Universal Display - Q2 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to Universal Display Corporation's second quarter 2024 earnings conference call. My name is Sherry, and I will be your conference moderator for today's call. If anybody should need operator assistance, 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 Darice Liu, Senior Director of Investor Relations. Please proceed.

Darice Liu (Senior Director of Investor Relations)

Thank you, and good afternoon, everyone. Welcome to Universal Display's second quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer, and Brian Millard, Vice President and Chief Financial Officer. Before Steve begins, let me remind you that today's call is a property of Universal Display. Any redistribution, retransmission, or rebroadcast of any portion of this call in any form without the express written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, August 1st, 2024. During this call, we may make forward-looking statements based on current expectations.

These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now, I would like to turn the call over to Steve Abramson.

Steve Abramson (President and CEO)

Thanks, Darice, and welcome to everyone on today's call. Our second quarter results were solid. Revenue was $159 million, operating profit was $56 million, and net income was $52 million, or $1.10 per diluted share. The trajectory of OLED continues to be robust, fueled by broadening adoption across the consumer landscape. With a strengthening growth trajectory, we are raising the low end of our annual guidance range. We now believe that our 2024 revenues will be in the range of $645 million-$675 million. During the second quarter, the OLED IT market picked up speed as leading OEMs embarked on their OLED IT journey with the introduction of their first OLED tablets. This includes Apple with the May launch of its iPad Pro series and Microsoft with its new Surface Pro.

Other global OEMs also recently launched new OLED PC products, including Samsung's Galaxy Book4 Edge laptop, Dell's first tandem laptop, the XPS 13, HONOR's MagicPad2 tablet and MagicBook laptop, and Wacom's Movink tablet. According to Omdia, OLED tablet panel shipments are expected to triple year-over-year to 14.8 million units, and OLED notebook panel shipments are expected to almost double year-over-year to 8 million units in 2024. With the rising demand for AI PCs, Omdia believes that demand for high-end notebook PCs will also rise, and by 2028, OLED mobile PC shipments are forecasted to jump by approximately 600% to 48.6 million units. For OLED monitors, gaming continues to drive its popularity.

According to Omdia, top-tier monitor brands such as Dell, HP, Lenovo, Samsung, LG Electronics, AOC, Philips, ASUS, Acer, MSI, and Gigabyte are incorporating more and more OLED displays into their product lineups for 2024. The DSCC market research forecasts that OLED monitors will increase 80% year-over-year, and longer term, Omdia forecasts that units will more than triple by 2028 to 3.6 million. As the bustling OLED IT pipeline continues to expand, we believe a new multi-year OLED CapEx cycle has begun to support this growth. Last year, Samsung and BOE made game-changing Gen 8.6 OLED IT investment announcements. In late May, Visionox announced plans to invest approximately $7.6 billion to build a new Gen 8.6 plant.

This new greenfield facility is slated for OLED IT and automotive production, with a capacity input of 32,000 plates per month. We continue to believe that this is just the start of new OLED fab and capacity expansion investments and expect more announcements in the future. At SID Display Week, the broadening form factor landscape was on full display with a plethora of new foldables, including tri-folding displays, as well as slidable and rollable prototypes and products at our customers' booths. According to DSCC, just in the first quarter of this year, there were panels procured for 24 different foldable smartphone models. TrendForce forecasts that by 2026, foldable phone penetration will climb to 4.8% of the smartphone market.

Speaking of smartphones, according to Omdia, OLED smartphone shipments surpassed LCD shipments for the first time in the first quarter of 2024 by capturing 51% of the market. According to the market research firm, OLED smartphone display shipments increased to 182 million units in the first quarter of 2024, up 39% year-over-year, while LCD shipments decreased to 172 million units, down 10% year-over-year. Omdia's short-term forecast indicates that OLED will account for 53% of smartphone display shipments in the second quarter, and expand to 56% in the third quarter, and expects OLED to lead the smartphone display market in shipments from 2024 onwards.

