter?

No. There’s nothing in there, I mean, historically, as you have seen, quarter-by-quarter, it can be lumpy by customer. And as you can see in this quarter with Chinese customers being higher versus last quarter.

Fair enough. And then last one for me also on the guidance and I will pass it on. Gross margin 74% of materials, I know it’s going to be lumpy and bounce around. It’s proven to be that way just if you look at Q4 to the Q1 progression. But coming into the year, it sounded like you had a bit more muted view on what the gross margin result would be for materials in 2021 versus historical and then you come right out and you are back to the historical level, so any thoughts or changes in thoughts around the gross margins that you could achieve on materials for the year?

No. Obviously, our gross margins were, as we stated, dependent upon our product mix, and this quarter’s product mix really translated into above the 70% gross margin range. We still think that for the year, it’s going to be 65% to 70%. And as we talked about in the fourth quarter, there were some things in the fourth quarter that really affected, which are developmental materials which were sold in the fourth quarter in a larger quantity than historically and that’s lumpy also.

All right. Thanks, guys. I will pass it on.

All right. Thank you, Brian.

Our next question is from Krish Sankar with Cowen and Company. Please proceed.

Yeah. Hi. Thanks for taking my questions. I have two of them. First one, a really good sale from China, I understand your largest customers obviously expanding in China. I am just wondering as they expand and as they are efficient in inventory, do you think there is a risk that the business and that customer might slow down given that they had issues in the past which might get resolved down the road? Then I have a follow-up.

It has historically been unpredictable with Chinese customers, making it challenging for us to forecast. We engage extensively with our customers and have incorporated what we believe will happen for the year into our guidance. However, several factors, including COVID-19 challenges and some weaknesses in the semiconductor sector, will impact the remainder of the year. We feel confident about our current position.

Got it. Got it. Very helpful. And then as a quick follow-up, Sid, how should we think about the OpEx growth for this year? Does it seem as you reiterated last quarter?

We provided guidance last quarter regarding operating expense growth, forecasting an increase of 20% to 25% year-over-year. Research and development is expected to rise about 25%, while selling, general, and administrative expenses will grow around 15%. This includes increased spending on our OVJP technology development. We anticipate our tax rates to be approximately 19%, plus or minus a few basis points. Additionally, we expect our operating margins for 2021 to fall between 40% and 45%.

Thank you very much. I will get back in the queue.

Thank you.

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

Yes, sir. Thank you. And Steve thanks so much for all the details especially with the evolving end market penetration and landscape. I just want to reconcile something, when I look at Samsung and LG it seems to me that over the past maybe three months to six months there is less of OLED CapEx and especially with China doing really well with LCD, maybe the LCD CapEx has gone up. And I am just trying to reconcile in the near-term if there is a downward pressure on OLED CapEx, how does that change your view on the end market demand or a square inch of OLED shipment in 2022? And I have a follow-up.

Well, I think right now our customers have expressed their commitment to OLEDs during recent calls. There are certainly demand and market factors that might lead to some changes. However, we believe that the growth of OLED is just starting; it’s a relatively young industry. Our customers are strongly attached to OLED technology, and while there may be some delays occasionally, we remain very optimistic about the market's direction.

Thank you. I'm trying to better understand the dynamics of the end market. I believe OLED TVs have a unique advantage, especially with Samsung working to establish a presence in the high-end market with their quantum dot OLED. Can you provide any additional insights regarding the quality of the display or 8K capabilities that would help clarify how OLED compares to emerging technologies like mini LED?

Well, mini-LED is an LCD technology. OLED is power efficient and provides the best picture quality for both TVs and mobile devices. It’s a straightforward technology that simplifies the process. Currently, we hold about a third of the smartphone market with OLEDs, and we're expanding into low- and mid-range mobile devices featuring OLED displays. The advantages of OLED over LCDs, including mini-LEDs and other types of LCDs, are significant. OLED technology allows for a thin form factor and unique flexibility, including bendable and rollable designs that no other technology can replicate. Given all the benefits of OLED that we've discussed over the years, it naturally leads the way in mobile devices due to its power efficiency, and in TVs, it delivers the finest picture quality.

All right. Thank you.

Thank you.

Our next question is from C.J. Muse with Evercore ISI. Please proceed.

Hey. Good afternoon. Thank you for taking the question. I guess first question, I am pretty surprised your deferred revenue is actually increased Q-on-Q and your LG revenues came in a little bit late at least versus our expectations. So, curious is that a result of your new agreement with LG, I guess could you expand on that?

Yeah. The new extended five-year agreement with LG and Visionox were effective on January 1, 2021, and they end at the end of 2025. The impact is under ASC 606 we expect this to continue. But the fact that we did this, this is a new agreement essentially for LG. So, you do see changes because we signed these agreements in deferred revenue.

Was there an expectation for higher revenues in 2021 before signing that agreement, and how has that affected your outlook for revenues in the calendar year 2021?

We are comfortable with our guidance as it stands. I didn’t expect signing these agreements to change our revenue guidance for 2021. When we provided our guidance, we were aware of these agreements; they were just not executed until later, but we anticipated the results.

