Universal Display Corp \Pa\ Q2 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to Universal Display Corporation's Second Quarter 2022 Earnings Conference Call. My name is Shari, 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 is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Senior Director of Investor Relations. Please proceed.

Thank you and good afternoon, everyone. Welcome to Universal Display's second 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. Before Steve begins, let me remind you that 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. 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, August 4, 2022. 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 Report 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. Now, I'd like to turn the call over to Steve Abramson.

Thanks, Darice, and welcome to everyone on today's call. Before we delve into our second quarter results and the OLED industry, I want to take a moment to discuss the leadership transition that we announced this afternoon. Following an exceptionally impressive and remarkable 26 years with Universal Display Corporation, Sid will be retiring from the company at the end of this year. Under his leadership, Sid helped transform UDC from a three-person startup to a profitable world-class operation. He played a critical role in establishing and fostering the robust corporate culture that makes UDC who we are and helped steer our path of growth and success. On behalf of the board, the management team, and our colleagues at UDC, I would like to thank Sid for his extraordinary service, steadfast commitment, and immeasurable contributions to the company. On a personal note, I am grateful for the 46 years of friendship and close business collaborations. In 1976, when many of you were probably not yet born, Sid and I met at Temple Law School. In 1982, we both joined one of Sherwin's earlier startups called International Mobile Machines Corporation or IMM, which helped invent digital cellular radio. In 1996, we joined Sherwin to help revolutionize the electronic display industry with a relatively unknown technology called OLED at a time when CRTs were still the mainstream display technology in the market. Fast forward to today, and UDC is a pioneer and a leader in the OLED ecosystem. We have strong customer partnerships, a lean and profitable operating model, and we are continuously growing our portfolio of state-of-the-art technologies and materials, expanding our presence around the world and fortifying a robust framework for growth, all of which Sid has been instrumental in. Don't worry though, Sid is not leaving the UDC family. He will remain on the Board of Directors and continue to share his valuable insights and guidance. On behalf of the entire company, I would like to wish him a happy, healthy, and well-deserved retirement. We're excited to announce that Brian Mullard has been appointed Chief Financial Officer, effective September 6, 2022. Brian will be an excellent addition to the executive team to help spearhead UDC to new heights of opportunity and growth. Brian joins UDC with a wealth of experience across several industries. He has a strong background with more than 15 years of deep financial, operational, and strategic experience. He was most recently Senior Vice President of Finance and Corporate Controller at Emergent BioSolutions. His prior experience spans large multinational corporations including Hertz Global and Hilton Worldwide. Brian will help nurture and enhance UDC’s collaborative culture of inventiveness, integrity, inclusion, and imagination that makes UDC a unique growth company. On behalf of the entire company, I welcome Brian to UDC. Now to our results; the second quarter 2022 revenue was $136.6 million. Operating profit was $53.3 million, and net income was $41.5 million, or $0.87 per diluted share. The second quarter started off on a solid note. As we approached the summer, customers lowered their forecasts given the downward trend and forecast revisions, and increasing macro uncertainty and volatility. We are revising our 2022 revenue forecasts to approximately $600 million, plus or minus $10 million. Our near-term headwinds are expected to continue weighing on the economy and impacting consumer spending, yet positive long-term momentum in our OLED pipeline continues. All industry roadmaps continue to expand as the evolution of the OLED market continues to advance in our favor. As a lean operating company with a strong balance sheet and no debt, we are well positioned to continue investing in our long-term growth strategy. We're investing in our people, our technologies, our materials, and our infrastructure to reinforce our first mover's advantage, expand our materials and technologies portfolio, and broaden our support to customers and the OLED industry. As we look out, we believe that 2024 is shaping up to be a pivotal year for the OLED industry and for us. From an industry perspective, a significant new wave of Gen 6 and Gen 8.5 OLED capacity plans are reportedly in the works as panel makers set product roadmap plans for medium and large area OLED adoption. OEM activity for OLED and OLED TV products continues to grow. There are recent reports of Samsung, LG Display, DOE, Tianma, China Star and Vision RX all reviewing new investment plans. This new wave of capacity builds is expected to drive significant growth and momentum in the OLED industry and for us. In addition to capital investment plans, panel makers are working on technologies such as LTP backplane and tandem OLED and material structures to prepare for the OLED TV. At the same time, we are continuing to build upon and expand our core competencies. We are innovating, inventing, and introducing new OLED phosphorescent emissive materials with continuously improved performance to achieve our customer specifications, including next generation reds, greens, yellows, and hosts. With respect to blue, we continue to make excellent progress in our ongoing development work for a commercial phosphorescent blue missile system. We continue to believe that we are on track to meet preliminary target specs with our phosphorescent blue by year-end, which would enable the introduction of our all-phosphorescent RGB stack into the commercial market in 2024. We believe that the commercial introduction of our full color emissive stack will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications. Another important component to support growth and our customers is the development of groundbreaking technologies that solve significant industry challenges and help advance the OLED market. For decades, the OLED industry has sought a manufacturing process for side-by-side RGB OLED TVs, to pattern the pixels across a Gen 8.5 Plus mother glass. This is the industry challenge and opportunity that we are taking on with OVJP. We are steadily making progress with constructing the key subsystems of our alpha system design for a trailblazing manufacturing printing platform. In May, our Silicon Valley team printed our first Gen 4 panel using 10 OVJP print nozzles and our phosphorescent red emitter materials. While still a few years away, we believe that OVJP will pave the path for high volume manufacturing of large area RGB OLED TV panels and develop into a multibillion-dollar market opportunity. These R&D programs bolster our global OLED intellectual property framework while increasing our value proposition in the ecosystem. These initiatives also reinforce our strategic priorities to widen our reach, expand our business, and drive profitable long-term growth. On that note, and for the last time in more than a decade of earnings conference calls, let me turn the call over to Sid.

