Q2 2022 Universal Display Corp Earnings Call
I think display industry with a relatively unknown technology called OLED.
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.
Lean and profitable operating model and are continuously growing our portfolio of state of the art technologies and materials.
Spanning our presence around the world and fortifying our robust framework for growth.
All of which it has been instrumental.
Worry, though soon is not leaving the UTC family. He will remain on the board of directors and continued to share his valuable insights and guidance.
Behalf of the entire company I would like to wish sit a happy healthy and well deserved retirement.
We are excited to announce that Bryan the large has been appointed Chief Financial Officer effective September six 2022.
Brian will be an excellent addition to the executive team to help spearhead UDC to new heights of opportunity and growth.
Brian joined UTC with a wealth of experience across several industries 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 bio solutions as.
His prior experience traverse large multinational corporations, including Hertz global at Hilton worldwide.
Brian will help nurture and enhanced Udc's collaborative culture of inventiveness integrity inclusion and imagination that makes UDC and unique growth company on behalf of the entire company I welcome Brian to UTC.
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 <unk> 87 per diluted share.
Our second quarter started off with a solid what.
Now as we approach the summer customers lowered their forecast given the downward trend and forecast revisions and increasing macro uncertainty and volatility we are revising our 2022 revenue forecast to approximately $600 million plus.
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 Roadmaps continue to expand as the evolution of the OLED market continues to advance so are we.
As a lean operating company with a strong balance sheet 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.
The 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. Six Gen. Eight five OLED capacity plans are reportedly in the works as panel makers and Thats product roadmap plans for media.
And large area OLED adoption.
OEM activity for OLED.
<unk> TV products continue to grow there are recent reports that Samsung LG display.
T asthma, China Star and <unk> are all reviewing new investment plans.
This new wave of capacity build 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 LTE Peel back plane in tandem OLED material structures to prepare for the OLED 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 would enable the introduction of our all phosphorescent RGB stack into the commercial market in 2024.
We believe that the commercial introduction of our full color emissive stack will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications.
Another important component to support growth and our customers is the development of groundbreaking technologies that solve significant industry challenges and help advance the OLED market.
For decades, the OLED industry is sort of a manufacturing process for side by side RGB OLED Tvs the pattern the pixels across a gen eight five plus mother glass.
This is the industry challenge and opportunity that we are taking on with Ob J P.
We are steadily making progress with constructing the key sub systems of our Alpha system design for our Trailblazing manufacturing printing platform in May our Silicon Valley team printed our first Gen. Four panel using 10, Ob JP print nozzles, and our phosphorescent emitter materials.
While still a few years away, we believe that Obi JP 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 and the ecosystem.
These initiatives also reinforce our strategic priorities to widen our reach.
<unk>, our business and drive profitable long term growth.
On that note.
And for the last time in more than a decade of earnings Conference calls, let me turn the call over to Sid.
Thank you, Steve and again, thank you everyone for joining our call today.
It has been my pleasure and privilege to serve as UDC CFO since Sherwin, Steve and I took the company public and $19 96.
This amazing 26 year journey has been filled with triumphs challenges unwavering determination as well as an unshakable belief in the future of OLED and the company.
In 2011, we achieve 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 $155 million and second quarter 2021, $129 $7 million.
Our total material sales were $71 9 billion 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.
<unk> sales in the second quarter of 2022 were $17 $3 million.
This compares to $22 million in the first quarter.
$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, a thesis 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 or $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 in gross margins of 78% in the second quarter of 2021.
Cost of OLED material sales in the second quarter of 2022 or $25 million translating into material gross margins of 65%.
First quarter material gross margins were also 65% and the comparable year over years 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.
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.
39%.
This compares to $62 $3 million and operating margin of 41% in the first quarter and $49 9 million in 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 <unk> 87 per diluted share. This.
This compares to last quarter's $50 million or a $1 five per diluted share.
And the comparable year over year quarter of $40 5 million or <unk> 85 per diluted share.
We ended the quarter with approximately $834 million in cash cash equivalents, and divestments or $17.58 of cash per diluted share.
Okay.
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 and licensing revenues will be in the ballpark of $1 three than one.
The shift in revenue mix as a result of the deferred revenue recognition as customer long term agreements reached the end of their term.
And lastly, our board of directors approved a <unk> <unk> quarterly dividend, which will be paid on September 32022.
Stockholders of record as of the close of business on September 16th 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.
As we look to the OLED industry. The stage is being set for the market next growth phase.
While macro economic clouds of uncertainty are expected to weigh on the consumer demand landscape in the near term with pending new OLED capacity announcements and 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 with strong growth in the coming years for the industry and for us.
From discovering 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 horizons.
Opportunities.
We'd like to thank each of our employees for their drive desire dedication and heart in elevating and shaping universal displays 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 Robinson.
We would like to ask a question. Please press star one on your telephone keypad.
Permission tone will indicate your line is in the question queue. You May press star two if he 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 star keys.
Our first question comes from Brian Lee with Goldman Sachs. Please proceed.
Hey, guys. Good afternoon, thanks for taking the questions.
Yes.
<unk> will be the last question is on a public call for one of my friends said.
But.
Great legacy here, you'll be sorely missed congrats on the retirement.
Thank you. Thank you very much Brian .
I guess, just a couple of questions I know youre going to get a turnaround in the guidance. So maybe just to start off big picture can.
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 <unk> more Korea, or China, and then on applications was it.
See more smartphone specific for more TV or vice versa, and then how comfortable are you that you're 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 in what you reflected in guide or.
What are some of the puts and takes as to whether or not there could be then even further downside risk.
