Universal Display Corporation
Q2 2021 Earnings Call Transcript

Published: 5 Aug 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to Universal Display Second Quarter 2021 Earnings Call. My name is Sherry, and I will be your conference moderator for today's call. . I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

[Darice Liu:]

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 a property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the express written of 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 5, 2021. 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. Universal Display disclaims any obligation to update any of these statements. Now I would like to turn the call over to Steve Abramson.

[Steven Abramson:]

Thanks, Darice, and welcome to everyone on today's call. We are pleased to report that revenue in the second quarter of 2021 was $129.7 million, operating profit was $49.9 million and net income was $40.5 million or $0.85 per diluted share. The widespread momentum of OLED across a broad range of consumer electronics market is unmistakable, from wearables and smartphones to tablets, notebooks and TVs to AR/VR, signs and automotive to the revolutionary world of plastic OLED that is redefining what a consumer product form factor can be. OLED adoption, which is still in its early innings, is advancing. Leading global consumer electronics OEMs have adopted OLED displays for watches and phones. And now there are numerous reports that their OLED adoption journey is widening. After OLED smartwatches and then OLED smartphones, they are now expected to broaden OLED adoption into new product segments such as foldables and IT with an initial focus on tablets. Speaking of form factor and IT through tremendous and burgeoning OLED markets. At SID Display Week, which took place virtually shortly after our first quarter earnings call, form factor was a major theme from our customers. Samsung Display showcases S-Foldable, a multifoldable device that looks like a trifold display. The display can be folded twice inside and outside and can be used as a smartphone when folded and as a tablet when completely unfold. Samsung also showcased a slide of OLED panel that was designed to maintain a traditional smartphone's form factor while capable of being slid horizontally to expand the screen size for use cases like multitasking and videos. In addition, Samsung exhibited a supersized 17-inch foldable OLED display, which can be used as a tablet when folded in a 4

[Sidney Rosenblatt:]

Thank you, Steve. And again, thank you, everyone, for joining our call today. Revenues for the second quarter of 2021 were $129.7 million compared to first quarter 2021's $134 million and second quarter 2020's $58 million. Our total material sales were $77.4 million in the second quarter of 2021 compared to material sales of $79.8 million in the first quarter of 2021 and $31.9 million in the second quarter of 2020. Green emitter sales in the second quarter of 2021, which include our yellow-green emitters, were $57.8 million. This compares to $60.5 million in the first quarter of 2021 and $24.2 million in the second quarter of 2020. Red emitter sales in the second quarter of 2021 were $19.5 million. This compares to $19.1 million in the first quarter of 2021 and $7.5 million in the second quarter of 2020. 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 2021 royalty and license fees were $48.2 million. This compares to $50.9 million in the first quarter of 2021 and $22.4 million in the second quarter of 2020. Second quarter 2021 Adesis revenues were $4 million. This compares to $3.3 million in the first quarter of 2021 and $3.7 million in the second quarter of 2020. Cost of sales for the second quarter of 2021 were $28 million. This compares to $23.3 million in the first quarter of 2021 and $12.6 million in the second quarter of 2020. Cost of material sales were $25.3 million, translating into material gross margins of 67%. This compares to 74% in the first quarter of 2021 and the comparable year-over-year's quarter material gross margins of 68%. As we have noted in the past, material gross margins can vary quarter-to-quarter. Second quarter 2021 operating expense, excluding cost of sales, was $51.8 million compared to last quarter's $47.1 million and the year-over-year comparable quarter's $46.5 million. We are investing in our research and development, including OVJP Corporation; our infrastructure, including our new Shannon site; and in our people to fortify our growth opportunities in the organic electronics landscape. Operating income was $49.9 million in the second quarter of 2021 compared to last quarter's $63.6 million and year-over-year's comparable quarter's operating loss of $1.2 million. Operating margin was 38% for the second quarter of 2021 and 47% in the first quarter of 2021. For the first half of 2021, operating margin was 43%, and we believe that we're on track for our operating margins to be in the range of 40% to 45% for the year. Second quarter 2021 income tax rate was 19.2%. Net income for the second quarter 2021 was $40.5 million or $0.85 per diluted share. This compares to last quarter's $51.7 million or $1.08 per diluted share and the comparable year-over-year's quarter of $800,000 or $0.02 per diluted share. We ended the quarter with approximately $733 million in cash and equivalents or $15.49 of cash per diluted share. Moving along to guidance. We continue to expect 2021 revenues to be in the range of $530 million to $560 million or a revenue growth of approximately 30%, with the ratio of materials to royalties/license revenues expected to be in the ballpark of 1.5