Thank you, Steve. And again, thank you everyone for joining our call today. It has been my pleasure and privilege to serve as UDC CFO since Sherwin, Steve, and I took the company public in 1996. This amazing 26-year journey has been filled with triumphs, challenges, unwavering determination, as well as an unshakeable belief in the future of OLEDs and the company. In 2011, we achieved profitability and UDC’s earnings have reached new record levels ever since. It has been a distinct honor to help lead this wonderful company and to work alongside a team of phenomenal and dedicated people. I am humbled by and proud of all of UDC’s accomplishments during my tenure, and I'm confident that the future of the company is exceptionally bright. I look forward to working with Brian in these coming months. Now to our second quarter 2022 results. Revenues for the second quarter of 2022 were $136.6 million, compared to first quarter $150.5 million, and second quarter 2021, $129.7 million. Our total material sales were $71.9 million in the second quarter of 2022. This compares to material sales of $86.7 million in the first quarter and $77.4 million in the second quarter of 2021. Green emitter sales in the second quarter of 2022, which include our yellow-green emitters, were $54.5 million. This compares to $66.4 million in the first quarter and $57.8 million in the second quarter of 2021. Emitter sales in the second quarter of 2022 were $17.3 million. This compares to $20.2 million in the first quarter and $19.5 million in the second quarter of 2021. As we have discussed in the past, material buying patterns can vary quarter to quarter. Some of the contributing factors include COVID-19 issues, as well as consumer product demand cycles, capacity ramp schedules, production loading rates, device recipes, product mix, material ordering patterns, customer inventory levels, and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us. Second quarter 2022 royalty and license fees were $60.3 million. This compares to $59.8 million in the first quarter and $48.2 million in the second quarter of 2021. Second quarter 2022 UDC’s revenues were $4.4 million. This compares to $4 million in the first quarter of 2022 and in the second quarter of 2021. Cost of sales for the second quarter of 2022 were $27.2 million, translating into overall gross margins of 80%. This compares to $33.2 million in gross margins of 78% in the first quarter, and $28 million in gross margins of 78% in the second quarter of 2021. Cost of OLED material sales in the second quarter of 2022 were $25 million, translating into material gross margins of 65%. First quarter material gross margins were also 65%, while the comparable year-over-year quarter material gross margins were 67%. For the year, as inflationary pressure persists, we estimate that our material gross margins will tend towards the low end of our guidance range of 65% to 70%. As we noted in the past, material gross margins can vary quarter to quarter. Second quarter 2022 operating expenses, excluding cost of sales, were $56 million. This compares to $55.1 million in the first quarter and $51.8 million in the second quarter of 2021. For the year, we estimate that our operating expense for SG&A, R&D, and patent costs in the aggregate will tend towards the low end of our guidance range of 10% to 15% year-over-year increase. Operating income was $63.3 million for the second quarter of 2022, translating into operating margin of 39%. This compares to $62.3 million and operating margin of 41% in the first quarter, and $49.9 million with operating margin of 38% in the second quarter of 2021. The income tax rate was 24.5% for the second quarter of 2022. For the year, we believe our tax rate will be approximately 22%. Net income for the second quarter of 2022 was $41.5 million, or $0.87 per diluted share. This compares to last quarter’s $50 million, or $1.05 per diluted share, and the comparable year-over-year quarter of $40.5 million or $0.85 per diluted share. We ended the quarter with approximately $834 million in cash, cash equivalents, and investments or $17.58 of cash per diluted share. Moving along to guidance, as Steve discussed, with the softening demand environment and continued macro uncertainty, we are revising our outlook for the year. We now expect 2022 revenues to be approximately $600 million plus or minus $10 million. We now believe that the ratio of material to royalty licensing revenues will be in the ballpark of 1.3 to 1. The shift in revenue mix is a result of the deferred revenue recognition as customer long-term agreements reached the end of their terms. Lastly, our Board of Directors approved a $0.30 quarterly dividend which will be paid on September 30, 2022, to stockholders of record as of the close of business on September 16, 2022. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders. With that, I will turn the call back to Steve.

