Q1 2023 Universal Display Corporation Earnings Call
Good day, ladies and gentlemen, and welcome to Universal display corporations first quarter 2023 earnings Conference call. My name is Paul and I will be your conference moderator for today's call.
At this time all participants are in a listen only about a brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference police Crestar zero on your telephone keypad.
As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference call over to Darris Blue Senior director of Investor Relations Police Christine.
Thank you and good afternoon, everyone welcome to Universal displaced first quarter earnings Conference call joining me in a call today or Steve Abramson, President and Chief Executive Officer, and buy them alert Vice President and Chief Financial Officer before she begins let me remind you today's call the property of unit versus like any redistribution, we transfer.
Question or rebroadcast in any portion of this call in any form without the express written consent of Universal's like is strictly prohibited.
Further this call is being webcast light and will they need available for a period of time and Universal displays website. This call contains time sensitive information that is accurate wanting as of the date at a live webcast of this call may 3rd 2023.
During this call you may make forward looking statements based on current expectations. These statements are subject to a number of significant information is guarantees and our actual results may differ materially. These residents are and teachers discussed in the company's periodic reports filed with the S. C C and should be referenced by anyone considering making any investments.
Benny Securities Universal display screen any obligation to update any of these statements.
I would like to turn the call over to see <unk>.
Hi, stairs and welcome to everyone on today's call.
For the first quarter of 2023, we reported revenue of $130 million operating profit of $45 million.
Come with $40 million.83 per diluted share.
Macro uncertainties continued to linger in way on near term demand. However, we remain confident in the long term growth passable lines. In addition to the significant I T adoption cycle.
That's good to commence next year all of the activity is increasing in several segments of the consumer electronics landscape.
Last month, Samsung display announced a 3.1 billion dollar investment to retrofit it just <unk> to adjourn 8.6.
I T facility and it has been reported that other leading panel makers are planning to invest in new capacity as well.
Doing this new cutbacks as a Nathan Oh, a I T market. According to the market research 470 million displays for IP products were shipped last year, and only 9.1 million units or 2% were over.
Do you forecast the due to leading oem's broadening their adoption of <unk>.
And their product portfolio I T old panels will reach 12.9 million units this year.
Will double to 25.4 million units next year and by 2028, all the tablet notebook panel shipments will reach 74.3 million units.
Both of US is another area of grocery excitement D. S. C. C forecasts the foldable smartphones shipments will increase 45% year over year in 2023 to 18.6 million units.
E C expects to see at least 37 different vulnerable models ship. This year from 10 different brands with Google, One plus and techno entering the foldable market for the first time.
This is an increase from last year. When there were 19 different phones will go smartphone models from seven different brands.
D C. Another market research firm projects, a five year kanger of 27.6% proposal phone shipments.
Reached 48.1 million units in 2027.
Switching gears to automotive according to Omnia, the automotive industry has emerged as a key market for displays becoming the fifth largest display application mortgage in terms of shipments as of 2022.
The a forecast that shipments in the automotive all the display market will search the 6.9 million units in 2027 from 770000 units in 2022, thanks to OLED displays rapid response rate low power consumption lightweight and slim design.
Just the past three months. So you have some display signs an agreement with Ferrari to develop all the displays for Ferrari as next generation models.
Oh Jesus play is reportedly planning to supply a 30 inch panel for electric carmaker elusive upcoming models.
Showcase its first electric S. U V. The 20th twenty-five electric E. Five in China was a 30 inch curved oli dashboard display.
Moses developed the world's first 30th Rollable OLED display for automotive applications.
And for a large area all the panels L.
L. G display announcer will release, a 77 inch transparent old product by the end of this year.
And Samsung display announcements hybrid Judy always time will yield now exceeds 90%.
We work closely with our customers as a map out the new product introductions for the coming years, and we are developing new technologies the materials to support their product roadmaps.
We have crafted a comprehensive approach for the invention of energy efficient high performing phosphorescent materials.
This includes a machine learning synthetic mechanistic analytical and processed chemistry expertise, all creative and driven by a global team of scientists engineers and technicians, we are continuously discovering developing and delivering next generation Reds Greens yellows and hosts.
To meet the ever changing and ever evolving specifications for energy efficiency operational lifetime and color gamut.
As a pioneer in the older ecosystem with approximately three decades of experience and know how we are leveraging our first mover advantage and continued to be at the forefront of the OLED materials industry.
With respect to Blue we continue to make excellent progress in our ongoing development work for commercial phosphorescent blew a missile system.
