Q3 2022 Universal Display Corp Earnings Call
Confident that Brian will enhance our executive team and help our company continue to grow and prosper.
Now to our results third quarter 2022 revenue reached a record high of $161 million operating profit was $68 million and.
Net income was $53 million or $1 12 per diluted share.
As we look ahead, we believe the long term growth path of the OLED industry remains strong.
Near term OLED demand may fluctuate due to uncertainties in the macro economy.
We continue to believe that 2024 will be a pivotal year for the OLED industry and for US. We believe that a number of panel makers are planning Gen. Six in Gen. Eight OLED investments setting the stage for a significant multiyear capex growth cycle.
Factors that Oems are slated to advance the OLED adoption curve to medium and large area displays with OLED IP being a key near term focus.
As an integral enabler and partner in the OLED ecosystem. These new capacity plans translate into new revenue opportunities for us.
Positive growth trajectory for years to come.
According to market research firm UBI OLED shipments for products, such as tablets notebooks and monitors are expected to grow more than 400% in the next five years with unit shipments increasing to $48 8 million units in 2027% up from $9 5 million units in 2022.
<unk> also noted the Korean and Chinese panel makers are expected to invest in OLED lines with leaders Samsung display LG display and Bofa already planning to invest in new Gen. Eight seven production.
At the end of August during the <unk> Conference in Korea, Samsung display announce it we will invest in Gen. Eight OLED capacity and estimate that this new capacity will be in operation by 2024.
STC also forecasted that the OLED market will reach approximately $100 billion by 2030 more than doubling from today's OLED market, which is estimated to reach about $45 billion by the end of 2022.
Ah VR augmented reality and virtual reality is also gaining buzz in the oil industry.
In early September at the <unk> Conference LG display announced it I believe on Silicon will be the main display used in future <unk> devices.
It has been reported that LG display of SK hynix are forming a partnership to produce micro OLED displays.
It has also been reported that Bowie recently established an AR VR Department that includes is coming micro OLED Division.
As a company we are continuing to reinforce and expand our leadership position in the OLED ecosystem with our deeper broad experience and know how of more than 25 years of pioneering research we are continuing to innovate and introduce new OLED phosphorescent emissive materials, including new Red.
Ads 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.
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.
On the <unk> J P. Front, we are pleased to report that we achieved a key performance milestones. We are now able to print two layers, the red Green and Blue Phosphorescent emissive layer and the prime lay our elektron blocking layer.
Additionally, these ob JP RGB forward devices, a comparable performance as OLED devices fabricated using traditional vacuum thermal evaporation.
This represents a significant milestone in our Ob JP roadmap of printing all the organic layers and an OLED device.
On that note, let me turn the call over to Brian .
Thank you, Steve and again, thank you everyone for joining our call today.
I'm excited to have joined Universal display Corporation, an extraordinary pioneer and the OLED industry for more than 25 years.
With our brilliant team cutting edge initiatives lean operating model and strong balance sheet. The company is well poised for continued advancement in the growing OLED market.
I look forward to working with the entire UDC team to continue to build upon our strong culture of inventiveness integrity inclusion and imagination.
And deliver on the company's mission of being a critical enabler in the OLED ecosystem.
Now to our third quarter 2022 results.
As Steve mentioned, we had a record quarterly revenue of $161 million compared to the prior year period of $144 million.
Our total material sales for $84 million in the third quarter compared to material sales of $76 million in the third quarter of 2021.
Green emitter sales, which include our yellow green emitters were $64 million. This.
This compares to $58 million in the third quarter of 2021.
Red emitter sales were $20 million. This compares to $18 million in the third quarter of 2021.
As it has been discussed in the past material buying patterns can vary quarter to quarter.
Third quarter royalty and license fees or $71 million.
Compared to the prior year period of $64 million.
<unk> revenues for the third quarter of 2022 or $5 million in the comparable period in 2021, it was $4 million.
Third quarter cost of sales were $37 million translating into total gross margins of 77%.
This compares to $31 million and total gross margins of 78% in the third quarter of 2021.
Cost of OLED material sales in the third quarter of 2022 or $34 million translating into material gross margins of 60%.
This compares to $29 million and material gross margins of 62% in the third quarter of 2021.
In addition to the inflationary pressures that were noted last quarter. We recently brought online an initial phase our new Shannon manufacturing site.
