Q3 2023 Universal Display Corp Earnings Call
Good day, ladies and gentlemen, and welcome to Universal display Corporation third quarter 2023 earnings Conference call. My name is Sherry and I will be your conference moderator for today's call. If anyone should require operator since starting the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded for replay purposes, I would now like to turn the call over to dairy slew senior director of Investor Relations. Please proceed.
Thank you and good afternoon, everyone welcome to Universal displays third quarter earnings Conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer, and Brian Millard, Vice President and Chief Financial Officer before Steve begins let me remind you today's call is a property of universal display any redistribution retransmission or where are you.
Aircastle any portion of this call in any form without the express written consent of Universal display is strictly prohibited further this call is being webcast slides will be needed available for a period of time on universal displays website. This call contains time sensitive information that is accurate only as of the date of the live webcast of this call and my my second.
2023.
During this call maybe 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.
This latest screens any obligations update any of these statements now I'd like to turn the call over to Steve Abramson.
Yeah.
Thanks, Darius and welcome to everyone on today's call.
For the third quarter of 2023, we reported revenue of $141 million operating profit of $48 million and net income was $52 million or dollar per diluted share.
For the year, we are further narrowing our revenue guidance range.
I'll give you range is $565 million to $590 million.
Yeah.
So as we look ahead the oil industry has multiple market verticals driving its long term growth.
The significant shift in the world of technology is occurring with the introduction of conformable Foldable enroll book consumer electronics and Oleds are fueling this form factor evolution.
Since our inception UGC as a vision of the future. We're always enable flexible displays to become part of the everyday lives of consumers around the world.
Oh, those are inherently flexible bendable and stretch them, making them the ideal display technology across a vast array of applications with more devices using flexible OLED displays consumers are seeing more adaptable product with fresh designs, new productivity features and functions.
Foldable phones had been a bright light in this year's sports sub market.
Market research from Dfc estimates as more brands entered the plausible market and existing brands introduced more foldable products 36 different foldable phones will ship this year compared to 19 in 2022.
Some of those brands include Samsung, Google Huawei, vivo onward and upward.
D. S. C C forecasts of Foldable phones will increase to 28% year over year to 16 4 million units in 'twenty two 'twenty three.
Quarters, the counterpoint research Foldable smartphone shipments are expected to exceed 100 million units by 2020.
In addition to affordable smartphones panel makers are developing Foldable I T panels in late September LG display announced it would start mass producing 17 inch Foldable I T piles for notebooks.
Missile products include Lg's Gram gold and HP Spectre fault.
Speaking of I T with always the only about 2% of the market today, whose mortgage segment offers a tremendous opportunity for growth.
We've made significant new adoption.
Adoption cycle will begin next year you'd be I'd market research forecasts that O I T shipments of tablet Pcs notebooks and monitors will more than double from this year's seven 9 million units to 18.8 million units in 2024 and will reach 31 3 million units in 2012.
Seven translated into an average annual growth rate of 41% over the four year period you'd be I also recently reported that Samsung display is expected to start production of its gen. Six line for IC devices in the first half of 2026.
The market research firm also noted the LG display and Bofa are expected to invest in Gen 8.6 for ITT.
Moving up the scale to OLED Tvs, which are only about 3% of the total TV market growth. In this segment is expected to resume in 2024 D.
The FCC forecasted OLED T D units will grow at a 13% CAGR from 'twenty to 'twenty three to 'twenty 'twenty seven to 9.2 million units.
Consumer reports once again ranked OLED Tvs as the best Tvs in the market.
With their brilliant color faster refresh rate of 180 degree viewing angle high contrast ratio thin form factor and other benefits, it's not surprising that OLED Tvs are considered the best of the best.
Another exciting and emerging opportunity for OLED as the automotive industry during the quarter al you unveiled the upcoming 2025 Q six each on EV SUV will include two OLED displays 11.9 hedge gauge cluster and a 14.5 infotainment touch screen.
And the 2025 mini Cooper easy the 9.4 in circular OLED interface display is centered on the dash.