We continue to believe that we are on track to introduce are all phosphorescent RGB stack into the commercial market in 2024.
We believe that the introduction of our full suite of Red Green and Blue Phosphorescent, Mrs materials will unlock the vast array of opportunities for higher energy efficiency and higher performance across a broad range of all of the applications.
On the O V J P front, we're making advancements with our groundbreaking dry printing manufacturing process platform.
Two critical milestones that we are currently driving towards our the printing of all layers in the forward device and achieving scale print uniform.
We believe that achieving these milestones will be significant in our path to commercialize the O B J P.
To learn more about your D C, including our phosphorescent Owens O V. J P programs. Please visit Booth 828, and S. I D display week in Los Angeles later this month.
Additionally, this afternoon, we announced the acquisition of Burke T. G E as Phosphoresce in a mirror a portfolio and a new multi year collaboration agree with.
We're folio accomplices over 550 patents is 172 patent families and will complement and boost our strong global I P framework of more than 5500 issued and pending patents.
New collaboration pertaining to certain UDC green and yellow phosphorus within meters for use with Merck K G E as transported host materials to create a dense foliage stacks.
On that note, let me turn the call over to Brian .
Thank you, Steve and again, thank you everyone for joining our call today.
Looking at the first quarter of revenue was $130 million compared to $150 million in the first quarter of 2022.
Results were in line with our expectations of a softer first half of the year compared to the second half.
Our total material sales were $70 million in the first quarter compared to material shells of $87 million in the first quarter of 2022.
Green a mentor sales, which include our yellow green emitters for $54 million. This compares to $66 million in the first quarter of 2022.
Bread administer sales were $16 million. This compares to $20 million in the prior year's quarter.
As it has been discussed in the past material buying patterns can vary quarter to quarter.
First quarter royalty and license fees were $55 million compared to the prior year period of $60 million.
His first quarter revenue was $5 million, an increase of $1 million from the comparable period in 2022.
First quarter cost of sales in 2023, and 20 twenty-two we're both $33 million. This translates into total gross margins of 75% in the first quarter of 2023 compared to 78% in the first quarter of 2022.
Cost of old material sales in the first quarter of 2023 or $29 million translating into material gross margins are 58% <unk>.
This compares to $30 million a material gross margins of 65% in the first quarter of 2022.
Impacting first quarter gross margins was a 3.3 million dollar increase in our inventory provision and $4.7 million related to the under utilization of our new Shannon facility.
The combined impact on these items is approximately 6% to total gross margins.
First quarter operating expenses, excluding cost of sales or $52 million in the first quarter of 2022. It was $55 million the year over year decrease is primarily due to lower stock based compensation expense and the fujifilm patents, becoming fully amortized in July of last year.
We continue to expect 20 twenty-three opex to increase 5% to 10% year over year as we continue to invest in our people and our global infrastructure ended our innovation agenda.
Operating income was $45 million in the first quarter translating into operating margin of 35%.
This compares to the prior year period of $62 million, an operating margin of 41%.
The income tax rate was 23% in the first quarter of 2023.
We expect our tax rate for the year to be approximately 22 per cent.
First quarter twenties twenty-three net income was $40 million or 83 cents per diluted share.
This compares to $50 million or a dollar five per diluted share in the comparable period in 2022.
We ended the quarter with approximately $845 million in cash cash equivalents and investments.
Regarding guidance, we are reaffirming our expectation that 20 twenty-three revenues will be in the range of $550 million to $600 million.
And lastly, our board of directors approved a thirty-five sent quarterly dividend, which we paid on June 30th 2000 twenty-three the stock holders of record as of the close of business on June 16th 2023.
<unk> M reflects are expected continued positive cash flow generation and commitment to return capital to our shareholders.
With that I'll turn the call back to Steve.
Thanks, Brian .
Energy efficiency and sustainability are key foundational elements and Ugc's core competencies are.
<unk> award, winning phosphorus and older technology and universal forward materials can enhance the performance of displays and lightening products, providing real power saving advantages for longer battery operation and portable electronics, and less energy consumption and larger displays and lightening products.
A recently published 20 twenty-two corporate social responsibility report, which can be found on our website. We estimate there are phosphorescent technology and materials in OLED smartphones saved more than 860000 metric tons of carbon dioxide equivalent per year used.
Using an E. P. A calculator this is comparable to carbon sequestered by more than 14 million tree seedlings grown for 10 years.
