OLED - NASDAQ

Good day, ladies and gentlemen, and welcome to Universal Display Corporation's Second Quarter 2023 Earnings Conference Call. My name is Sherry and I will be your conference moderator for today's call. [Operator Instructions] 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.

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 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 expressed 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 3rd, 2023. 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'd like to turn the call over to Steve Abramson.

Thanks, Darice and welcome to everyone on today's call. For the second quarter of 2023, we reported revenue of $147 million, operating profit of $59 million and net income was $50 million or $1.4 per diluted share. As we move into the second half of the year, we expect this solid momentum to continue. For the year, we are narrowing our revenue guidance range to $560 million to $600 million. The OLED industry continues to lay the groundwork for promising growth in 2024 and beyond as a significant new OLED adoption cycle for the IT market is poised to commence. Market research firm Omdia recently forecasted OLED tablet and laptop panel demand on an area basis can grow at 34% CAGR by 2030. As a key enabler in the ecosystem, we are continuing to support the OLED market's growth by leveraging our nearly three decades of pioneering discoveries and know-how, investing in our infrastructure, innovation engine and people, and delivering increasing value to our customers. On the infrastructure front, we celebrated the opening of our Shannon, Ireland facility in the second quarter along with our longstanding partner of more than two decades PPG. This new site, which is designed to produce red, green, and blue phosphorescent materials represents a major infrastructure investment for the future of the OLED industry and demonstrates our commitment to supporting our customers' needs. As a pioneer and leader in the OLED ecosystem, we push boundaries to redefine what's possible and forge pads that drive us forward. Our innovation engine is a collaborative symphony of inventiveness, ingenuity and imagination that bridges the gap between vision and reality. Our steadfast focus on R&D has led to breakthrough technologies and cutting edge advancements, including our high performing energy-efficient phosphorescent OLED materials. Our brilliant team of scientists, engineers, and technicians are working together to invent, develop and commercialize new and next-generation reds, greens, yellows, and blues. With respect to Blue, we continue to make excellent progress in our ongoing development work for a commercial phosphorescent blue emissive system. We continue to believe that we are on track to introduce our 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 emissive materials will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications. At SID Display Week in late May, we exhibited our latest advancement in red, green, and blue PHOLEDs with groundbreaking narrow emission spectral lineshape. The narrow spectral emission is important to achieving next-generation energy efficiency and color gamut product roadmap including BT 2020. Regarding OVJP, our novel massless dry printing platform, we continue to make meaningful progress. We are pleased to announce today another OVJP milestone with the world's first ever fully printed high-resolution RGB side-by-side PHOLED start with comparable performance to vacuum thermal evaporation. This significant achievement positions OVJP to be a complete deposition solution for OLED TVs, putting all the layers of OVJP, meaning the red, green, and blue PHOLED prime and common layers paves the way for faster throughput, smaller footprint, and cost effective manufacturing platform for OLED TVs. One of UDC's primary mission is to enable and support our customers. We are continuously engaging with our partners, listening to their needs, anticipating their challenges, and working tirelessly to deliver solutions to meet their ever changing, ever evolving requirements. Most recently, UDC received BOE's highest Supplier Award, the Diamond Award and also received TCL China Star's Hand in Hand Strategic Partner award. These prestigious recognitions are wonderful testament to our relentless innovation, commitment to excellence and collaborative spirit. It is also a reflection of the unwavering dedication and hard work of our outstanding global team. Coming off the heels of last week Samsung and [indiscernible] event, foldables are another segment of increasing consumer interest. In recent years, the consumer electronics industry has witnessed a revolutionary paradigm shift with the introduction of foldable devices. Capturing the interest and imagination of many, foldable offers a seamless blend of portability and functionality. OLEDs are enabling this revolutionary form factor. According to Counterpoint Research, shipment of foldable smartphones are forecasted to quadruple to approximately 55 million units by 2025. As someone who bought the first Galaxy Fold and now has a Fold3, I have never looked back. On that note, let me turn the call over to Brian.

Thank you, Steve. And again, thank you everyone for joining our call today. Our second quarter revenue was $147 million compared to $137 million in the second quarter of 2022. Material sales were $77 million in the second quarter compared to material sales of $72 million in the second quarter of last year. Green emitter sales, which include our yellow green emitters were $58 million. This compares to $54 million in the second quarter of 2022. Red emitter sales were $70 million in both the second quarter of 2023 and 2022. As it has been discussed in the past, material buying patterns can vary quarter-to-quarter. Second quarter royalty and license fees were $64 million compared to the prior year period of $60 million. Adesis' second quarter revenue was $5.1 million compared to $4.4 million from the comparable period in 2022. Second quarter cost of sales in 2023 was $32 million compared to $27 million in the second quarter of 2022. This translates into total gross margins of 78% in the second quarter of 2023 compared to 80% in the second quarter of 2022. Cost of OLED material sales in the second quarter of 2023 were $29 million translating into material gross margins of 63%. This compares to $25 million and material gross margins of 65% in the second quarter of 2022. Second quarter operating expense in 2023 and 2022, excluding cost of sales was $56 million. For the full year of 2023, we now expect the year-over-year OpEx increase to be at the low end of our 5% to 10% forecast range. Operating income was $59 million in the second quarter translating in operating margin of 40%. This compares to the prior year period of $53 million and operating margin of 39%. The income tax rate was 22% in the second quarter of 2023. Second quarter 2023 net income was $50 million or $1.4 per diluted share. This compares to $42 million or $0.87 per diluted share in the comparable period in 2022. We ended the quarter with approximately $756 million in cash, cash equivalents and investments. Regarding our 2023 guidance, as Steve mentioned, we are revising our revenue forecast by narrowing the range to $560 million to $600 million. And lastly, our Board of Directors approved a $0.35 quarterly dividend, which will be paid on September 29, 2023 to stockholders of record as of the close of business on September 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. For nearly 30 years, we have demonstrated adaptability and resilience. We fostered a culture of creativity and collaboration and we consistently invested in the world-class employees, infrastructure and ideas to advance our robust first mover leadership position in the OLED ecosystem. As we look to the future, we continue to believe that 2024 will be a pivotal year for the OLED industry and for us. We believe the panel manufacturers and OEMs are preparing to advance the OLED adoption curve to medium and large area displays with OLED IT being a key near-term focus. As the future of OLEDs continues to shine with balance brilliance, we'll forge ahead with an unwavering determination to take our Company to new heights. And lastly, 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 Instructions] Our first question is from Brian Lee with Goldman Sachs. Please proceed.