Leaving Chinese EV maker BYD through its sub brand young Wong launched the U. A Premier addition, E D. SUV that features a 12.8 inch OLED central screen Orange Dash.
Young day unveiled a newly redesigned Genesis G V SUV with a 27 inch OLED display integrates the instrument panel and central display screen.
Market research firm trend force notes in automotive displays, including rear seat entertainment screens passenger side displays central information displays and digital clusters or evolving into a more powerful communication mediums.
Additionally to integrate the various independent functions found in traditional cockpit larger screens and more flexible spatial designs are vital.
Train four is forecasted OLED automotive panels will continue to grow and could capture approximately 10% of the automotive display market by 2026.
Why are they growing interest in OLED for the automotive market.
Well automotive OLED displays are lighter and more flexible the traditional displays OLED displays using your energy efficient phosphorescent materials require less power, which makes OLED. The ideal displays for electric vehicles. Although it can also be designed into various shapes and form factors have a wider temperature range and for <unk>.
Exceptional clarity, whether it's day or night.
Oh, well, it's in the automotive market also accomplish all related how he future OLED taillights units eight and smaller Q five crossover and most recently <unk> expanded OLED taillights to its 2024 Q eight SUV.
So some of that activity continues to expand across the consumer display Lady landscapes, we remain steadfast in our commitment to advancing our robust OLED materials and technology leadership, we continuously push the boundaries of what we can achieve and their unwavering dedication to delivering best in class products to our customers is our guiding.
Right.
With our deep and extensive experience in cutting edge knowhow of nearly 30 years of pioneering research we are innovating inventing and introducing new OLED phosphorescent emissive materials, including New Reds Greens yellows and hosts with respect to Blue we continue to make excellent progress.
And our ongoing development work for a commercial phosphorescent Blue Emissive system.
We continue to believe that we are on track to introduce our all phosphorescent RGB stuck into the commercial market in 'twenty 'twenty four.
We believe that the introduction of our full suite of Red Green and Blue Phosphorescent emissive materials, while unlocking vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications.
We also continue to make notable progress with constructing the key subsystems for Ob J P. Alpha system design. The completion of these sub systems is a crucial step in our commercialization roadmap, while the commercial launch of <unk> J P is still a few years away, we believe that Obi J P represents.
Groundbreaking platform towards a low cost highly efficient dry printing RGB side-by-side OLED TV manufacturing platform.
And on that note, let me turn the call over to Brian.
Yeah.
Thank you, Steve and again, thank you everyone for joining our call today.
Our third quarter revenue was $141 million compared to $161 million in the third quarter of 2022.
Material sales were $92 million in the third quarter compared to materials yells of $84 million in the third quarter of last year.
Green emitter sales, which include our yellow Green emitters were $69 million. This compares to $64 million in the third quarter of 2022.
Red emitter sales were $22 million. This compares to $20 million in the third quarter of 2022.
As it has been discussed in the past material buying patterns can vary quarter to quarter.
Third quarter royalty and license fees were $46 million compared to the prior year period of $71 million.
The year over year $25 million decline was due to a few primary factors one is customer mix. Additionally, the cumulative catch up adjustments. The majority of which are recorded to royalty and license fees decreased by $8 million between periods.
And finally Q3 this year had a lower average contract royalty and license fee per gram for certain customers. As a result of an increase in estimated demand over the remaining lives of their contracts.
For the full year, we continue to expect the ratio of material sales for royalty and license fees to be in the ballpark of one and a half to one.
<unk> third quarter revenue was $2.7 million compared to $4 $9 million from the comparable period in 2022.
Third quarter cost of sales in 2023 was $34 million compared to $37 million in the third quarter of 2022.
This translates into total gross margins of 76% in the third quarter of 2023 compared to 77% in the third quarter of 2022.
Third quarter OLED material gross margins were 66%.
This compares to material gross margins of 60% in the third quarter of 2022.
For the full year of 2023, we now expect total gross margins to be approximately in the range of 76% to 77%.
Third quarter operating expenses, excluding cost of sales were $58 million.
Third quarter of 2022, it was $55 million for.