This additional capacity is critical for the anticipated growth in the years ahead, but it is currently underutilized.
This underutilization impacted cogs by approximately $1 million per month.
And is expected to move our near term material gross margins to the low 60% range. This year and our total gross margins for the year to be approximately 78%.
As an industry leader in sole source to all of our customers. We are planning for the future. We're also preparing for the OLED industry's next significant wave of new capacity and for our expanding portfolio of phosphorescent materials.
The Shannon facility is slated to meet our customers' increasing needs as well as diversify our global manufacturing footprint.
Third quarter operating expenses, excluding cost of sales or $55 million and.
In the third quarter of 2021, it was $54 million.
For the year, we now estimate that our operating expenses of SG&A R&D and patent costs in the aggregate will increase in the range of 5% to 10% year over year.
Operating income was $68 million in the third quarter translating into operating margin of 43%.
This compares to the prior year period of $58 million and operating margin of 40%.
The income tax rate was 24% for the third quarter of 2022 and for the year, we believe our tax rate will be approximately 23%.
Net income for the third quarter was $53 million or $1 12 per diluted share.
This compares to the third quarter of 2021 $46 million or <unk> 97 per diluted share.
We ended the quarter with approximately $844 million in cash cash equivalents and investments are $17 77 per diluted share.
Moving along to guidance, we are reaffirming our belief that 2022 revenues will be approximately $600 million plus or minus $10 million. We believe that the ratio of materials to royalty and licensing revenues will be in the ballpark of one three to one.
Our board of directors approved a 30 quarterly dividend, which will be paid on December 32020 to stockholders of record as of the close of business on December 16th 2020 to.
The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.
While it's only been two months since I joined UDC my level of excitement for the SaaS moving forward thinking company as well as the OLED industry has only increased with our strong operating profit base, we have the ability to support our customers increasing needs shape, our future and broaden into new opportunities.
With that I will turn the call back to Steve.
Thanks, Brian it's great to have you on the team.
Universal display history illustrates our long term strategic planning execution for growth and success, our ability to overcome challenges and our steadfast commitment to enabling our customers with groundbreaking solutions as well as supporting their evolving needs.
The road from discovery to delivery can be long and winding and also tremendously rewarding.
It was 2003, when a red phosphorescent emitters in technology, we're commercially adopt OLED some display for clamshell phone.
Over the course of a decade. In addition to developing an array of next generation roads. We worked on commercializing our greenfields for Essent materials and in 2013, our Greenfield was adopted in Samsung Galaxy S. Four.
Our sights are now set on delivering commercial red Green and Blue phosphorescent materials to the market, enabling our customers with a comprehensive portfolio of energy efficient high performing materials and helping the OLED industry to further grow.
With a robust balance sheet of nearly $850 million in cash and investments a lean operating model and know that we have the flexibility to continue to invest for a strong future. While uncertainties may continue to weigh on the near term macro economy, we're continuing to invest in our R&D initiatives and ERP.
And in our infrastructure.
Multifaceted strategic approach enables us to continue to support our customers expand our market opportunities and amplify our value proposition in the OLED ecosystem further solidifying and broadening our leadership position to not only grow with the OLED market, but to grow faster than the market.
I would like to thank each of our employees for their drive desire dedication and heart.
Elevating and shaping universal displays accomplishments and events, 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 Steve I'd like to ask a question. Please press star one on your telephone keypad.
Formation, Tom will indicate your line is in the question queue you.
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.
Pressing the start he is.
Our first question is from C. J Muse with Evercore ISI. Please proceed.
Good afternoon, and thank you for taking the question I guess first question.
Trying to think through the moving parts for calendar 'twenty three for you.
<unk>.
Should we be thinking.
Smartphone units.
And plus a certain percentage of your ending deferred revenues I think down to $94 million.
What percentage of that should we be thinking about and then what about other kind of new markets that can start to kind of move the needle like it et cetera would love to hear your thoughts there.
I see Jamie Steve. Thank you. Thanks for your question.
We're going to provide 2023 guidance on our February conference call.
And we're looking at 2023 frankly, the biggest should be in the macro environment just like we're seeing some headwinds now and it's really going to be the macro environment, if the demand environment improves.
We expect to benefit.
You may see some additional some new it.
In 2023, but we think it would be more of a 2024 type of ramp or.
On the <unk>.