Hi, everyone. Good afternoon, thanks for taking the questions. Kudos on the nice execution here in the quarter. I guess for you, Brian. To start off, just a housekeeping question. I think last quarter you had broken out a blue revenue number, is there a similar one you can provide for 2Q and then also just any thoughts in general in terms of the progress. And maybe what you've achieved since the last time you updated us on the blue commercialization path?

Sure, thanks, Brian. Yes, so on blue revenues we did have approximately $2.4 million of sales in Q2. That was a combination of both emitter and host, predominantly emitter. And then as it relates to the progress, we continue to make really strong progress as Steve mentioned in his comments. I feel like we're on track for having commercial material available in 2024.

I mean it's going to...

Also one other thing to note. I mean I think it's going to -- the blue development revenues are going to vary quarter-to-quarter. So $2.4 million is certainly a positive step forward in Q2, it's going to be a little bit variable between here and commercialization.

Fair enough. So not -- we shouldn't necessarily expect that to be linear. That's fair. I guess a couple of more things here, just on the model itself. You reiterated a few of the guidance metrics for the year. I know you're tightening the revenue but on gross margin, is the guidance still for 65% plus or minus that, it does imply a pretty significant pickup in the second half. Even though you did better in the second quarter versus the first quarter. Can you kind of speak to some of the drivers and confidence around getting gross margins up to that mid to higher 60% level in the back half of the year to reach the full year target.

Yes, so I think at the total gross margin level the guidance we've given, it continues to be true 77% to 78% for the year. And for material gross margins, ballpark 65% is a reasonable assumption. There's obviously as we increase volumes and revenues, there's some operating leverage that we get out of that generally that we'd expect in the second half. So those guidance figures are still relevant at this point.

Okay, fair enough. And then last one from me and I'll pass it on. It looks like there was a fairly meaningfully sized customers see this quarter it was larger than your customer in China, that's historically been your biggest one. Presumably, this customer is also from China. Can you give us some sense of their ramp, is this a one-off or they're building new capacity, just they haven't always showed up as one of your top three customers. So wondering if you can share any color there. Thank you.

Yes, yes, you're right, we did have new customers see this quarter. And I think we tend to have a little bit of variability in purchases from our Chinese customers, so hard to say at this point if that remains the case going forward. But it is an additional customer that kind of showed up in the top four this go around.

Okay, fair enough. I will pass it on. Thanks a lot.

Thanks.

[Operator Instructions] Our next question is from Jim Ricchiuti with Needham and Company. Please proceed.

Hi, good afternoon. Thank you very much for taking the question. This is actually Chris Grenga on for Jim. With respect to the comment you made about the solid momentum continue into 2H, could you talk a bit or elaborate a bit more about the nature of the conversations you're having and what's underpinning the confidence in what you're seeing there. Thank you.

Yes. Thanks, Chris. So we have regular updates from our customers in terms of what they're seeing and what their expected volumes are from us. We get solid rolling forecast from each of them and those demand signals that we've been seeing from our customers remain pretty consistent over the course of this year. So that's forming a lot of the confidence that we have in terms of what the rest of the year is expected to look like.

Got it, thank you. And with the Shannon facility costs, I believe this came in at $3.9 million this quarter, what do you expect the cadence of that to be for the rest of the year now that the facility has been opened?

Yes, so I think that a run-rate of slightly more than $1 million a month is what we've been -- that's what we updated back in May when we had the Q1 earnings. I think that slightly more than $1 million a month is the right number in terms of the underutilization for this year. We did, as you mentioned just have kind of the ceremonial grand opening of the site, which was an important step forward and now it's a matter of how do we continue to put more volume of production activities into that site and therefore have greater utilization and therefore less underutilization that's hitting the P&L directly.

Great, thank you. And maybe just one more from me, if I may. With the contribution of the Merck IP portfolio, are you pleased with how that's been - the integration events have been going. And was there any contribution worth mentioning to Q2 revenues in the quarter.

We're in the process of integrating the Merck portfolio into our 6,000 patent portfolio in this field, but I can't focus on any particular revenue gain in this quarter. It's more part of the whole group of patents and technologies that we were able to implement to serve our customers.

Got it, thanks very much. I appreciate the color.

Thank you.

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

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