For the full year of 2023, we now expect operating expenses to be up by a low single digit percentage year over year.
Operating income was $48 million in the third quarter translating into operating margin of 34%. This compares to the prior year period, a $68 million and operating margin of 43%.
The third quarter income tax rate was 4.4%. This lower tax rate was primarily due to a recent change in IRS regulations that now allows certain foreign withholding taxes to be credited against U S income for 2022 and 2023.
For the full year of 2023, we now expect our tax rate for the year to be in the range of 17% to 19%.
Third quarter 2023, net income was $52 million or $1 eight per diluted share. This compares to $53 million or $1 12 per diluted share in the comparable period in 2022.
During the quarter, we purchased our Shannon manufacturing site for $14 million for the year, our capital expenditures are expected to be approximately $60 million.
We ended the quarter with approximately $779 million in cash cash equivalents and investments.
Regarding our 2023 guidance as Steve mentioned, we are revising our revenue forecast by narrowing guidance to a range of 565 million to $590 million.
And lastly, our board of directors approved a 35 cent quarterly dividend, which will be paid on December 29, 2023 to stockholders of record as of the close of business on December 15 2023.
The dividend reflects our 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.
Innovation collaboration inclusion and sustainability are the primary pillars that drive UGC and our people.
Innovation is part of the company's DNA is what propels us forward opens the door to new opportunities and reinforces our position as a leader in the OLED industry.
We foster a culture of continuous innovation and innovation thrives on collaboration.
UGC is diverse and talented team worked together to provoke and exchange ideas and solutions with our growing portfolio of new and next generation energy efficient materials and technologies, we are making a positive impact towards a sustainable future.
In recent months, we have been recognized for these principles, we were awarded a silver rating for corporate social responsibility from Eco Davis, a leading provider of business sustainability ratings. We were named to Newsweek's 2024 list of America's Greenest companies, placing UGC among the top 300 companies in the U S where it's <unk>.
It moved to being good stewards of the environment.
We were also recognized by the form of executive women I'm, the executive women of New Jersey for Board diversity Lynn.
Led by our corporate culture that celebrates inventiveness integrity inclusion and imagination, we are proud of the diverse and dynamic global UDC team.
I would 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.
Customers and for our shareholders and with that operator, let's start the Q&A.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
Tone will indicate your line is in the question queue.
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 one moment, while we poll for questions.
Our first question is from Brian Lee with Goldman Sachs. Please proceed.
Hey, everyone. Good afternoon, thanks for taking the questions.
And sorry, if I missed this but I think.
If I back into Blue, maybe just stated it outright, but blue was a $1 $5 million of revenue in the quarter is that correct number one and then.
I know you've been saying, it's going to be lumpy until you get to the full commercialized commercialization scale. What would you expect kind of near term trends are we going to see that kind of start to pick up off of the level. He saw here in Q3.
Yeah. Thanks, Thanks, Brian Yeah, as you indicated blue's sales for Q3 were one and a half million. So that brings the total for the year to date to 4.3.
So certainly a positive trend over the course of the year, but it is going to be variable quarter to quarter. As we continue to move forward closer to the commercial launch so no specific guidance to give but it's going to be a variable duh result from here to commercialization.
Yeah.
Okay fair enough.
And then I guess.
You're kind of headed it off in your prepared remarks, Brian, but just China on package the.
The mix between materials and royalty and license couple questions here I guess first off.
This was a record quarter for you guys in terms of materials revenue.
Seasonally speaking the past couple of years, you've seen Q4 up off of Q2.
Q4 off of Q3, but I know in the past you've talked about the seasonal downtick. So is this more of a normal year, where you didn't expect materials revenue to kind of be seasonally down into Q4 and was there maybe any pull forward that helped the number be so strong in Q3.
Yeah. So thanks, Brian I think as you said there were the ratio for the third quarter in terms of the the materials for royalty and licensing it was two to one which as you know much higher than it's been in prior periods.
A couple of factors there one is customer mix as I said in my prepared remarks that we just had a different customer mix. This period. We also had a situation that as we went through the quarter on the royalty and license side, we had a larger volume expectation over the remainder of certain customer contracts and so that has an impact of.