In addition to the continuous generation to generation improvements in a red and Green phosphorescent materials, the introduction of our phosphorus and blew into the commercial market is expected to further increase energy efficiency and translated into added power savings longer battery life brighter displays and lower.
Pedal temperature.
We believe that our broadening phosphorescent portfolio will enable new product designs and applications and support our customers sustainability initiatives driving growth for you D C and the old industry.
And lastly, I would like to thank each of our employees for their drive desire dedication and heart elevating and shaping universal displays accomplishments in the deserts, we are committed to being a leader in the over the ecosystem, achieving superior longterm growth and delivery 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.
We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tonal indicate your line isn't the question queue. You May press star too if you'd like to remove your question from the queue for participants anything speaker equipment and may be necessary to pick up your handset before pressing the star Kids one moment, please while we poll for questions.
Thank you. Our first question is from Brian Lee with Goldman Sachs. Please proceed with your question.
<unk>. Thanks for thanks for taking questions Uhm, So I jumped out late so I apologize if you've already covered this but.
To sell.
Development materials in the quarter how much.
How many customers new account flying toward their purchasing this quarter for sampling purposes.
Yeah, Hey, Hey, Brian Thanks for the questions. So we did have a sales blue materials, both host and a better development sales and that's been the period.
$200000 worth across the number of customers.
Okay, Great and then.
Second question just.
The television market.
There's a lot of that.
And the press about L G and Samsung doing a deal.
<unk> pedals for T V 's.
Maybe high level can you speak to some of the implications for the market and also for your D C.
Alright, any potential upside maybe to your internal meetings around the television market.
Yeah.
<unk>.
Right as you know we can't speak for our customers. We thank thee O T Z market is great O T. V's are great and the more Samsung L. G. So the better it is for us.
Alright.
The rest of <unk>.
[laughter].
Thank you. Our next question is from crushed car with T. D. Cowan. Please proceed with your question.
Hi, Good afternoon. This is Stephen calling behalf of Christian Thanks for taking my questions first one if I could have Steve or for Brian .
I'm interested in fact linearity in the in the first quarter can you talk about how customer orders at trended relative to your expectations and.
Finally coming into at this current quarter, how have your conversations with customers and their salmon.
Especially relative to any you know.
<unk> or <unk>.
Yeah, Hey, Steven Nice Great question. So yeah in terms of the quarter I mean, let as we said in their release it really did play out in line with our expectations. So there really wasn't anything out of the ordinary that we saw on cue on in the reaffirmation of guidance for the year as evidence that I think what we're seeing and hearing from customers for the rest of the year.
There is also in line with those expectations and what we had originally planned I think it's certainly expect it to be a second half waited story. Let me do expect the first have to be later and I think you're seeing that in the queue unresolved, but everything we're hearing from the customers is really consistent with with where we were back in February as well.
Got it and that just says Michael O'brien, just wondering about inventory days side of things said.
Dollar levels and also you can download it.
This quarter, but just in terms of.
Picture conceptually.
Yeah.
<unk> well above 12 months for quarters, now and I guess that just kind of looking back historically the last time, there was a big step up from I think fee roughly nine months type arrange to about 12 months with back in 2017 wing.
Smart phone started to adopt panels and so I guess my question is.
The the higher and enjoy your day that you guys running at should we expect that to go back down towards the 12 months Mark over time is at the name of it covers or is the <unk>.
A structural change in your profile for customers because of T V 's and I keep passing by Fort where we should expect <unk> to maybe stay on this at 12 to 16 months have arrange thanks.
Yep, Yeah. So I'll have an inventory, there's really kind of two main drivers there for the increase you've seen in recent periods. The first being in our raw materials inventory, which is where the bulk of the increase has been yeah. We have already M, which is a key raw material for US and is included in a a number of our materials and so we have been building up.
Strategic stockpile of that Uhm, we feel comfortable with the quantities of iridium that we have on hand, but that's been some of what you've seen in the increase dollar value in the last few years also on the on the finish good side near where a sole source supplier for our customers. So we need to make sure that we have the qualities on hand to meet their demands but.
The increases that you've seen on that side of not necessarily because of anything specific we're hearing from customers, but more just our own planning, but we're always making sure that we're being disciplined and not getting too far ahead of of the demand curve, there and how we how we both of our supply.
Okay, great. Thank you.
Thank you. Our next question is from Sydney help with Deutsche Bank. Please proceed with your question.
Thank you I got a couple of questions first plan is on the acquisition of Mark Mark status of polio.
