Conference Transcript - OLED 2025-12-09

Darice Liu, Head of Investor Relations

All right. Well, good morning, everyone. I hope that you've been enjoying the sessions this morning. I have just had such the pleasure of spending the last couple of minutes with Brian and getting to know him a little bit better, and I'm sure that you're going to enjoy getting to know him and Universal Display better as well. So we're going to go ahead and kick things off with Universal Display and their CFO, Brian Millard, CFO and Treasurer. So first question, for those new to UDC, Brian, can you share a quick snapshot of who you are

Brian Millard, CFO

and what makes your story unique sure yeah so thanks brandice for having us and thanks thanks nasdaq um before i get started just a quick safe harbor statement so i may make some forward-looking statements today as part of my remarks our actual results may differ materially from those so we'd encourage everyone to look at our filings to understand the risks and uncertainties associated with the business so udc so we have been in business for more than 30 years we are a key OLED material supplier our materials today are really focused on and throughout our history have been focused on phosphorescent emitter material which in an OLED display is really the way to think about is what gives off the light so in a display you have red green and blue colors that are used primarily to create displays we today have commercialized our red and green material and have you know been in market for many years and I'll talk a little bit about the various applications and end markets for our products. We've also been working over many years to commercialize our blue phosphorescent material as well, and continue to believe we're moving closer and closer to commercial introduction of that material. So in terms of the end markets today, smartphones, TVs, and IT are really kind of the main key markets for our products. Smartphones today, we have roughly 60% penetration, so that's grown very nicely over the last decade or so as more and more smartphones, especially the premium models, which today we have nearly 100% penetration in the premium smartphone market, and more mid-tier and low-end models also continue to convert and adopt more and more OLED displays. And that's because of the energy efficiency benefits of OLEDs, as well as for our material, the phosphorescent emitters, they are more energy efficient than the alternative, which is a fluorescent type of emitter. in also in smartphones and a compelling opportunity for us we believe in the next few years is as foldables continue to gain more and more momentum more oems are adopting foldables we also know that consumers are increasingly interested in foldables as a form factor and so as that continues to gain more momentum that's very compelling for our business because there's more you know square area per device as well as there's you know hopefully the expectation that spurs a replacement cycle and more consumers will upgrade and get new devices. On the TV market, that's a very compelling market for us because of the size of those displays. Currently, we're about three percent penetration in the TV market. We believe that has the opportunity to grow in the years ahead, especially given that OLEDs and LCDs, the price gap has continued to narrow between those two technologies. OLEDs have the clear advantage in terms of technical performance and consumers continue to prefer OLEDs because of all the various technical performance characteristics of those TVs the last market that I'll mention which is you know in terms of key markets today is one that we have the most opportunity for growth the next few years which is the IT market and that is tablets and laptops and monitors we're currently only about five percent of those products have all the displays today so very low penetration huge market and the opportunity for our business to continue to penetrate there off of our customers making significant advancement in improvements and advancements in new capacity for that market so right now samsung boe vision ox and china star which are four of our largest customers they've all announced new capacity investments that they're making for the it market as more and more oems want to adopt oled products into it products whether it be tablets laptops or monitors then there's other markets that we also monitor like automotive and wearables where OLEDs are also gaining more momentum off of very low penetration rates today. So a lot of opportunity really across a variety of different markets and our phosphorescent material being critical to the performance of OLED displays and

Operator

continuing to increase the adoption from here. Very thorough. I love the foldables, right? Flip phones are back again. Yep. It's all cyclical. So universal display has been a pioneer an OLED for decades. So what are the core differentiators that keep you at the top of the