Lowering the average the E S. P on a on the royalty and license side per unit and then on the material side. We also had a situation where we had some X and expectation that some newer kind of next generation materials will be used by our customers over the remainder of their contracts that has a favorable ASP increase on the material side. So those are.
A number of factors kind of going the same direction that caused the Ah the ratio to fluctuate a bit this period.
Okay, and then maybe just a couple last ones and I'll pass. It on you you mentioned the ratio should get back to 1.5 to one is that starting in Q4 or is that more of a 2020 for comment.
Yeah that was a twenty-three comment so we expect for the full year to be one and a half to one and on a year to date basis through Q3. It is one of them have to one that we expect Q4 to be similar in terms of one and a half to one.
Understood and then last one for me just if I I know you've talked about this in the past in terms of ASC 606, accounting and how the royalty and license Rev. Rec is tied to materials expectations.
So is this volume projections under those material purchase contracts just moving out into the REIT or did you actually take volume expectations up in some of these contracts and some of that volume is just kind of in the latter half of those contracts and that's why the upfront royalty licensing.
<unk> is smaller here in the quarter just understanding whether this is just timing or there's also volume.
In aggregate also in question.
Yeah. So it was really a change in estimate from what we had estimated at Q2 relative to Q3 so.
An increase in our estimate of volumes of certain customer contracts over the remaining term of their of their frameworks.
Okay Fair enough I will pass it on thank you.
Yeah.
Thanks.
Our next question is from Krish Shankar with TV Cowen. Please proceed.
Hey, guys. This is Eddie for Chris I had a question on the OLED tablet.
Wondering if you can take our hand and guide us through the linearity of revenues coming from that product next year.
It would be back half weighted or more evenly spread out and wondering if you can give us any color about the incremental revenue opportunity from that product next year.
Yes, I think certainly you know we've been saying for a number of quarters now that we think 'twenty 'twenty four is a pivotal year for the I T markets certainly tablets are a key part of that segment.
So we expect a positive trend heading into next year in that area hard to put an exact percentage or dollar figure to it at this point, but we know that theres positive momentum behind the I T segment as we go into 'twenty four.
Got it and I.
I understand you wont be guiding for 'twenty 'twenty four but wondering whether you think consensus estimates are up high teens for revenues is reasonable given the tablet and the blue product ramp next year.
Yeah, I mean, I think we're you know we'll give full guide on 24, when we get into February and do our year end call with you guys, So, but and we'll give full guidance at that point I think at this stage and all the best information. We can say is that we expect 2024 to be a growth year end to be up relative to 'twenty three but we'll give more NFL in February on that.
I understand that's helpful and just last thing are looking at deferred revenues. It seems they were up $37 million quarter over quarter like they more than doubled can you just hear some reasons behind that is it related to blue or a tablet or is there any other reason.
That's it for me thank you.
Thanks, Yeah, Yeah, we had a increase in both accounts receivable and deferred revenue in the period and that's due to a milestone that we hit on one of our contracts. So that was a billing milestone. So the we increased a R and increased deferred revenue is that amount was uncollected as of the end of the period.
Got it thank you.
Thanks.
Our next question is from Jim Ricchiuti with Needham and company. Please proceed.
Hi, Good afternoon. This is Chris Greg on for Jim.
You had mentioned that.
One of the one of the tailwind for material sales was was the product mix for new generation I'm just curious.
Our new generation materials, a majority of our materials sales at this point and then do you have any visibility into whether those types or that generation of the meters is going to be.
Used in I T and automotive applications or.
Or will that be one of the former generations any insights that you could provide there would be helpful. Thank you.
Hi, Chris Yeah. So we we have I guess the comment we were making was more about as we introduce next generation materials as our customers introduce new materials into their product portfolios that tends to start at a higher price once it's commercially launched.
And then and then work its way down as they purchased additional volumes.
So I think there was more just a matter of weeks and that's across a variety of applications not unique to one particular segment.
Got it.