In large form factors, OLED TVs continue to win accolades and rave reviews in multiple countries for its bright, beautiful, brilliant picture quality with 180-degree viewing angles, high contrast ratio, and fast refresh rates. According to Omdia, OLED TV panel shipments are forecasted to reach 7.1 million units this year, up 33% year-over-year. OLED TV sales growth is expected to gain traction and reach nearly 10 million units by 2030. On the R&D front, our outstanding team of scientists, engineers, and technicians are dedicated to exploring new ideas, challenging the status quo, and developing solutions for our customers' continuously evolving needs. One of our trailblazing solutions is OVJP. At SID Display Week, we showcased another major milestone with a printed red, green, and blue full-width device with 160 pixels per inch, which is equivalent to 8K resolution for a 55-inch TV.

We continue to believe that OVJP will enable high volume, cost-effective manufacturing of side-by-side RGB OLED TV panels. Regarding our phosphorescent materials portfolio, we are continuously discovering, developing, and delivering next generation reds, greens, yellows, and hosts to meet the ever-changing and ever-evolving customer specifications. Regarding blue, we continue to make excellent progress on our ongoing development work for commercial phosphorescent blue emissive system. Since the beginning of 2022, we've achieved significant advances in our phosphorescent blue development work, and we believe that we are nearing commercial entry specifications. However, we believe we need more time to further refine our phosphorescent blue emissive materials, and that work is expected to extend beyond this year. We believe the additional time needed will be measured in months and not years.

Even though our timeline is shifting, our confidence in delivering a commercial phosphorescent blue to the market and the tremendous promise it has for the OLED industry has not wavered. Interest in our phosphorescent blue continues to increase, and we believe that the forthcoming expansion of our phosphorescent portfolio will unlock a vast array of opportunities for higher efficiency and higher performance across a broad range of OLED applications. The bottom line is, phosphorescent blue is coming. We just need some more time before commercial introduction. When it is adopted in an OLED device, we believe that the benefits will be significant for the industry, for consumers, and for us. On that note, let me turn the call over to Brian.

Brian Millard (VP and CFO)

Thank you, Steve. Again, thank you everyone for joining our call today. Our second quarter revenue was $159 million, up 8% year-over-year from $147 million in the second quarter of 2023. Our total material sales were $95 million in the second quarter, compared to material sales of $77 million in the second quarter of 2023. Green emitter sales, which include our yellow-green emitters, were $71.6 million. This compares to $57.9 million in the second quarter of 2023. Red emitter sales were $22.5 million. This compares to $16.7 million in the prior year's quarter. As we've discussed in the past, material buying patterns can vary quarter to quarter.

Second quarter royalty and license fees were $60 million, compared to the prior year's period of $64 million. Adesis' second quarter revenue was $3.5 million, compared to $5.1 million in the second quarter of 2023. Second quarter cost of sales was $38 million, translating into total gross margins of 76%. This compares to $32 million in total gross margins of 78% in the second quarter of 2023. We continue to believe our full year total gross margins will be in the range of 76%-77%. Second quarter operating expenses, excluding cost of sales, were $64 million. In the second quarter of 2023, it was $56 million. The year-over-year increase was primarily due to higher stock-based compensation and continued investments in our people, infrastructure, and innovation engine.

We now expect our 2024 OpEx to be at the high end of our guidance range of a 10%-15% year-over-year increase as we continue to invest for future growth. Operating income was $56 million in the second quarter, translating into an operating margin of 36%. This compares to the prior year period of $59 million and 40% operating margin. We continue to believe our full year operating margins will be in the range of 35%-40%. The income tax rate was 19% in the second quarter of 2024. We expect our effective tax rate for the year to be approximately 20%. Second quarter 2024 net income was $52 million or $1.10 per diluted share. This compares to $50 million or $1.04 per diluted share in the comparable period in 2023.