Well without commenting on any particular customer we believe that the macroeconomic uncertainties.
Inflationary pressures are impacting consumer spending across the board. There has also been a lot of reporting that the lockdown in China may have impacted domestic sales.
When we do this we took into account our customer forecast slowing demand for the consumer electronics products and continued headwinds from the pandemic.
Yes.
As you're well aware.
There are many of the consumer electronics and it's 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 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 for the OLED materials segment, I think the Samsung purchases of Cynosure 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 Guy's vantage point around your status in Red and Green.
And then I guess updated thoughts around blue as well thank you.
Hi, Brian .
We believe the future of OLED will continue said profiles for us as they have for for.
For more than a decade.
And we believe we're continuing to make a lot of progress across the color spectrum.
Have the largest team.
If the world working on these 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 2020 for commercial introduction.
Alright fair enough. Thanks, a lot guys.
Thank you.
And our next question is from Chris <unk> with Cowen and company. Please proceed.
Yeah, Hi, Thanks for taking my question and say that Brian mentioned, congrats on the retirement, you'll definitely be missed for sure by analysts investors and your customers.
Customers. Thank you for all that you've done for us.
Well. Thank you very much I appreciate those kind words.
And it'll be a mist employees too.
And then play it still I apologize.
My wife May not give you the same answer.
He might be on the board of directors, but I wanted to ask you. This question and feel free to answer it because he might not be liable for this I'm just joking.
Hypothetically speaking if revenues are down.
If revenues are down next year lets say, 10% or so how do you think about the operating leverage in the model and the earnings forward.
Well, we think that.
It's still.
Going to be a short term blip and operating a lean and mean company.
We're actually we're talking about when we talked about expenses.
Being up 10%, 15%.
We're going to guide towards a 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.
40% now and as we said in the past we expect it to grow.
Got it got it and put it off and then.
Follow up thank.
And then you spoke about the $8 $8 million catch up revenue in the quarter and I guess some color around it.
The amount of volume agreement.
What was that $8 8 million exactly about thank you very much.
It's a.
The catch up based upon estimates for the year and as we said that.
We've made an adjustment in our guidance for the year by reducing our guidance of approximately 600 million from $6 95 to $6 50.
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 impacted.
Got it got it thanks, a lot Sir thanks a lot.
Thank you.
Our next question is from Sidney Ho with Deutsche Bank. Please proceed.
Thanks Len.
Add my congratulations on your retirement, it's been a pleasure working with you over the years.
So let me let me ask I think you said.
I like talking to said alright. Thank you.
I totally understand.
Let me ask a question on.
On utilization again 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 LTE market when utilization drops of choice.
That also applies to OLED.
Well.
Clearly one of the reasons, we reduced our forecast as demand is getting reduced but.
We talked about.
Installed capacity from the end of 'twenty, one to 'twenty and 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 our products, but we have not seen anything of antibody.
Scrapping their plans for expansion I think in the long run OLED theyre going to be the winner we all believe that.
Okay. That's fair my follow up question is.
On the on the OLED TV side of things Samsung talk about their <unk>, surpassing the target that we expect increasing demand for QD display can you remind us your revenue opportunity in the current version of QD OLED and maybe how that will change over time, if they start adopting your phosphate.
And how should we think about your revenue opportunity.
And choices can deal that TV, assuming revenue is fully.
Fully adopted in both technologies.
While we can't speak for our customers. So we are excited about Samsung during the OLED TV market.
As you can survive, we believe that OLED Tvs are spectacular.
We are here to help them collaborate with our customers.
OLED displays from Wearables smartphones and.
The Tvs.
In other markets, including <unk>. So we're very excited about entering the TV market.
And your question was one blue works.
Will it get adopted that's something we really can't talk about it I can't talk about our customers.
We do know is our customers are very excited about getting a commercial blue.
Okay. Thank you very much.
Thank you.
Our next question is from Jim Ricchiuti with Needham <unk> Company. Please proceed.
Hi.
Chris <unk> on for Jim.
And congrats on the on the announcements here.
Thank you.
Yeah.
Sure.
Just with the 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.
Are you thinking about that.
Yeah.
We believe that the Shanghai facility is really going to help us.
<unk> expands 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.
Theres, obviously start up costs that you have to deal with but I don't expect this to have any impact that would be noticeable.
Terrific, Thanks very much.
Thank you.
As a reminder, the star one on your telephone keypad, if he would like to ask a question. Our next question is from Martin Yang with Oppenheimer and company. Please proceed.
Hi.
For taking my question. My question is more about Chinese customers it seems that.
Their revenue contribution held up pretty well.
Alright, very well communicated weakness.
The lighting market can you maybe talk about what was driving that.
Do you expect maybe a higher decline from those customers in the second half.
Referring to your customers in China.
Alright.
I think that our customers see it 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.
We think that there are issues, obviously with the shutdown in China and things like that that impacted but I mean overall I think they are all working very hard to grow the OLED market and grow their share.
Okay. Thank you.
And a second question on gross margin.
Okay Hasnt really.
Affected by volume.
<unk> driven mix is that still the case if revenue slows down. Furthermore, do you expect any meaningful impact on your gross margin.
No I think again.
We expect as we said we expect our growth we think that our gross margin 65% to 70% for this year. We do think it's because of inflationary pressures is going to be towards the lower end.
Okay.
Got it.
Thank you.
Congratulations on the retirement thank.
Thank you very much.
Thank you. This concludes the question and answer session I would like to turn the program Baxter said 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 wanted to say it's been my pleasure working with all of you. So thank you. Thank you all.
Thank you. This does conclude today's conference call you may now disconnect.