Brian Millard, CFO

game year after year? Yeah, so we've, I'll talk about our red and green material and then talk about the opportunity for what blue can provide for a device because I think that's also really important to touch on. So in our red and green material, we are continually inventing new technologies, you know, generation to generation that improve their performance characteristics. And those are in a couple different areas. One is, you know, specifically as the color requirements continue to change for our customers various points on the color spectrum that they want to be as they continue to invent new technology and displays we our teams continue to invent new materials that meet those color specifications the biggest area of improvement also that we've had is our material has 100% internal quantum efficiency but even off of that 100% we've been able to continue to increase and make more and more efficient our material over years so gen to gen we've seen improvements in terms of the energy that our material consumes to emit the light that it needs to. And so that improvement has been very significant, about a 70% increase over the last 10 years in the energy efficiency of our red and green material. And so that enables, you know, when you think about, you know, getting a new phone and having the battery last longer or, you know, more energy-consuming features being able to be put into those devices, having more energy-efficient OLED material that we provide is one of the ways that the industry has been able to improve the performance of those devices, and we continue to improve that. Blue is the big opportunity. So all of your smartphones today that have OLED displays have red and green phosphorescent emitter material, and currently the blue material is a fluorescent emitter, which is a much less energy-efficient material. So compared to our 100% internal quantum efficiency, A fluorescent material is only about 25% energy efficient. So as we continue to move closer to introducing phosphorescent blue into the market, that's the opportunity for the energy efficiency of the display to increase significantly. About a 25% increase in energy efficiency if you were to just replace the fluorescent with the phosphorescent. And we've been, for many years, developing phosphorescent blue material and working with our customers to bring that closer and closer to adoption.

Operator

So that's so interesting. So we talked about the differentiators themselves. What about your long-term vision? So can you talk a little bit more about not just what's happening now, but your long-term?

Brian Millard, CFO

Yeah, so long-term vision is really focused on continuing to fuel the growth of the OLED industry. So we're a key material supplier, key enabler to our customers' growth and to the industry's growth and to the adoption that we know OEMs want to have across more and more applications. So if you think about the three markets we talked about today and the growth there, there's also emerging technology and other areas for OLEDs to go, such as in health care. There's some areas for OLEDs to be used in red light therapy, and, you know, as display technology is used in a variety of different applications, you know, we believe OLEDs will continue to be a major growth driver. Automotive is a market, you know, also especially for EVs. You know, we've seen OLEDs gain, you know, good share in EVs. We think that has the opportunity to grow, not just in EVs, but across the entire auto market in the years ahead as well.

Operator

So lots of untapped growth. Lots of penetratable market. So let's talk a little bit about partnership. You're known for your energy-efficient materials and cutting edge technologies, which we've already discussed a little bit this morning. But you don't manufacture any of the materials yourselves. So can you talk about your partnership with PPG and how that collaboration helps you deliver reliability and at scale?

Brian Millard, CFO

Yeah, so we've had a 25-year manufacturing partnership with PPG. So we invent and have key capabilities on R&D and innovation. We also have a significant patent portfolio, 7,000 patents that are formed off of our innovations that are in-house. And then as we scale and our customers ultimately select product for commercial use, that is when we transfer our materials to PPG and they scale up that production for mass quantity. So it's been a very strong partnership and working relationship with them. We are able to tap into, you know, their resources and network and also continue to, you know, be the lean machine that we are on the R&D and innovation side of the house. And we expect the relationship to continue to be quite strong for the years ahead. We currently have three sites that PPG manufactures at. Two are in the U.S. and have been longstanding locations that they've been working on our account with. And recently, in the last few years, we set up manufacturing in Ireland as well. And the plant in Ireland, we actually wholly own that site, and PPG operates it for us. And that's been a very good model for us. And we also, as we look forward to the growth that we expect in the next few years, we have great capacity abilities also in our Irish site where as the industry grows and we need to expand our volume, we have room to grow there in the Ireland location.

Operator

Got it. Got it. So you mentioned models for a second there. We're going to dive a little bit into financial. So your business model combines royalties and licensing with material sales. Can you walk us through the key revenue drivers for that model?