And I guess it was reported recently that one of your larger customers is looking to adopt a math class Cros.
Process and in the production of panels I'm just curious.
Does mask glass have a any meaningful impact on the amount of material consumed versus existing processes.
And is Obi J P technology, something that could potentially fit that description for from masked thus process. Thank you.
Well when a new manufacturing technology is introduced we have to take a look and see what the effect would be on the material consumption.
And so we'll have to see how that plays out in general everybody wants to use our materials wherever their production technology is moving J P is a printing technology. So yes, it would be missiles.
Got it thank you very much.
Yeah.
As a reminder, just star one on your telephone keypad, if he would like to ask a question. Our next question comes from Sidney Ho with Deutsche Bank. Please proceed.
Great. Thanks, guys. Thanks for taking the question Mark on for Sidney first question on gross margin, Brian maybe if you can walk us through some of the puts and takes on gross margin for next quarter and then just to follow up how do you get back to that sort of long term target range of 77%, 78% gross margin.
So we did update slightly our expectation for the year and now we expect 76% to 77% for the year and that's largely due to we had $2 5 million of inventory provisions that we had to put up in Q3 due to as we went through our evaluation of inventory on hand, So that's really what resulted in the.
The tweak this quarter.
We always are identifying opportunities cost reduction opportunities and making sure that were being.
Thoughtful as we go through contract negotiations in terms of gross margin. So we're always doing everything we can to increase it.
I think that as volumes continue to increase in the years ahead. We also have the impact of volume pricing dynamics as well as certain input cost to our materials that have.
Varied and an increase in certain areas over the course of time, but it's something we focus a lot of attention on.
Okay, that's very clear thanks, and then my second.
Second question on I guess tandem OLED, we've been hearing a little bit more about the adoption within certain Nike devices can you just walk us through sort of applications.
On your business given that until adoption of this two stacked structure.
It's certainly an incremental opportunity because of the increased volumes of our material that would be needed in tandem structure. It's hard to say right. Now you know what the multiplier is there it's somewhere between one and two times, but we really won't know until we see some of those products come closer to market and be able to provide some insight.
On that.
Okay. That's fair thanks, guys.
Thanks.
Our next question is from Martin Yang with Oppenheimer and company. Please proceed.
Hi, Thank you for taking my question first question on contract with assurance revenues can you maybe talk about.
Paul.
What contributed to the volatility you can get revenue and why was it down versus the past few quarters.
Yeah. So those are R&D service revenues are decent subsidiary there our performance in the quarter was a little bit variable. There were just some timing issues that impacted that business. In Q3, we do expect for Q4 for them to kind of get back on track with the recent run rate.
And for 2024, we also expect them to have you know growth off of where they are this year.
Got it thanks and.
Second question is can you talk about the impact on.
Utilization charges for Shannon after debt facility as purchase would that well we shall we expect.
No more similar charges after the acquisitions done.
So the acquisition didn't have an impact on the utilization or underutilization of the site, but independent of the acquisition, we actually were able to utilize Shannon to a greater degree in Q3, and we also expect in Q4 to utilize it to a greater degree.
So the Underutilization for all of Q3 was $2 million, which is much less than it's been in other recent quarters.
A follow up on that would you say that the utilization of Underutilization that Shannon during <unk>.
Was.
Less comparing to two here.
So to shed and performed better than expected.
Yes, yes, absolutely our our underutilization cost that we that we recorded in Q3 or 2 million in the prior quarter. They were approximately I believe slightly over $4 million.
So it is a decreasing trend and as we head into next year. We also expect to be able to continue to utilize Shannon to a greater degree next year as well as in the years a few years beyond that.
Great capability excellent part of our manufacturing network and we.
We expect to be able to utilize it to a greater degree as our business continues to grow.
Got it. Thank you Brian that's all for me.
Thanks Martin.
Thank you. This will conclude the question and answer session I would like to turn the call back over to Brian Miller for any additional or closing remarks.
Thank you for your time today, we appreciate your interest and support have a good evening.
Thank you. This will conclude today's conference you may disconnect your lines.