Universal Display Corporation

Good day, ladies and gentlemen, and welcome to Universal Display's second quarter 2021 earnings 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darius Liu, 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 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 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 report, followed with the SEC, and should be referenced by anyone considering making any investment 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.

Thanks, Darius, 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 85 cents per diluted share. The widespread momentum of OLEDs across a broad range of consumer electronics markets is unmistakable. From wearables and smartphones to tablets, notebooks, and TVs to AR, VR, science, 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, two 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 multi-foldable 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 unfurled. Samsung also showcased a slidable 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 4-3 ratio and a PC monitor when unfolded. Also at SID Display Week, Samsung Display presented a paper titled Blue Phosphorescent Organic Light Emitting Diodes for Future Display. Their experimental blue work was performed using Universal Display Corporation phosphorescent dopant material. Samsung's paper discussed the continued progress and advancements in the development of a phosphorescent blue OLED to achieve commercial launch. For LG Display, one of the major highlights of the show was when its 65-inch rollable OLED TV won the Display of the Year award. According to LG, the product was recognized for its cutting-edge form factor that has not only shifted the paradigm of displays, but also continues to demonstrate OLED's infinite possibilities when it comes to its application across various important industries, including its use for automobiles and aircraft. BOE also showcased a flexible slideable display. BOE's 8-inch prototype panel that can expand and turn a mobile phone into a tablet and vice versa can sustain up to 200,000 phones. The NMOD demonstrated an 8.03-inch color filter-on-touch rollable OLED prototype at the virtual show. VisionOx exhibited a number of OLED form factors. including a 12.3-inch rollable scroll-like display, a 7.92-inch foldable wraparound display, as well as a bifold, trifold, and slidable display. And AU Optronics presented a 5.6-inch rollable dual-sided AMOLED display, which shows images on both sides of the display. On the OEM front, Samsung Electronics announced during their earnings call last week that it wants to mainstream the novel form factor of foldables and that it expects foldable phones to start contributing to its bottom line beginning in the second half of the year. Samsung is slated to launch its Galaxy Z Fold 3 and Galaxy Z Flip 3 next week. It is reportedly targeting shipment levels of 6 to 7 million units. which is up from the 2.5 million foldable smartphones the company shipped last year. It has also been reported that foldable OLED panel production for Google, Vivo, and Xiaomi will begin in the fourth quarter of this year. Ulstered by increasing new models, foldable smartphone shipments are expected to exceed over 10 million units in 2022. In the IT landscape, Samsung Display continues to lead OLED adoption. With over 10 new Samsung OLED notebook panel models expected this year, compared with five in 2020, OEMs, including Lenovo, Dell, and Xiaomi, are unveiling new notebooks with OLED displays. Samsung Display's largest customer for OLED notebook panels is reportedly Taiwan's ASUS. As a leader in the gaming notebook market, OLED's strengths, including wider color gamut, high contrast ratio, and fast response times, are appealing to Asus' customer base. According to reports, Samsung Display recently increased its 2021 shipment target for notebook OLED panels by approximately 45%, from 4 million units to the range of 5.5 to 6 million units. We are also seeing other panel makers enter the nascent OLED IT market. LG Display is currently offering 13.4-inch OLED panels to Lenovo, and there are reports that BOE Technology and others may begin shipping OLED notebook panels in 2022. This is in addition to a myriad of reports on increasing OLED tablet activity for leading OEMs. We believe that the ongoing transition to OLED in the small and medium markets is prompting the need for new OLED capacity. Very recently, it was reported that Samsung Display plans to spend $2.6 billion in OLED backplane capacity, and LG Display plans to spend approximately $4 billion for additional Gen 6 OLED capacity. Additionally, BOE is expected to begin ramping OLED capacity at its third Gen 6 fab, B12, in Chongqing in the fourth quarter of this year. On the TV front, LG Electronics released its 83-inch OLED TV model during the quarter. This is the latest addition to LG's OLED TV lineup, which currently consists of 48, 55, 65, 77, and 88 inches. LG commented that as people spend more time at home these days, demand for ultra-large TVs to view streaming content and play games is on the rise. The global market for OLED TVs is expected to nearly double this year. And last week, LG Display announced that with additional capacity in its Guangzhou plant, it is targeting 10 million OLED TV units in 2022, up from this year's target of 7 to 8 million units. And according to reports, Samsung is now expected to launch their hybrid QD OLED TVs next year. The company is reportedly developing 55-inch and 65-inch QD OLED TVs for a market launch in the first half of 2022, with a larger 70-inch model to be offered at a later date. The report also suggests that Samsung may showcase its first QD OLED TVs at CES in January 2022. In gaming, Samsung Display announced in mid-May that its OLED panels receive the Gaming Performance Certification from SGS. According to SGS's test results, Samsung Display's new OLED offers 1.5 times better blur length than conventional LCD, which can be attributed to OLED's very wide range of contrast and fast response rates. This is important in gaming. as long blur lengths can degrade image quality in fast-paced video games. Also in OLED gaming news, Nintendo confirmed last month that it adopted OLED for the first time in its new Switch. In OLED lighting, an interesting study was published in Nature.com's Scientific Reports by researchers from the University of Tsukuba in Japan that compared the effects of LEDs and OLEDs on physiological changes that occur during sleep. The researchers measured energy expenditure, core body temperature, fat oxidation, and melatonin levels during sleep. When comparing LED to OLED light exposure, they found that OLED lighting may benefit your sleep and possibly even help one lose weight. Extended exposure to LED lighting before sleep seemed to negatively affect health. The researchers pointed out that the reason may be blue light. One of the many benefits of OLED is that OLED devices emit less harmful blue light compared to LED devices. We believe that the runway of growth for the OLED market, and therefore for us, is long and vast. As a result, we are investing in our people, our infrastructure, and in our innovation to advance our first mover advantage and to further enable our customers and the OLED ecosystem. On infrastructure, we are expanding our global footprint. This includes expanding our Ewing, New Jersey campus, as well as expanding emitter production capacity with our new site in Shannon, Ireland. which is being designed with the flexibility of manufacturing a range of our emissive materials, including red, green, yellow, and blue phosphorescent emitters. On the R&D front, we are fortifying and fueling our innovation engine. As panel makers' customers' roadmaps expand and product specs of color gamut, efficiency, and lifetime continue to broaden, demand for next-generation materials and novel technologies continues to increase. Our R&D team, in their relentless pursuit for cutting-edge, energy-efficient, and cost-effective solutions, are discovering, designing, and developing new emissive materials and technologies, including new 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 emissive system. As you are aware, our target is to deliver an all-phosphorescent RGB stack, which will further enable higher energy efficiency and high performance for OLED applications across the consumer landscape. Organic vapor jet printing is our novel manufacturing process for maskless, solventless, dry direct printing of full-color OLEDs. We believe that OBJP has the potential to revolutionize the manufacturing of OLED TV panels. OBJP Corporation's first major milestone will be an alpha system build in 2022. On that note, let me turn the call over to Sid.