We ended the quarter with approximately $879 million in cash, cash equivalents, and investments. Regarding guidance, as Steve shared, we now believe our 2024 revenues will be in the range of $645 million-$675 million. And lastly, our board of directors approved a $0.40 quarterly dividend, which will be paid on September 30th, 2024 to stockholders of record as of the close of business on September 16, 2024. 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.

Steve Abramson (President and CEO)

Thanks, Brian. On June 17th, we celebrated the 30th anniversary of Universal Display Corporation. Our company started with the vision of our late founder, Sherwin Seligsohn, who observed a green organic dot light up for just a few seconds. From that, Sherwin envisioned the future of OLEDs, and he founded Universal Display in 1994. As we commemorate 30 years of vision, innovation, and reality, we are reminded of our extraordinary journey, including 17 years of perseverance before we turned profitable, our relentless spirit of innovation, and continuously pushing the boundaries of what's possible, as well as the strong and long-term partnerships forged along the way. We evolved from a pioneering R&D startup to a global leader. Our commitment to research and development has led to groundbreaking inventions and advancements that have enabled the OLED industry.

As we step into the next chapter of our growth story, we are excited to soar to new trailblazing heights of innovation, collaboration, and excellence. In closing, I would like to thank each of our employees for their drive, desire, dedication, and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth, and delivering cutting-edge technologies and materials for the industry, for our customers, and for our shareholders. And with that, operator, let's start the Q&A.

Operator (participant)

Thank you, Mr. Abramson. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Krish Sankar with TD Cowen. Please proceed.

Speaker 8

Hey, guys. This is Eddie for Krish. Congrats on strong results again. You guys talked about refining blue phosphorescent and that requires much more time. Correct me if I'm wrong, but this feels a little bit less optimistic tone versus prior quarter, when you expected to introduce a qualification-ready product this year. So I wonder if this update on blue has been expected and part of the roadmap, or is it an unexpected development? Also, if you can share revenues from blue development during the quarter, that would be great. Thank you.

Brian Millard (VP and CFO)

Sure. Hi, Eddie. So, on blue, yeah, as you heard Steve mention, you know, we do believe that we're gonna need some more time beyond this year to hit entry commercial specs. Previously, we had expected this year to have that achieved, but, we think it's gonna be, you know, months, not years, beyond this year for us to achieve those commercial entry specs. But, still feel very confident in the work that we've done. We've seen a lot of improvement in the performance of our material over the last few years, and that work continues. But, we will need a little bit more time beyond this year, so it is a bit of a change compared to our, you know, prior expectations. On the revenues for the quarter, we had $1.3 million of sales in Q2 of blue emitter and host.

Speaker 8

Got it. That's super helpful. Thank you. And maybe just a quick question on competition from China. There has been a lot of noise about that, that taking place within semis in general. I understand it's a different industry you guys are in, but I wonder if you can remind investors about competitive dynamics in China and whether you think there are some local Chinese competitors emerging or being more competitive. Just any color on how you feel about competitive dynamics within China, that would be great. And I'll go back to Krish.

Brian Millard (VP and CFO)

Sure.

Speaker 8

Thank you.

Steve Abramson (President and CEO)

You're welcome. Sure. Well, we don't believe that there are any materials that are competitive with our state-of-the-art materials. What we've learned is that our customers want our full suite of current and next-generation OLED technologies and material solutions, which is why we believe all the major panel makers are working with us and have signed long-term agreements. We work closely with our customers to understand all the specification requirements that they have today and into the future.

Speaker 8

Perfect. Thank you.

Brian Millard (VP and CFO)

Thanks, Eddie.

Operator (participant)

Our next question is from Mehdi Hosseini with CID. Please proceed. I'm sorry, SIG. Please proceed.

Mehdi Hosseini (Analyst)

Thank you. It's Mehdi Hosseini from SIG. A couple of follow-ups from me. First, can you help me understand what drove the updated guide, especially as you raising the low end of the calendar year guide?