Can you walk us through what you get that is not already covered by your I P portfolio does that to celebrate your product development and <unk>, Oh, well does that mean going for what you'll be more active in selling host materials are just kinda strengthen your royalty and licensing business.
This is really to expand and vouchers.
Patent portfolio or a <unk>.
Patent portfolio. So we're we're we're clearly have the leading position in and fast rest of the <unk> patent portfolio became available. We felt it was a very good addition to our portfolio and it will broaden tools or their teams disposal as we develop new and.
Next generation Phosphoresce of materials and continue to build upon our industry leading physician.
Okay. Sir the second question is if I noticed at Apple tier one the revenue L site. Your two top customers now 44% of total revenue, which seems like the highest that I can remember can you talk about the breath of that revenue stream and did you have any concerns that there is a lot of excess.
<unk> those customers, especially given the persisting weakness, we've been hearing some Chinese and central yet thanks.
Yeah. So you know we continue hope you have a number of customers as you know uhm beyond the top two and you know we've seen you know those those entities continue to increase their you know share with us have a recent period. So nothing really specific I think there's also variability in our customers buying patterns quarter to quarter that also contributes to it.
Some periods you know the top two maybe a little less than others, but it's not a structural change in our view is just kind of you know a little bit of a one off I think that you're seeing in Q1.
Okay. Thank you.
Thanks.
Thank you. Our next question is from Mettie Hosseini with S. I G. Please proceed with your question.
Yeah, Sir Thanks for taking my question a follow up to the <unk> topic.
Should I take this uhm pattern acquisition.
A sign that you are renewing efforts to drive revenue from the host.
And if not then what's the main objective here.
No it is not.
Renewing efforts on the host this is an emitter a portfolio acquisition and it was basically to provide our team with additional pathway. So that we can develop future materials broader materials for our customer first for the industry and accelerate the ecosystem.
Okay got it and I'm, assuming that the one the acquisition of patterns.
Won't have any near term impact on your financials.
No. It was a 66 million dollar purchase price. So yeah, we've that cash outflow has occurred and we'll be amortizing that over a 10 year period. So there'll be you know roughly $6 million of annual expense going forward.
Okay, Alright, and then just the it's very encouraging to hear that you actually are recognizing.
<unk> revenue or I'm, sorry, Blue <unk> revenue Uhm should I assume that.
Couple of hundred thousand dollars a quarter of revenue is enough for your customers to.
Uhm.
And your customers customers to develop the required semiconductor components to qualify the panels or would you have to sell them more.
I'd say retool them prepare for.
High volume manufacturing next year.
Yeah. So in terms of the quantities of Blue. It is an increasing quantity I think will be solving Q1.
Dollar wise is pretty similar to what we sold for for all of last year. So it has increasing in queue want I think those quantities certainly will increase somewhat as we get closer to a commercialization, but we feel comfortable with the 2024 I was having commercial material available next year and the timelines and uhm feel comfortable with that.
Pace that we're making with that as well as you know what we're hearing from our customers.
I guess, what I'm trying to better understand is if there's a lack in effect between the.
Volume shipment from you to your customer and the.
The time it would take for your customers to work with their customers to qualify for private.
I mean, I think there are certainly you know would be there's you know just kind of playing out the sequencing our customer our customers we need to do they'll panels feel comfortable with the performance of those and you know then have conversations with theirs. So I think that you know there'll be increased activity as we approach commercialization or commercial law.
<unk> of of a paddle with our blue fast pressing material in it.
Okay. Thank you.
Thanks.
Thank you. Our next question is from Nam Kim with Eric K Research. Please proceed with your question.
Hi, Thank you for taking my question sorry quick clarification on <unk> again, you. Just said you were gonna say I need a <unk>. You also said in prepared there'll be Mara and I also remember mark used to supply H T L a or two for one will be.
Customer so I just wonder you are interested in entering into any other older material repeating so like H T L. Other than current <unk>.
No no. This is just a <unk> physician.
Okay collaborate.
Yeah, Yeah. The the collaboration agreement that we announced today as well and the earliest that we put out that's focused on collaborating with mark and providing hour and that are so they can you know use those in their development of <unk> and transfer layers.
Okay. It's another question I think and none will be our customer assign the concierge <unk>, yes. It is not available commercially today should we expect <unk> on you and you have a <unk> pump below next year I just wonder if there will be any finance <unk>.
An additional licensing <unk> video customer thank you.