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, ADESA's 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. Costs 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. Costs 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 is $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 85 cents per diluted share. This compares to last quarter's $51.7 million or $1.08 per diluted share and a comparable year-over-year 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 revenue growth of approximately 30% with the ratio of materials to royalties slash license revenues expected to be in the ballpark of 1.5 to 1. And lastly, our board of directors approved a 20 cent quarterly dividend, which will be paid on September 30th, 2021 to stockholders of record as of the close of business on September 16th, 2021. 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, Seth. As Ola Momentum continues to grow in 2021 and beyond, we are incredibly excited and confident about our leadership position in the Ola ecosystem and advancing our mission to to enable an energy-efficient, eco-friendly consumer world. Energy efficiency and sustainability are key cornerstones of our universal folate 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 four times higher than conventional OLED materials, UDC's patented and award-winning phosphorescent OLED technology and universal full-LED 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, 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 smartwatches 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.

Thank you, Mr. Abramson. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. Our first question is from Krish Sankar with Callen and Company. Please proceed.

I'm 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 uh full year growth margins for materials between the 65 to 70 percent range we're at a follow-up yeah uh the first part of your question was cut off a little bit but i think what you asked was about the mix with what was uh in terms of cost versus customer mix is that correct That's right. Yeah. Yep. I mean, we don't really break it out between the two, but clearly they are some of the things that impact our gross margin and it is it's customer mix, product mix and costs.