And C. J, it's Brian one thing to add on the deferred revenue question I mean, I think as you know we recognize all of our deferred revenue by the end of each of our customer contracts. If you look at our balance sheet. We have as of the end of September $67 million in current deferred revenue. So that's the amount that we would currently expect to recognize over the next 12 months.
And can you kind of can you walk through how that could change if you were to shine a new agreement with your largest customer would those revenues get pushed.
The next contract or they would stay within the next 12 month window.
Yes, so I think we're not going to be talking we're not in a position yet to talk about any contract renegotiations and new contracts and when they come to pass we'll certainly provide an update at that point.
Okay.
Quick follow up on the gross margin side, you talked about Underutilization for Shannon, how should we think about the progression there in calendar 'twenty three.
Yes, So I think Shannon first of all the key capability and adding this additional capacity to our manufacturing network was really critical as we plan for the future of the industry and where we know that will go along with the industry.
As we said in the prepared comments, we're a sole source provider for our customers. So we need to make sure that we have the capacity available to meet their needs.
As you look into next year I mean, we're going to hot Shannon is a key capability as I said it will be part of our network and we expect to continue to utilize it to a greater degree.
As volumes increase in the years ahead.
Thank you very much.
Our next question is from Krish Shankar with Cowen and company. Please proceed.
Hi, This is Steven calling on behalf of Krish I think so much for taking my questions I had.
First one is just on.
The September quarter, as well as the December quarter and material revenues can you talk a little bit about how the linearity material sales were doing.
In the business and your question was earlier on them you know.
Material versus royalty and licensing and based on our revenue recognition model. They they tend to follow one another because we recognize both revenue streams as we saw units of material.
<unk> and <unk>.
<unk> should receive I was wondering if you could talk with them about.
Dynamics in your major markets like mobile.
Well I was just like T V 's and loss of I T. I think the the mobile weakness has been a loner stood for awhile now, but I guess your as you've seen a demand play out so far and then the second half of the year.
You scheme.
Large displays also showed weakness in along with iced tea or are those two market says potentially bucking the trend just because of that.
New plans come with customers happy helpful. Thank you.
Good question are generally seeing softness across the board. It does seem as though the high end cell phone market seems to be holding up reasonably well, we're seeing activity growing for I T, especially as we look forward.
2024.
Okay. Thank you very much.
Thank you.
Our next question is from Brian Lee with Goldman Sachs. Please proceed.
Hey, guys. Good afternoon, thanks for taking the questions.
I got on the call a little bit late so I apologize if if you covered some of this but.
Brian .
Nice to speak with you that the ketchup revenue, you're referring does that referring to stem from your largest customer it seems like the revenue contribution from them.
Hit a record quarterly high here. It also as close to back to being back to 50 per cent of your sales makes so wondering if if that's what it was related to and then how this would impact for Q and going forward as well.
Yeah. So we're not in a position to talk about individual customers, but it was a number of customers that resulted in the the cumulative catch up that you saw come through.
We have seen quarter over quarter sequential growth in revenues of our largest customer.
Okay Fair enough and then I know you you can't give us guidance on 23, but this gross margin issue with Shannon.
Clearly is gonna have a multi quarter impact it doesn't sound like just based on your answers to an earlier question it's gonna be.
Reverting right back to kind of full utilization at the beginning of 23, so how how how should we be thinking about the past to sort of normalize or historical gross margins. If this is gonna be.
An issue that extends beyond four Q, if I hear you correctly.
Yeah, I mean, I I think as it relates to Shannon clearly as I said earlier, it's a key capability that we see is very critical to our manufacturing network.
You know as as we expect increased volumes material volumes in future periods, we would expect to be able to absorb the overhead related to that facility over.
That incremental volume. So I think there is a path to get the margins back up to closer to where they were previously we just you know in the near term given the softness in the market that we've my preference, which is echoing you know what we're seeing and hearing from peers. It is gonna be you know for the show up at a time here in the near term a dry.
Gross margin.
Okay.
Okay.
Our next question is from Sydney donation Bank. Please proceed.
Great. Thanks for taking my questions and welcome Brian Uhm I wanted to follow up with the last question on the accumulated Justin last quarter. You also have a similar adjustments, but that's at that time, you didn't know guidance for the full year for <unk> 22, but this time, you're not changing the full year guidance can.