Thanks, Sid. As we look to the OLED industry, the stage is being set for the market's next growth phase. While macroeconomic uncertainty is expected to weigh on the consumer demand landscape in the near term, with pending new OLED capacity announcements, an expanding list of panel manufacturers entering commercial medium and large area OLED production, and a broadening landscape of consumer OLED products, OLED momentum continues to build for strong growth in the coming years for the industry and for us. From discovery and opening new innovation pathways to broadening our portfolio of all materials and technologies to increase the critical mass in growing our global footprint, in Asia and Europe, we are further solidifying our leadership position, bolstering our value proposition support to our customers while expanding our horizon of opportunities. 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 ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, our customers, and our shareholders. And with that operator, let's start the Q&A.

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

Hey, guys, good afternoon. Thanks for taking the questions. Sid, I must say these will be the last questions on a public call for my friends, but what a great legacy here! You will be sorely missed. Congrats on the retirement.

Thank you. Thank you very much, Brian.

I guess just a couple of questions. I know you're going to get a ton around the guidance. So maybe just to start off big picture, can you kind of give us a bit of a breakdown of where you saw the orders and demand softening? Is it kind of between geos, North Korea or China? And then on applications? Was it more smartphone specific or more TV or vice versa? And then how comfortable are you that you sort of captured the downside risk as we move through the second half? ie, is this pretty conservative in terms of the order softening in what you reflected in the guidance or what are some of the puts and takes as to whether or not there could be even further downside risk?

With that comment on any particular customer, we believe that the macroeconomic uncertainties and inflationary pressures are impacting consumer spending across the board. There's also been a lot of reporting that the lockdown in China may have impacted domestic sales. When we did this, we took into account our customer forecast, slowing demand for the consumer electronics products, and continued headwinds from the pandemic. As you're well aware, many consumer electronics and parts of the consumer electronics ecosystem, the uncertainty of the macro environment and rising inflationary pressures are really weighing on consumer spending and affecting the demand side.

Yes, fair enough. And then maybe just one more question. I'll pass it on. There's a little bit more scrutiny around the competitive landscape here for the OLED materials segment. I think the Samsung purchase of a particular company has gotten some investor focus, as well as some of the QD-LCD targeting commercialization in the next couple of years. Anything noteworthy from your guys' vantage point around your status and green, and then I guess updated thoughts around blue as well? Thank you.

Brian, we believe the future of OLED will continue to prioritize phosphorescence as they have for more than a decade. We believe we're continuing to make significant progress across the color spectrum. We have probably the largest team in the world working on these materials, and we're continuing to make excellent progress on blue and continue to be on track to meet preliminary specs by year-end, with commercial introduction in 2024. Thank you, Brian.

All right, fair enough. Thanks a lot, guys.

Thank you.

And our next question is from Krish Sankar with Cowen & Company. Please proceed.

Yes, hi, thanks for taking my question, and Sid, as Brian mentioned, congrats on the retirement. You will definitely be missed, for sure, by analysts, investors, and your customers. Thank you for all that you've done for us.

Thank you very much. I appreciate those kind words. And I'll be missed, but I am still an employee.

An employee still. I apologize.

My wife may not give you the same answer.

Because you might be on the Board of Directors. But I'm going to ask you this question, and feel free to answer it because you might not be liable for this. I'm just joking. Hypothetically speaking, revenues are down. If revenues are down next year, let's say 10% or so, how do we think about the operating leverage in the model and the earnings power?