Got it. Got it. And the second part of the first question materials, those modern still 65 or 70% for this year. yes yeah for the year we continue to believe that our 2021 material gross margins will be 65 to 70 percent i mean this is a quick follow-up said um 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 trade costs impacting your business, or are you still too detached from it at this point?

You know, we previously mentioned Iridium pricing and increase in development of material affects our gross margins. So, and in terms of supply chain, we haven't seen any material issues with our supply chain. Got it. Thanks a lot, Tim. Thank you.

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

Yeah, good afternoon. Thank you for taking the question. I guess first question, I was hoping you could help me with your annual revenue guide. You know, in the press release and on the call, you reiterated the up 24% to 31%. But at the same blush, 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?

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 you know, 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.

Okay. But I guess I, you got into two different numbers.

Yeah. No, I'm sorry. The 30% is really just a midpoint.

Okay. All right. And I guess the second question would be on the IT side of things. Obviously, you sound pretty bulled up about that opportunity. I'm wondering if you're seeing that translate into capacity additions. Particularly, we'd 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? Thank you.

Well, in terms of the growth benchmark capacity, at the end of the year, we've talked about 50% growth for a two-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 – 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, you know, right now, the IT market is barely 1%. You know, BOLAs are barely 1% of the IT market. And, you know, that's about... 450 million units. So there is a lot of runway for growth on the IT side. Thank you. Thanks, CJ.

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

Thanks for taking my question. 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 describe that this is 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?

I don't think there's any real inventory dynamics in terms of, safety stock or pre-purchases that, but as you're well aware, our material or purchases have been lumpy from time to time by our customers. And if we're, you know, if you're talking about, you know, where our customers are in terms of what they sold, you know, we are, we are on the input side. So, you know, 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, you know, any different this quarter than other quarters in terms of lumpiness.

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? Thanks.

Yeah, we believe that the 21% buying patterns are lumpy, and they have been, particularly with Chinese customers in the past.

Okay.

Thank you.

Thank you, Sidney.

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

Hi. Thank you for taking my questions. I have a question on the progress of the blue phosphorescent material. Obviously, you know, Samsung presented a paper at the 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.

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

Great. Steve, I have another one. In your prepared remarks, you talked about 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 maybe 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?

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

Thank you.

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

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

Well, as you're aware, I mean, LG this year has been talking about an increase from last year's number, and then they're talking about going to 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 are the best TVs ever.

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 TPG, but just in general, how are you sort of balancing it as you look forward to the next year or so?

Yeah, I mean, we specifically called out a review and the review has gone up. And that does have an impact on it. It also has an impact on product mix. And we're always looking to be more efficient in terms of our manufacturing process. But, you know, our gross margins do vary quarter to quarter. Thanks. Thanks, Shannon.

As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from Brian Lee with Goldman Sachs. Please proceed.

Hey, everyone. Good afternoon. Thanks for taking the questions. I might have missed it. I had to jump on a little bit later here. But, you know, 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, you know, kind of that view versus what you've historically been experiencing?

You know, I don't think there's anything specific. I mean, it really is, there are some uncertainties related to the chip shortage and the pandemic issues. And, you know, based upon everything we can see, I mean, we're still comfortable

Okay, fair enough. You mentioned the chip shortages, and I think it's widely known that there's different areas of different supply chain sinks and constraints. Are you seeing that impact your customer buying patterns at all? I know it's not easy to gauge that. 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?

I mean, as you mentioned, you're well aware that, you know, industry only ends at talk about it. And, you know, our customers on their conference this is where right now we're very comfortable with where we are.

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? Thank you.

I think as you're aware that the way we talk about 50% capacity from the year 19 to the end of 21 is it was I think there is, you know, a lot of chatter about 1085, but I don't think, you know, to be perfectly honest, you know, that's new. And, you know, when we looked at this at the end of 19, And, you know, 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 take over what it really was.

Okay. Thanks a lot. I appreciate it, guys. Thanks, Brian.

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

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

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