Universal Display Corp (OLED) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Universal Display Corporation's Second Quarter 2022 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. (Operator Instructions) 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 a property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the expressed 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 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.

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 3-person start-up to a profitable, world-class operation, 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 start-ups called International Mobile Machines Corporation or IMM, which helped invent digital cellular radio. In 1996, we again 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 are continuously growing our portfolio of state-of-the-art technologies and materials, expanding our presence around the world and fortifying our robust framework for growth, in all of which Sid has been instrumental.

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 Sid a happy, healthy and well-deserved retirement.

We are excited to announce that Brian Millard 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 joined 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 traversed 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. Our 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. Our second quarter started off on a solid note. But as we approached the summer, customers lowered their forecasts. Given the downward trend in forecast revisions and increasing macro uncertainty and volatility, we are revising our 2022 revenue forecast to approximately $600 million, plus or minus $10 million.

While near-term headwinds are expected to continue weighing on the economy and impacting consumer spending, positive long-term momentum in our OLED pipeline continues. OLED industry road maps continue to expand. And as the evolution of the OLED market continues to advance, so are we. 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 are investing in our people, our technologies, our materials and our infrastructure to reinforce our first-mover 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 advance product road map plans for medium- and large-area OLED adoption.

As OEM activity for OLED IT and OLED TV products continue to grow, there are recent reports that Samsung, LG Display, BOE, Tianma, China Star and Visionox are 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 LTPO backplane and tandem OLED material structures to prepare for the OLED IT wave. 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 continuous 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 emissive system. We continue to believe that we are on track to meet preliminary target specs with our phosphorescent blue by year-end, which should 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 our 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's 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 unshakable belief in the future of OLEDs and the company.

In 2011, we achieved profitability, and UDC's earnings has 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 was $136.6 million compared to first quarter of $150.5 million and second quarter 2021's $129.7 million. Our total material sales were $71.9 million in the second quarter of 2022 compared 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. Red 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 Adesis 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 and gross margins of 78% in the first quarter and $28 million and gross margins of 78% in the second quarter of 2021.

Costs 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%, and the comparable year-over-year's 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 expense, excluding cost of sales, was $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 of SG&A and 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 $53.3 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 and operating margin of 38% in the second quarter of 2021. Income tax rate was 24.5% for the second quarter of 2022. And 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 1.3:1. The shift in revenue mix is a result of the deferred revenue recognition as customer long-term agreements reach the end of their term.

And 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 clouds of uncertainty are 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 broaden our portfolio of OLED materials and technologies, to increasing our critical mass and growing our global footprint in Asia and Europe, we are further solidifying our leadership position, bolstering our value proposition and 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 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 Instructions) Our first question comes from Brian Lee with Goldman Sachs.

Sad to say these will be the last questions on a public call for my friend, Sid, but great legacy here. You will be sorely missed. Congrats on the retirement.

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, more Korea, more 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, i.e., is this pretty conservative in terms of the order softening and what you reflected in guide? Or what are some of the puts and takes as to whether or not there could be even further downside risk?

Well, without commenting 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 lockdowns in China may have impacted domestic sales.

When we do this, we took into account our customer forecast, the slowing demand for the consumer electronics products and continued headwinds from the pandemic. As you're well aware, many of the consumer electronics -- and as part of the consumer electronics ecosystem, the uncertainty of the macro and rising inflationary pressures are really weighing on consumer spending and really affecting the demand side.

Yes. Yes, fair enough. And then maybe just one more question, and 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 CYNORA, in particular, has gotten some investor focus as well as some of the key locks, I think, targeting of commercialization in the next couple of years. Anything noteworthy from your guys' vantage point around your status in red and green? And then, I guess, updated thoughts around blue as well.

Brian, we believe the future of OLEDs will continue [to set] phosphorescence as they had for more than a decade. And we believe we're continuing to make a lot of 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 for the year-end meeting preliminary specs and 2024 commercial introduction.

And our next question is from Krish Sankar with Cowen and Company.

And Sid, as Brian mentioned, congrats on the retirement. You will definitely be missed, for sure, by analysts, investors and your customers. So thank you for all that you've done for us.

Well, thank you very much. I appreciate those kind words.

He'll be missed by employees, too.

And employees, too. I apologize for missing that out.

My wife may not give you the same answer.

Sid, 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 you think about the operating leverage in the model and the earnings power?

Well, we think that it's still -- it's going to be a short-term blip. And we're operating -- we're a lean-and-mean company. We're actually -- we're talking about -- when we talked about expenses being up to the 15%, we're going to guide towards the lower end of that number. And the operating margins, I think, are going to continue, and we expect them to grow in the future. So it's 40% now. And as we said in the past, we expect it to grow.

Got it. Got it, fair enough. And then a follow-up is you spoke about the $8.8 million catch-up revenue in the quarter. Can you give some color around it? Is it due to like a certain amount of volume purchase agreement? Or what was that $8.8 million exactly about?

It's a catch-up based upon estimates for the year. And as we said that the -- we've made an adjustment in our guidance for the year by reducing our guidance to approximately $600 million from $625 million to $650 million. So based upon the softness in demand in the quarter, we did make an adjustment to the forecast. And when you do that, you do have a cumulative catch-up that impact it.

Our next question is from Sidney Ho with Deutsche Bank.

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

Thank you, Sid. I like talking to Sid, so 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 may recover some in the second half. Given the lower utilization seen across the industry, have you seen any of your customers slowing down capacity addition? I understand that usually happens in the LCD market when utilization drops, so curious whether that also applies to OLED.

Well, clearly, one of the reasons we reduced our forecast is that demand is getting reduced. But we talked about installed capacity from the end of '21 to the end of 2023 to be approximately 20% to 25%. And right now, we still think that, that is the case. We are talking about 2024 for new capacity for IT products, but we have not seen anything of anybody scrapping their plans for expansion. I think in the long run, OLEDs are going to be the [one], and we all believe that.

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

Well, while we can't speak for our customers, we are excited about Samsung entering the OLED TV market. As you can surmise, we believe that OLED TVs are spectacular. And we are here to help and collaborate with our customers for OLED displays from wearables to smartphones to IT to TVs and other markets, including AR and VR. So we're very excited about them entering the TV market.

And your question was, when blue works, will it get adopted? That's something we really can't talk about as we can't talk about our customers. What we do know is our customers are very excited about getting a commercial blue.

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

This is actually Christ Grenga on 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? How are you thinking about that?

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

(Operator Instructions) Our next question is from Martin Yang with Oppenheimer & Co.

My question is more about your Chinese customers. It seems that their revenue contribution held up pretty well despite some very well-communicated weakness in the underlying market. Can you maybe 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 that customers, as we've talked about, is -- those sales to Chinese customers have always been lumpy. And from one quarter to next, it's difficult to predict. I do think that there are issues obviously with the shutdown in China and things like that, that impacted. But I mean, overall, I think they're all working very hard to grow their OLED market and grow their share.

Got it. On the second question, on gross margin, historically, hasn't really affected by volume and it's mainly driven by mix. Is that still the case? If revenue slows down furthermore, do you expect any meaningful impact on your gross margin?

No, I think we expect -- as we said, we expect our gross -- we think that our gross margin is 65% to 70% for this year. We do think it's, because of inflationary pressures, it's going to be towards the lower end.

Got it. Sidney, congratulations on the retirement.

Thank you very much.

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, and we appreciate your interest and support. And I just want to say it's been my pleasure working with all of you, so thank you very -- thank you all.

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