Great. As my follow-up, you had big numbers from both DOE, as well as T-Online. And I guess the question here, is that supply chain risk mitigation in terms of building some inventory or is there concern in China around getting access to materials out of the U.S. given rising U.S.-China tensions?

No. Revenues in China did indeed increase, but they have historically been inconsistent. We haven't identified anything specific in this quarter as we've done in the past when customers communicated their actions to us. We just believe it's different for each customer and each purchasing department. Thanks, C.J.

Our next question is from Shannon Cross with Cross Research. Please proceed.

Thank you very much. Just a couple of questions. You said you have about I think was like 30% of the smartphone market at this point. What percent of the market do you think is addressable to you given where pricing is maybe in the next couple of years? Just trying to think of what opportunity for upside there is especially with some of the comments out of Samsung recently?

Yeah. I think that the addressable market eventually we believe over the entire smartphone market. Samsung is moving from the high-end to the mid-range and they now have some low-end phones that I think entry-level phones that are in the $240 range or something like that. So, we do think that this will continue to grow.

And how are you thinking about China TVs from an OLED perspective, not necessarily the vendors, but the market in general. I know there was some pressure on the Chinese TV market, I guess, it was last year and are you expecting to see it kind of rebound when you look at the second half?

In terms of market perspective where it’s difficult for us to talk about one area specifically and another. I mean, I think that OLED TVs are the best TVs ever. I think that some of the pressure that you saw was pretty much across the board on the demand side that there was weakness because of COVID-19.

Okay. My final question is with regard to inflationary pressures that people are seeing out there. Are you seeing any pressures on materials required by PPG and do you feel like you have the opportunity if you need to, I am not sure you would even need to here, but to push pricing through to some of your partners again on the materials side?

Well, there are two answers to that question. One, as we have stated in the past, our contracts have pricing for the length of the contract. So pushing some things further would be difficult. There is one thing that we have talked about is iridium and iridium has gone up. We have actually for a number of years been managing iridium and we have been building inventory that you could see on our balance sheet of raw materials going up every quarter and that we want to make sure that, A, we have a constant supply and have a significant amount of inventory that we have and that has allowed us to manage our cost structure.

Okay. Thank you.

Thanks, Shannon.

Our next question is from Sidney Ho with Deutsche Bank. Please proceed.

Thank you for taking my question. My first inquiry is about your full year revenue guidance. It seems like you may be being a bit conservative due to supply chain disruptions. Can you estimate how much this might affect your revenue guidance for the year? Additionally, where are you noticing the most impact from these supply chain issues? I have seen this not only from your supply chain. I have another follow-up as well. Thank you.

Well, to be honest, we do not provide quarterly guidance or detailed information on all the components we are observing. One issue I discussed with Shannon was iridium; although it is part of our materials, it is not the only component. There are several other materials, overhead, and various factors involved. Therefore, not every dollar increase will correspond directly to revenue growth. However, we remain comfortable with our guidance despite the ongoing impact of COVID-19. The demand side may affect our recovery speed, which is why we set a range of $530 million to $560 million. At this moment, we feel confident about our position.

Okay. Maybe my follow-up question is on the IT side of things. I know there are a number of models that companies have announced. But Apple has officially announced the mini OLED display. Does that change your view of your opportunity for OLED display and specifically in the IT market, I know you addressed the TV market a little earlier and it’s a different question. Thanks.

I believe the industry is still in its early stages. There's a significant focus from Samsung on the IT market, and when discussing Apple, their tablets utilize either LEDs or LCDs. However, I think there is a strong emphasis on the advantages of OLED, and we believe that trend will continue, especially since the use of OLED in the IT market is currently quite limited. Thank you, Sid.

Our next question is from Krish Sankar with Cowen and Company. Please proceed.

Hi. Thanks for taking my follow-up. I just want to check with Steve, to the extent you can talk about, obviously, there’s the Display Week coming on and then as well about the Samsung abstract and the blue. To the extent you can talk about it kind of curious your view on it. And along the same path, if and when blue gets commercialized, is it going to be plug-and-play or do you need to change some of the design, like a heat shrink or any such thing when you try to put it into a smartphone?

Well, thank you. Obviously, Display Week is coming up, and there’s a lot of chatter about what will happen. There’s really nothing we can say until the papers are presented. So regarding that, there’s nothing we can talk about what was coming up. We do obviously talk about a paper that was talking about blue that has the same author that had it in last year. In terms of commercial blue, we have stated that it’s not plug-and-play. You would need to make modifications to your drivers and your backplane in order to adopt our technology for blue because phosphorescent uses 75% less power. So it is a redesign. It isn’t new CapEx. It is really just a redesign. So as they introduce new products and new SKUs, they will design those that our technology into those. So as we stated, a number of times in the past, even if I had something that met all the commercial specs today, it would be nine months to 12 months before you start seeing it in products. But we are continuing to make excellent progress.

Thank you very much.

Thank you.

Thank you. This concludes the question-and-answer session. I would like to turn the program back to Sid Rosenblatt for any additional or closing remarks.

Again, thank you, everyone, for your time today. We appreciate your interest and your support and everybody, have a good night. Thank you.

This concludes today’s conference call. You may now disconnect.