Brian Millard, CFO

Yeah, so we have, as you said, we have two root revenue streams, material sales and licensing, and all of our customers have both agreements with us. So they're licensing our portfolio of 7,000-plus patents, and they're also purchasing their phosphorescent emitter needs from us. On the material side, we have price tables in all of our agreements, And we have typically five-year agreements with our customers for both licensing and material supply. They are volume price models on the material side, so greater volume, greater price per unit for our customers. And on the licensing side, that's really focused on what our customers' OLED revenues are expected to be over that five-year term. And we've had great longstanding relationships with all the major OLED display manufacturers in the world.

Operator

Great, great. And I know we touched on red, green, and blue a little bit, but let's dive a little bit more into the material side. So you currently supply red and green admitters, which you told us earlier. But what's the latest on blue? What benefits would phosphorescent blue bring to the OLED market from both the technology and financial perspective? And then how does successful commercialization shape your long-term growth story? I know that was a lot.

Brian Millard, CFO

Yeah, so phosphorescent blue, like I said earlier, we've been working for many years to invent and you know material that performs at commercial levels and i think the the biggest you know proof point that we have that we're continuing that we are you know at that point is our customer lg display came out earlier this year and mentioned that they had produced a commercially performing panel using our material they had validated that production on a commercial line at their facility and they showcased that panel also at an industry conference back in May of this year. So that certainly was a key milestone in our development toward moving our product into the commercial market. We've also been working with other customers on, you know, multiple customers on phosphorescent blue development for the last few years and continue to believe we're moving closer to that commercial entry point. So the key benefit, like we were talking about earlier, is that energy efficiency boost that you get off of replacing the fluorescent material with more energy efficient phosphorescent material and this has applicability really across all devices certainly battery powered devices it's very compelling for but even for tvs you know there's certainly you know a value proposition for having a higher efficiency blue material in those products as well so we're moving closer and closer now we're at a point where our customers really need to work with their oem customers to determine how this gets incorporated into a product for the market we believe that there you know is use for it across, you know, all OLED products. And we're continuing to invent material that has better and better performance characteristics to, you know, make that possible for our customers to introduce. The approach that LG noted back in May was they used a tandem structure. So they had one layer of phosphorescent material for blue and one layer of fluorescent material for blue. And so by using that combined approach, they were able to get the energy efficiency benefits of our product while also getting the lifetime benefits of the fluorescent material which is a more more mature product and we ultimately are continuing to develop like i said new material that will enable in the future we believe a all phosphorescent approach to be possible that said we're very happy you know if you know lg or any of our other customers you know can introduce a product you know even if it means there's some combined material set that's used with an alternative material.

Operator

Interesting. That dual use is very interesting. Thank you for sharing that. So let's dive a little bit away from the product itself and talk just a little bit more about your CFL approach as a leader. So can you talk about what principles guide your approach to margins, operating discipline, and free cash flow?

Brian Millard, CFO

Yeah, so we have very strong gross margins, so 76% to 77% this year in our gross margins. And we've maintained those gross margins for many years. So we've been in the high 70s for a number of years now. Because we have long-term agreements with our customers, that also gives us good stability in terms of ASP over those five-year terms of those agreements. And we have a number of things on the COG side that we're actively managing in terms of sourcing of materials, making sure that we're doing everything we can to, from a tariff avoidance perspective, We've been very strategic in purchases to make sure that we're maintaining the best possible margin profile in terms of the sourcing of those materials. We also have the ability, as we can put more volume through our manufacturing in the next few years, to have operating leverage in the model. And so we're actively managing both on the ASP side through those new customer agreements as they come for renewal, as well as on our, you know, sourcing, production, yield, improvements, all those factors to keep gross margins at the highest possible level. And, you know, as the industry scales, I think that's just the only pressure, right? As you have a greater and greater volume, you do have, you know, customers expecting a better price per unit, which is a reasonable expectation. But we've been able to have, you know, very strong gross margins for, you know, a very long time at the company.