Well, we think that it's still going to be a short-term blip. We are lean and mean company. When we talked about expenses being up to 50%, we're going to guide towards the lower end of that number. Operating margins are expected to continue to grow in the future. So, it's 40% now, and as we said in the past, we're expected to grow.

Got it, put it off, and then follow-up. You spoke about the $8.8 million catch-up revenue in the quarter. Can you give some color around it? Is it due to a certain number of volume purchase agreements, or what was that $8.8 million exactly about? Thank you very much.

It's a catch-up based upon estimates for the year. We made an adjustment in our guidance for the year by reducing our guidance from approximately $600 million from $645 to $650 million. Based on the softness in demand in the quarter, we did make an adjustment to the forecast, and when you do that, it results in a cumulative catch-up that impacts it.

Got it. Thanks a lot, Sid, and Steven.

Thanks a lot.

Thank you.

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

Thanks. Hey Sid, let me add my congratulations on your retirement. It's been a pleasure working with you over the years. So let me make sure...

I like talking to you, Sid. Thank you.

I totally understand. Let me ask a question on utilization of your customers. Clearly, OLED utilization has probably dropped in the second quarter, but maybe recovered some in the second half. Given the lower utilization seen across the industry, have you seen any of your customers slowing down capacity additions? I understand that usually happens in the LCD market when utilization drops off—curious whether that also applies to OLED?

Well, clearly, one of the reasons we reduce our forecasts is that demand is getting reduced. However, we discussed that installed capacity from the end of ‘21 to the end of 2023 is expected to be approximately 20% to 25%. We still think that is the case, and we are talking about 2024 for new capacity for IT products. We have not seen anyone scrap their plans for expansion. I think in the long run OLEDs are going to be the winning technology that everybody believes in.

Okay, that's fair. My follow-up question is on the OLED TV side of things. Samsung talked about their OLED TV surpassing new targets, and they expect increasing demand for QD displays. Can you remind us of your revenue opportunity in the current version of QD OLED? And maybe how that will change over time as they start adopting your phosphorescent technology? And how should we think about your revenue opportunities in a white electrolysis to QD OLED TV, assuming your revenues fully emitters are fully adopted in both technologies?

While we can't speak for our customers, we are excited about Samsung and their entry into the OLED TV market. As you can see, we believe that OLED TVs are spectacular. We are here to help and collaborate with our customers for OLED displays, from wearables to smartphones, IT, TVs, and other markets including AR/VR. So we are very excited about entering the TV market. Your question was focused on when the blue technology will be adopted. That's something we really can't discuss. However, we do know our customers are excited about getting a commercial blue.

Okay, thank you very much.

Thank you.

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

Hi, it's actually Chris Green filling in for Jim. And congrats on the announcement, Sid.

Thank you.

Sure, and just with the Shannon facility coming online in June, do you expect any impact on gross margin in the near term, whether it's a drag as it ramps up? How are you thinking about that?

Well, we believe that the Shannon facility is really going to help us as it expands our capacity by doubling our efforts. We think it's going to be a very cost-effective facility when it's up and running. There are obviously startup costs that you have to deal with, but I don't expect this to have any noticeable impact.

Terrific. Thanks very much.

Thank you.

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

Hi, thanks for taking my question. My question is more about our Chinese customers. It seems that their revenue contribution held up pretty well, despite some well-communicated weakness in the underlying market. Can we talk about what was driving that? And do you expect maybe a higher decline from those customers in the second half, referring to customers in China?

I think your comments about those sales to Chinese customers have always been lumpy. From one quarter to the next, it's difficult to predict. I do think that there are issues, obviously, with the shutdowns in China and such that have impacted sales. But overall, I think they're all working very hard to grow their OLED market and grow their share.

Got it. Thank you. The second question on gross margin has historically not been affected by volume and is mainly driven by mix. Is that still the case? If revenue slows down, do you expect any meaningful impact on your gross margin?

No, I think we expect, as we said, we expect our gross margin to be 65% to 70% for this year. We do think that because of inflationary pressures, it will trend toward the lower end.

Got it. Thank you, Sid, and congratulations on the retirement.

Thank you very much.

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

Well, I want to thank you all very much. We appreciate your interest and support. I just want to say it's been my pleasure working with all of you. So thank you, Shari. Thank you all.

Thank you. This does conclude today's conference call. You may now disconnect.