You help us understand how we should think about revenue per helping the out year that that is kinda tiger dysrhythmia adjustments, but this quarter.
Yeah, So I mean, I'm, just kind of explaining it in higher level terms right. We recognize all the deferred revenue over but I guess it is it released the cumulative catch up.
We assess our forecasts on a quarterly basis and what we saw this this time only that went through the process. We're due to some of the uncertainties in the macro economy.
We did have to revise are forward looking estimates across a number of customers and that was what resulted in the cumulative catch up this period.
And yet it gives maybe just to clarify that is a <unk> tie to primarily royalty and license fees and not the material sales right.
It's the totality. So we recognize both of our material revenues as well as our royalty in licensing revenues based on the units that we expect to sell to each customer. So both revenue streams move in the same direction with each other based on based on that pattern. So it's both revenue streams. So if you look at them on a combined basis and a revenue model.
Okay got it maybe I follow up questions <unk>, giving you a strong balance sheet close to $850 million of cash and way you should wait of share prices, how as a team and the board of directors think about potentially buying back shares in the open market I know you want to build the hold onto some certain cash balance for various reasons, but as for.
<unk> something the company would consider.
Thank you so yeah, sorry, where they are in other parts of that.
Yeah, So our our board and the management team are certainly regularly reviewing the capital structure in ways that we can return capital to shareholders. So we evaluate all options you know at present, we continue to believe that the dividend program that we have in place is the best method for us to do that.
Okay. Thank you.
Thanks.
As a reminder into star one on your telephone keypad as he would like to ask a question. Our next question comes from gym, where shady with Needham and company. Please proceed.
Hi, Good afternoon, that's actually Chris Gringa on for Jim.
Thanks for taking my questions.
You had mentioned that the eyes of the investment in the I T panel lines and S. D. C's Jan eight line, but other fad capacity expansions and retooling that you're keeping track of I've seen any indications that those investments are being pushed out or trimmed back.
Not really I mean other than the the general thrust of the macro economy and the things that were sick.
We're not seeing any.
Any pushups.
On these sorts of things.
Especially we're not looking for it because we tried to look at the.
It seems as though.
It looks like it may be the next big move up for for all of US and people want to get on the rug everybody.
Is there a short term macro uncertainty out there, but to Ya OLED industry as a long term secular growth market and people want to be there and be ready when it turns up again.
Got it thanks, and how how should we think about R&D expense going forward as blue nears commercialization.
<unk>, new product development initiatives, such as O B, J P and perhaps others to ramp investment to backfill win win blue when the intensity of blue kind of subsides.
Yeah. So I think you know as a as a growth company, we're always going to be making sure we're making the right investments in the business and our R&D pipeline.
Whether it's programs have you already have underway and I've talked about our other things that we may have it they were working on so we're.
We're not in a position today to give any guidance on forward looking R&D expense, but.
I'll, just say, we're kicking to continue to invest and grow the business.
Great and one more if I may any any sense of timing or updates on Samsung exercising that the two year extension has under the in place agreement.
We can talk about anything right now and there's often when there was something to announce we will talk about it.
Perfect. Thank you very much.
Thanks to welcome.
And our final question is from our end Yang with Oppenheimer and company. Please proceed.
Hi, Thank you for taking my questions Uhm, so given a tougher setup for smartphones and television into next year.
Can you maybe give us a historical perspective on win.
Men slows down and there's a massive pricing panels.
Are there any customer.
And for you to lower prices and looking into next year or do you feel that.
It's comfortable to hold your aspie assumptions stable into next six months or next 12 months.
We have long term contracts with our customers and we are constantly talking to them.
But we're pretty confident uncomfortable and our current pricing strategies.
Got it.
Also a follow up call regarding Shannon facility.
Is that what it's.
<unk> on.
Do you feel the need to maybe put.
Put it off long if you want to maybe optimize their market structure or do you intend to keep the running once it started.
Yeah. So it's a good question I mean, I think if you think about it it's not the type of thing you can easily turn on and turn turn off and turn on when you need it and don't so we.
We have a core group of folks that are working there with our partner PPG and our expectation is that we need to have that group already unable to continue to grow and develop the facility.
Got it thank you Brian .
Welcome to the company.
Thank you.
Thank you. This does conclude our question and answer session I would like to turn the program back over to Brian My life for any closing our additional remarks.
Thank you all for your time today, we appreciate your interest and support.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.