[Steven Abramson:]

Thanks, Sid. As OLED momentum continues to grow in 2021 and beyond, we are incredibly excited and confident about our leadership position in the OLED ecosystem and advancing our mission to enable an energy-efficient, eco-friendly consumer world. Energy efficiency and sustainability are key cornerstones of our UniversalPHOLED technology and materials. The discovery of UDC's proprietary phosphorescent technology was an enabling breakthrough in the OLED industry. With efficiencies that are up to 4x higher than conventional OLED materials, UDC's patented and award-winning phosphorescent OLED technology and UniversalPHOLED materials are proven to be integral in enabling high-performance, low-power consumption and energy efficiency in OLED displays and lighting. In addition to phosphorescence, Plasmonic OLED is our most recently announced fundamental groundbreaking device architecture that is expected to extend the lifetime and enhance the efficiency of OLED panels. Our energy-efficient phosphorescent materials and technology are key to better battery life in mobile OLED products and less electrical consumption in wall plug-in OLED products, and we are contributing to the world's objective of creating a sustainable and low-carbon future. Samsung Display recently announced that due to low-power OLED panels, the company was able to reduce its greenhouse gases by 110,000 tons, and the effect is equivalent to the amount of carbon that can be absorbed when about 17 million pine forests are built over 5,600 soccer fields. In 2020, the total power consumption of Samsung's OLED panels for smartphones, notebooks and smart watches decreased by 239 gigawatt hours, which is about 30% of the power consumption in 2017, while maintaining an average annual output of 400 million units. According to Samsung, power consumption of electronic devices, especially mobile devices, is a very important issue not only in terms of user convenience but also in terms of global warming. 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.

[Operator:]

. Our first question is from Krish Sankar with Cowen and Company.

[Krish Sankar:]

the quarter. Just kind of curious, how much did any of those inflationary costs from the raw materials play a part this quarter versus customer mix? And do you still expect full year gross margins for materials to be in the 65% to 70% range? And then I have a follow-up.

[Sidney Rosenblatt:]

Yes. The first part of your question was cut off a little bit, but I think what you asked was about the mix, what was in terms of cost versus customer mix. Is that correct?

[Krish Sankar:]

That's right. Yes.

[Sidney Rosenblatt:]

Yes. I mean we don't really break it out between the 2. But clearly, they are some of the things that impact our gross margin. And it's customer mix, product mix and costs.

[Krish Sankar:]

Got it. Got it. And the second part of the first question, materials gross margin still 65% to 70% for this year?

[Sidney Rosenblatt:]

Yes, yes. For the year, we continue to believe that our 2021 material gross margins will be 65% to 70%.

[Krish Sankar:]

And then just as a quick follow-up, Sid. I know in the past, you mentioned that the component tightness do not impact you directly, and I'm guessing freight cost is not a big deal given your shipment quantities are very small. But I'm just kind of curious, over the last few quarters, have you started seeing any derivative impact from either the component tightness with your customers or freight costs impacting your business? Or are you still too detached from it at this point?

[Sidney Rosenblatt:]

We've previously mentioned iridium pricing and increase in development and material affects our gross margins. So -- and in terms of supply chain, we haven't seen any material issues with our supply chain.

[Operator:]

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

[Christopher Muse:]

I guess first question, I was hoping you could help me with your annual revenue guide. In the press release and on the call, you reiterated the up 24% to 31%. But at the same time, you referenced up 30%. So are you tightening the guide to 30% growth? Is the range still appropriate? And what kind of visibility do you have into calendar Q4 sitting here today?

[Sidney Rosenblatt:]

Well, I mean we do expect solid double-digit growth over -- year-over-year revenue, and we did say approximately 30% in 2021. We are comfortable with our current guidance. At the same time, there are some uncertainties that are related to chip shortage and the pandemic that we're keeping an eye on to see whether it's going to impact it.