Brian Millard (VP and CFO)

Sure. Hi, Mehdi. So, I think as we're now, you know, more than seven months into the year, we just have more visibility to, you know, what the rest of the year looks like at this point. And, you know, felt like the, you know, the prior guidance, you know, we warranted coming up by the $10 million adjustment that we made. So I think it's just greater visibility as we sit here compared to where we were a few months ago.

Mehdi Hosseini (Analyst)

Is it mostly driven by smartphone or across the board?

Brian Millard (VP and CFO)

Yeah, I think it's, you know, across the board. I mean, I think we roll up our forecast based on what we hear from our customers and what our expectations are of their needs in the coming months. And, as we went through that process, you know, we landed where we did for, for this quarter on guidance.

Mehdi Hosseini (Analyst)

Gotcha. Okay. And then on the blue, is there any way that we could track this systematically rather than trying to triangulate your progress by reading your body language through earnings conference calls?

Brian Millard (VP and CFO)

Yeah, I mean, we would love if there were a more, you know, an easier way. I think obviously we, you know, need to be mindful of the information we're sharing about our own development efforts. And certainly can't share anything about what our customers are doing. So, it's a difficult thing, but, you know, we're very confident with the progress we, you know, we've made and where we expect to go and see ourselves going in the future, future periods here. And, you know, we believe this is, you know, not a matter of if, but when, phosphorescent blue is commercialized, and it's just gonna take a little more time than what we had thought previously.

Mehdi Hosseini (Analyst)

I guess what I was trying to understand is, would the actual products with the, your blue emitter be available in the market in the second half of 2025, or is it still to be determined?

Brian Millard (VP and CFO)

Yeah, it's really a question for our customers in terms of, you know, when there's a product in market with our phosphorescent blue. We're focused on hitting those entry commercial specs, which then enables our customers to determine how they use the material in a commercial product.

Mehdi Hosseini (Analyst)

Okay. Thank you. I'll go back to the queue.

Brian Millard (VP and CFO)

Thanks.

Operator (participant)

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

Chris Grenga (Analyst)

Hi, good afternoon. This is Chris Grenga on for Jim. Are you observing any pricing differential in so far in quantity sold so for IT applications, or are you taking any different approach to pricing there?

Brian Millard (VP and CFO)

Hi, Chris. Yeah, so there's, you know, not necessarily a pricing difference in terms of the use of our emitter. So, you know, we don't, you know, necessarily price differently based on the, the use of the emitter.

Chris Grenga (Analyst)

Got it. And how should we think about the level of R&D as you know, blue gets closer to commercialization? Is it the case that you don't necessarily expect the R&D level to change that much? Or how are you thinking about that?

Brian Millard (VP and CFO)

So we have a robust, you know, blue development program, you know, underway currently at the company. So I don't think there's necessarily, you know, a significant increase off of where we are right now. I think, you know, our materials continue to advance and become more complex, which drives, you know, a little bit of the expense that we've seen. But, you know, we're continuing to invest in new next-generation materials, whether that's red, green, or blue, and, that's what's driven, you know, some of the higher expenses we've seen in recent periods. But blue in and of itself, I don't think drives, you know, an uptick in the R&D spend.

Chris Grenga (Analyst)

Got it. And you had mentioned that the milestone with respect to OVJP, in the past, you've talked about potentially pursuing partnerships. Just curious if there's any incremental development with respect to discussions that you've been having with partners on that front?

Brian Millard (VP and CFO)

Yeah. We continue to talk to customers and equipment industry players, you know, about partnerships. And we continue to believe, you know, very strongly in the promise of OVJP, but nothing to share, you know, at this point in terms of those partnerships.

Chris Grenga (Analyst)

Got it. Thanks very much.

Brian Millard (VP and CFO)

Thanks.

Operator (participant)

As a reminder, it is star one on your telephone keypad if you would like to ask a question. Our next question is from Martin Yang with Oppenheimer & Company. Please proceed.