Yeah. So our our contracts are our license agreements with our customers you know certain of our portfolio license agreements that do include blue in certain customer specifically archive contact with Samsung Our license agreement with Samsung excludes blue. So it just kinda depends on our customer customer basis, whether there is an incremental opportune.
Neither.
Okay makes sense. Thank you.
Thanks.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone on the <unk> and the question in queue.
Our next question is from Jim <unk> with Needham and company. Please proceed with your question.
Hi, Good afternoon. This is actually Chris screen to offer jam.
Uhm.
With respect to the cost of materials could you just elaborate on on the puts and takes their particularly the inventory charge and how should how should we be thinking about the cadence of the impact that impact of of the Shannon facility as we as he goes through the year.
<unk>. Thank you.
Thanks, Kress so on the inventory charge, we did record of 3.3 million dollar your inventory provision in Q1 and that was really you know each quarter, we have to take a look at ourselves plan and in the quantities. We have on hand, and as we did that this period. There are certain materials that we had excess quantities off I just needed to provide for so that's.
That's really composition of that it's something we have to do every quarter or sometimes it's a really small number or no number this quarter. It happened to be $3 million and then as it relates to Shannon you know we had a 4.7 million in Q1 of under utilization that's slightly higher than the run rate that we had last year and I think he knows we've worked with a team I think I'm just gonna.
B, a slight uptick maybe slightly more than a million dollars or under utilization cost this year, but I'm still more or less in that ballpark of what we'd previously disclosed and it should be pretty linear or is it in terms of key that's over the year at slightly more than a million dollars per month.
Thank you very much and.
You spoke about the the investments that you see in the end the secular Tailwinds particular, I T. I've, just I guess, what what else are you seeing that <unk> that gives you confidence that you're going to see an acceleration in the back half of the year or two.
The chief Itchy the guidance.
Yeah, I I think it's you know a lot of it is what you know what you hear from our customers in terms of the expectation that the second half of the year is going to be you know better than the first half. So I think that a lot of what we're saying is an echo of others in the ecosystem, which is also informed by you know our forecast information that we get from our field teams that our customer.
<unk> in terms of what they're seeing and expecting a planning for and also some of that has to do with product launch cycles that are you know plan for the second half of the year, which you know also you know demand additional quantities of material to meet those meet those watches. So there was a number of factors that were monitoring, but all of that kind of informs the the off reaffirmation.
Of our guidance range.
Alright.
Or the emitters broadly relevant to consumer electronics generally or is there any particular typology or size that <unk> that that newly acquired portfolio of I P would be more or less relevant to.
Well first we're working in this field for a long time, and then a lot of really smart people working on it. So I would say, it's probably a couple of applicable across the board.
Got it thanks very much.
Thank you.
Thank you. Our next question is from Martin Yang with Oppenheimer. Please proceed with your question.
Hi, Thank you for taking my question Ah dropped off for the last couple of minutes. So sorry. If this has been asked before can you remind us you're expected racial pretreat material and rolliche sales for a year.
Yeah, Hey, Martin So, we're we're expecting one and a half to once a one and a half materials to one royalty license.
Got it. Thank you second question is.
Oh your license a great <unk>. So it seems that you have eliminated language around with him a purchase agreement.
The new material supply agreement that <unk> late last year.
Can you confirm and also maybe comment I'll have that package.
Revenue recognition.
The cash flow going forward.
Yeah. So so there's no change in terms of the structure of the contract with respect to minimum requirements from the old agreement to the new one so that's completely unchanged. So if there's if there's a wedding changing <expletive> that just you know a nuance on our side as opposed to anything structural all my contracts.
Got it so.
Can you maybe clarify on how.
Uhm going for the rest of your recognition can track I'd be more closely with cash flows.
Yeah. So so the revenue model is exactly the same and that we have to look at you know or recognize on a per unit basis as we shipped material both the the material revenues as well as the royalty and license revenues and that's based on estimates of of contract purchases over the full term. The payment structure is you know slightly different than the new.
[noise] contract as opposed to the to the former you know the <unk> prior contract had quarterly payments and this contract has both quarterly and annual payments. Obviously, we can't go into the the depths of the details on how those are calculated but there is just a different payment structure that makes us feel like revenue recognition in cash collect.
<unk> should be much more closely correlated and this next next is Clark contract.
Got it thank you.
Thanks.
Thank you. This concludes the question and answer session I would like to turn the program back to Brian Millard for any closing comments.
Thank you for your time today, we appreciate your interest and support.
This concludes today's conference call you may now disconnect.