[Christopher Muse:]

Okay. But I guess I -- you've got 2 different numbers.

[Sidney Rosenblatt:]

Yes. No. I'm sorry, the 30% is really just the midpoint.

[Christopher Muse:]

Okay. All right. And I guess the second question would be on the IT side of things. Obviously, you sound pretty bold about that opportunity. I'm wondering if you're seeing that translate into capacity additions. Particularly would love to hear your thoughts on the potential for Gen-8.5 to serve that market. And if so, what's the timing there? And when would you be able to update us on kind of a new growth path for capacity?

[Sidney Rosenblatt:]

Well, in terms of the growth path for capacity, at the end of the year, we've talked about 50% growth year -- for a 2-year period. And we intend, at the end of the year, in our call, to give you what we think next year would be like. But the increase in the capacity, there's been a lot of chatter about it. Particularly, I think that you talked about Gen-8.5. And we are seeing increases, and our customers are all talking about increasing in the IT market. And I think the Gen-8.5 reference you talked about was related to someone that talked about building that for IT purposes. So I think it is something that, right now, the IT market is barely 1% -- OLEDs are barely 1% of the IT market, and that's about 450 million units. So it's -- there is a lot of runway for growth on the IT side.

[Operator:]

Our next question is from Sidney Ho with Deutsche Bank.

[Sidney Ho:]

So my first question is on the revenue from your largest customer in the second quarter. That seems to be a little stronger than how they described the business on their earnings call. I guess the question is, how should we reconcile that? Is this just a timing thing when they may be buying the materials ahead of the ramp? Or are there other inventory dynamics we should be thinking about?

[Sidney Rosenblatt:]

I don't think there's any real inventory dynamics in terms of safety stock or repurchases that -- but as you're well aware, our material purchases have been lumpy from time to time by our customers. And if you're talking about where our customers are in terms of what they sold, we are on the input side. So as they build inventory, they may be buying more from us that you may see, and then you will see that in the subsequent quarter. But I don't see anything in terms of any different this quarter than other quarters in terms of lumpiness.

[Sidney Ho:]

Okay. That's helpful. Maybe just along the same line, asking a different set of customers. Revenue from your Chinese customers, if you exclude LG Display, seems to have fallen a little harder than I thought. In hindsight, was there any inventory thing going on in Q1 that we should be aware of or -- especially for the one customer that is no longer a 10% customer in Q2?

[Sidney Rosenblatt:]

Yes. No. Yes, we believe that the '21 buying patterns are lumpy. And they have been, particularly with Chinese customers in the past.

[Operator:]

Our next question is from Atif Malik with Citigroup.

[Atif Malik:]

I have a question on the progress of the blue phosphorescent material. Obviously, Samsung presented a paper at SID conference. I'm curious what your thoughts are on their progress and the progress they have made in terms of the lifetime and purity on blue phosphorescent.

[Steven Abramson:]

Well, thank you for the question. We have -- as you know, we have a strong relationship with Samsung Display, and the relationship spans approximately 2 decades. We believe that we're making excellent progress with our ongoing development work. And as we've noted in the past, we believe a commercial phosphorescent blue is a matter of when and not if. While we have not provided a specific time frame, we can say that our excitement on phosphorescent blue continues to grow.

[Atif Malik:]

Great. Steve, I have another one. In your prepared remarks, you talked about the adoption of form factors like tablets for OLEDs. You mentioned Samsung, Lenovo. Apple has announced iPad Pro this year using Mini LED, and there's also talk about them using OLED next year. So I'm curious, how should we think about the inflection of OLED in tablets versus a competing Mini LED technology?

[Steven Abramson:]

We think that -- as Sidney mentioned earlier, we think that OLED has great promise into the tablet market. It's the next size up from the smart phones and the like. We think we're going to see a significant increase of tablets in the next few years with OLEDs in them.

[Operator:]

Our next question is from Shannon Cross with Cross Research.

[Shannon Cross:]

I was curious about how you're thinking about TV demand in this year and next. I know Corning, when I talked to them, are pretty positive on the opportunity for larger screen sizes. It seems as if pricing for larger screen size OLED has come down. So wondering how you're sort of gauging things.