Martin Yang (Analyst)

Hi, thanks for taking my question. Can you maybe talk about, you know, what contributed to the growth in PP&E in the quarter?

Brian Millard (VP and CFO)

Yeah. So we've had, you know, in terms of CapEx, you know, our CapEx projects in recent periods have been, you know, some of the renovation work we're doing on our campus in New Jersey, as well as, you know, making sure we stood up all the operational capabilities across our manufacturing network to support the growth that we see in the years ahead. So those are the two things to point to in the, you know, year-to-date period.

Martin Yang (Analyst)

Thanks. My second question is around the different performance or sales growth between Korean and Chinese customers. Korean customers growing really strongly in first quarter and the first half, Chinese not as much. Is there any, you know, details you could give us that can help explain that different growth between the two regions?

Brian Millard (VP and CFO)

Yeah, it's a good question. I mean, I think if you look over the last few years, you've seen that our ordering patterns and revenues from our Chinese customers have been quite variable and lumpy quarter to quarter. So I think that's, you know, a lot of what we've seen in recent periods as well. So no real themes to point to other than just the variable buying patterns of our Chinese customers.

Martin Yang (Analyst)

Got it. Thank you.

Brian Millard (VP and CFO)

Thanks.

Operator (participant)

Our next question is from Brian Lee with Goldman Sachs. Please proceed.

Brian Lee (Analyst)

Hey, guys. Good afternoon. Thanks for taking the questions. Sorry, I jumped on late, so apologize if you already answered some of this. But, you know, you're kind of pretty precise on the blue update here, several months into 2025, based on what I'm hearing. So can you give us a sense, like, what are the puts and takes? How could this, you know, kind of several months delay update, not become, you know, another year or two? Just trying to get a sense of what your visibility is there.

Brian Millard (VP and CFO)

Yeah, so I think the comment that Steve made was months, not years, of, you know, of delay beyond 2024. And, you know, I think that's just as you get into the final stages of an R&D project that's as complex as phosphorescent blue, you know, the last few stages can be some of the more complicated ones, and I think that's where we are right now. And so as we, you know, we're preparing for the call and, you know, analyzing some of the information over the last few months, you know, felt like, you know, we expect some time's gonna be needed beyond this year to get to those commercial entry specs.

Brian Lee (Analyst)

Okay, fair enough. And then, I guess from a practical implication standpoint, can you, you know, give us, it sounds like you wanted to update the financial community on this call, but I'm sure you've been engaging with customers throughout this year. What's the feedback from that community? And I guess, what does it mean from, you know, for your commercial efforts to sign a new contract with Samsung, for example, or also just setting pricing terms for this new molecule once it's ready?

Brian Millard (VP and CFO)

Yeah, I mean, interest in the project and interest in phosphorescent blue continues to grow. You know, we have strong customer engagement across the board on phosphorescent blue. On the contracting, you know, we're not really, you know, super focused on that at this point. We're focused on getting to the commercial, you know, entry specs, and we're confident that the contracts will fall in place when they need to be there.

Brian Lee (Analyst)

All right, fair enough. Last one for me, just, numbers related. Sorry if you did cover this, but the, the big jump in deferred revenue, the current balance, was there some sort of contractual update or, or something that drove that? Just, I hadn't seen that in a few quarters, in terms of deviations, on the trend line in deferred revenue. So just wondering what that might be related to. Thank you, guys.

Brian Millard (VP and CFO)

Yeah, thanks, Brian. So that really was due to a certain billing milestone that was achieved on a contract in the quarter. So as you know, the deferred revenue balance, you know, either goes up or down based on timing of cash collection relative to revenue recognition. And, in this quarter, you know, there were a few billing milestones that drove an uptick in the balance. It was a normal course, nothing, nothing out of the ordinary there.

Operator (participant)

Thank you. This will conclude the question and answer session. I would like to turn the program back over to Brian Millard for any additional or closing remarks.

Brian Millard (VP and CFO)

Thank you for your time today. We appreciate your interest and support.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.