Operator

Those are fantastic margins, so congratulations on that. So we haven't talked at all about strategic opportunities, so let's dive into that for a second. So as you balance returning capital through dividends and buybacks and maintaining flexibility to invest in innovation, talk a little bit about strategic opportunities and how you're thinking about all of that.

Brian Millard, CFO

Yeah, so we have a number of things. So first of all, in terms of continuing to maintain and bolster our position in the OLED space, we've made investments in not only our own team's R&D, and we continue to identify opportunities for continued investment in R&D within the company. Our AI ML team, we have a team that's about 10 years old in terms of computational chemistry. That's helped us significantly on red, green, and blue to use those technologies to invent new materials. So continuing to invest in that capability in the years ahead is a priority for the management team. And we recently announced the acquisition of a patent portfolio from Merck, the German OLED materials company, which has also continues to improve and bolster our position on the patent side. And that's a device architecture portfolio primarily where it looks at materials and ways of combining materials in a display to make OLED products. and in terms of capital return we have had a dividend program for many years in place we've annually increased that dividend we expect to continue to increase that going forward and we've the earlier this year our board put in place a buyback authorization as well so we balance maintaining capital in the business for investment which has been a long priority of the board and the management team to have capital available to rapidly pursue investments and not need to raise capital for those as they come about as well as returning capital through both the dividend and the buyback program. Fantastic. That's great to hear. And we talked

Operator

a little bit about AI. So when it comes in R&D that you're doing involving AI. So when it comes to R&D, how do you think about the right level of investment to keep innovation strong while maintaining financial discipline? You talked about that a little bit, but a little bit deeper.

Brian Millard, CFO

Yeah. So we really take a longer term view because the seeds that we plant in R&D today aren't necessarily going to pay off for years to come. So we really do take a longer term view. And when we sit down each year to go through our planning process with our R&D leadership team, we focus on, you know, what do they think they can do and, you know, accomplish with the team and the resources that they have and what could they do if we gave them more. So it's more of a qualitative view than a quantitative view, really, in terms of how we look at R&D investment. We also have to make sure that we're, you know, meeting all of our customers' needs and expectations. And, you know, certainly as the industry continues to mature and grow, we've seen over the last few years, you know, we've needed to increase our R&D investment to make sure that we're meeting all of our customers' demands, which continue to increase as well. So it's more of a qualitative view as opposed to setting a specific percentage of revenue or the like that we're looking at. It's more what are we going to do now that's going to benefit us three, five, and beyond years from now, both in terms of, you know, the existing portfolio as well as, you know, like and maintaining our position there and building upon it but also how do we plant seeds

Operator

for new growth in other areas as well got it got it i know we only have a few more minutes left um and i think we're about through with all the questions i had for you but just if we could leave us uh with just some insights on 2026 and what you're thinking about what's top of mind for

Brian Millard, CFO

you i think that'd be a good place to end yeah so um we're still you know wrapping up the planning process and we'll share you know in in the new year where we're looking for guidance next year but i think there's a couple key growth areas for us next year one is on the smartphone side foldables continuing to gain more and more momentum and that being a growth driver for our business on the tv side continuing to see additional unit growth there that's projected you know our customers are expecting in 26 and lastly it being the biggest one where you know there's new capacity from samsung and boe coming online toward the middle of next year and you know more and more oems are looking at adopting oled products into their it portfolio in the coming years that's compelling for us on a unit basis it's also even more compelling for udc because many of those it products also have a tandem structure where there's two layers of emissive material that's used and so that's even more material per square inch from us that's needed for those products so lots of exciting opportunity with all the new capacity and plans that our customers have and we look forward to meeting you know the cut the industry's

Operator

needs going forward excellent well we've been so lucky to have you here in London with us we hope you come back for many many more years I hope you all enjoyed this session and we'll be back with the next panelist soon thank you thanks