[Sidney Rosenblatt:]

Well, as you're aware, I mean, LG this year have been talking about an increase from last year's number, and then they're talking about going through approximately 10 million OLED TVs next year. And I think it is something that, obviously, there's more and more OEMs that are branding them, and you're hearing chatter about Samsung entering the OLED TV market. So we're actually very bullish on the TV market. And I think that has consistently been stated that the OLED TVs are the best TVs ever.

[Shannon Cross:]

Okay. And then maybe just from a margin perspective. I'm curious, how much of the incremental costs do you think are sort of transitory versus inflationary? And how are you planning ahead? I know you've increased your capacity with PPG. But just in general, how are you sort of balancing it as you look forward to the next year or so?

[Sidney Rosenblatt:]

Yes. I mean we've specifically called out iridium. Iridium pricing has gone up, and that does have an impact on it. It also impacted product mix, and we're always looking to be more efficient in terms of our manufacturing process. But our gross margins do vary quarter-to-quarter, and there's a number of factors that always impact them from one quarter to the other. But we fully expect for the year to be in the 65% to 70% range for our material gross margin and 40% to 45% range for operating margins.

[Operator:]

. Our next question is from Brian Lee with Goldman Sachs.

[Brian Lee:]

I might have missed it. I had to jump on a little bit late here. But Sid, you're maintaining the revenue outlook for 2021. It does imply a more flattish seasonal trajectory in the back half versus what you've historically seen in prior years. So is that based on ordering patterns you're seeing right now? Or is there anything unique about the second half of this year to drive kind of that view versus what you've historically been experiencing?

[Sidney Rosenblatt:]

I don't think there's anything specific, and it really is there are some uncertainties related to the chip shortage and the ongoing pandemic issues. And based upon everything we've been seeing, I mean, we are still comfortable with the $530 million to $560 million for the year.

[Brian Lee:]

Okay. Fair enough. You mentioned the chip shortages, and I think it's widely known that there's different areas of different supply chain seeing some constraints. Are you seeing that impacts your customer buying patterns at all? I know it's not easy to gauge necessarily what's flowing through the manufacturing line versus what might be getting built in stock. But in the past, you've had some handle on it. And I think you said, especially with some of your customers like the Chinese, you have a better handle. But do you think there's buffers being built at all? Or are we seeing sort of a true reflection of demand in terms of your shipments and ordering patterns at the moment?

[Sidney Rosenblatt:]

As you mentioned, we're well aware of it. Industry OEMs have talked about it, and our customers on their conference calls have also referred to the chip shortage and whether it may or may not do. So it isn't anything specific that we can point to that have done that. This is just based upon talking obviously to our customers and internal forecast, and this is where -- right now, we're very comfortable with where we are.

[Brian Lee:]

Okay. Fair enough. And then maybe last one for me. I'll pass it on. The 50% industry capacity expansion view you've maintained, I don't think you mentioned it on the call. I'm assuming it's still intact for the end of '21 for that 50% growth. There's been more chatter, it feels like, about the potential for 8.5G capacity being built across the industry focused on IT products like notebooks and tablets and others. Is there any of that baked into your 50% capacity view? And can you just speak at a high level around any kind of medium-term visibility you might have for those types of new expansions that could obviously improve the medium-term growth outlook for you guys?

[Sidney Rosenblatt:]

I think -- I mean as you're aware that the way we -- when we talk about 50% capacity at the end of '19 to the end of '21, it is installed capacity. It doesn't mean that it's actually coming on, but it is installed capacity. I think there is a lot of chatter about 10, 8.5. But I don't think, to be perfectly honest, that's new. And while we looked at this at the end of '19, whether or not -- even if Gen-8.5 was very small, it's not a lot. So I don't think that's going to be impacting -- I don't believe it's going to impact this number for '19, '21. It may be in our next forecast when we talk about it. And the pandemic and component shortages may have some impact on this 50% number when we get to the end of the year. It could actually pick up what it really was.

[Operator:]

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

[Sidney Rosenblatt:]

We would like to thank you all for joining the call today, and we wish you all a good evening. Thank you.

[Operator:]

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