Ben Wiley, assistant professor of chemistry and research scientist at Duke University, recently published a SeekingAlpha article highly critical of emerging technology company, Uni-Pixel, Inc. (UNXL), and its lead product, UniBoss.
In the article, Wiley questioned UniBoss's potential market size and economic viability. He took an authoritative stance, impressing readers with a bio that noted his work publishing 57 papers with over 5800 citations, 5 patent applications, and an NSF career award. Wiley assured readers, under the guise of respected scientific objectivity, that he had "gathered and analyzed data from independent, publicly available market reports in order to build a clear, quantitative picture of the potential market for patterned metal grids such as UniBoss."
While Wiley did gather facts from market reports, his interpretation and analysis of these facts lacks credibility. Had assistant professor Wiley applied the same discipline and rigor shown in his academic work to his Uni-Pixel analysis, he would have come to a starkly different conclusion. It seems that his financial involvement with two Uni-Pixel competitors (Cambrios and NanoForge), and his short position in Uni-Pixel, may have clouded his judgment. While Ben has done interesting work in the area of nano conductors, he demonstrates very little understanding of the ITO replacement market, UniBoss's technology, and investment analysis more generally.
His numbers don't make a lot of sense. Wiley begins by telling us that were Uni-Pixel to record sales of $240mn in 2013, the company would record earnings of $120mn. No, Ben-- that would be the company's gross profit. You would still have to take out all of the operating and non-operating costs and you would have to tax the numbers (if you don't give the company credit for $50mn in NOLs). But his math gets screwier still. $120mn in theoretical profits would not equal the $2 in earnings that Wiley cites, it would equal just over $9/share in earnings, assuming 13.2mn fully diluted shares outstanding. Wiley's numbers weren't even in the ballpark.
Readers should note that the theoretical scenario Wiley laid out for 2013 is wildly optimistic vis. a vis. Street expectations (as represented by sell-side research). The model I am looking at anticipates a little more than $28mn in revenues for 2013, equating to a bit over $1 in earnings. Understand also that $15mn of that $28mn is actually engineering services revenue, so product revenue is projected at a conservative $13mn in 2013.
In fact, we get a sense for how poorly Wiley understands Uni-Pixel's business model from merely reading the headline of his article ("Losses for 2013"). Uni-Pixel will be profitable in 2013 based on engineering services revenue alone, according to analyst models. That's right, assuming the company meets certain milestones (which may or may not be related to sales) it could turn a profit while barely selling any UniBoss at all (though I think it's a stretch to imagine the company wouldn't sell much UniBoss).
Wiley proceeds to draw a distinction between UniBoss's mesh grid and the finished touch sensor - which includes lamination and tab bonding. Fair enough, but he doesn't have the actual numbers to understand this distinction or to compare UniBoss with ITO film. This creates a massive flaw in his analysis, which essentially asserts that ITO sensors are less expensive than UniBoss sensors.
UniBoss isn't a finished touch sensor, but it's a lot closer than a sheet of ITO film. The Uniboss film is a highly customized, patterned grid. It already has the bezel circuitry printed. It just needs to be die-cut, tab bonded, and laminated, and it is a sensor (it may actually be printed in a manner to obviate the need for a flex cable, but we don't need to go there now). The processes by which UniBoss becomes a sensor are very low cost, low value-add, and can be done in a clean, ambient production environment - not in a heated and cooled vacuum chamber. The completed UniBoss sensor costs approximately $25; assuming $3 for lamination and $2 for bonding (and $20 ft2 for the UniBoss).
The patterned ITO film (which Wiley claims is available for $9 ft2), on the other hand, still needs quite a bit of work to become a sensor. First of all, you need two separate sheets of patterned ITO, so you're up to $18 ft2 right there. The bezel circuitry needs to be silk screened which costs $5. Lamination of the two ITO sheets adds $3, tab bonding $2, and yield issues add another $3. Then you need to laminate to the cover and to the display for approximately $6 and add at least another $3 for yield. Now your sensor is around $40.
But readers should be aware that it is more complicated than I've presented above. Typically, ITO film is not sold with patterns already etched on the surface. It is simply a sheet of film covered in a thin layer of ITO. That film might cost $3-5 ft2 depending on a number of factors. This raw film needs to go through a highly customized, time intensive, expensive, batch production process to emerge as a patterned sheet of ITO.
Depending on the flavor of ITO sensor being made, that sheet of ITO is then combined with another sheet and undergoes another complicated production process to form a sensor. Because there are so many flavors of ITO, so many choices in patterning the film, and so many work-around requirements in some applications, the actual value of a finished ITO sensor can vary quite a bit.
Note that the patent that Wiley references in his note actually undermines his entire thesis. I'd encourage all readers to peruse the abstract to see exactly what I mean. The process it outlines is complex, and it demonstrates how far ITO film must travel to become a sensor. It involves several distinct substrates, and three separate deposition and etch processes using ITO. UniBoss, on the other hand, uses a single substrate, printed on both sides in a single pass, roll-to-roll process. No vacuum chamber, no sputtering, no photolithography, no etching, no separate bezel silk screening, and no batch processes.
In short, comparing a $9/ ft2 ITO film with a $20/ ft2 UniBoss film is an enormous error in analysis. These two materials clearly aren't apples-to-apples. As SeekingAlpha member Brian Coleman of Domino Analytics astutely observed in a comment on Wiley's article:
It seems to me that if we want to make raw material cost comparisons we would look at the largest raw material cost of an ITO sensor being the cost of ITO at $4-5/sq ft vs the largest raw materials cost in the manufacture of a Uniboss sensor - a piece of PET film - at $0.20/sq ft.
Comparing ITO film with UniBoss conveys a deep misunderstanding of the two products.
To complete the point, we simply look at market prices for finished ITO sensors with the understanding that they may vary quite a bit depending on type and application. As recently as three weeks ago, I spoke with one of the largest touch controller manufacturers in the world; he told me that a standard ITO sensor for a display in the 12" to 14" range would run $45 to $50. Understand that his motivation is to produce touch modules as cheaply as possible, I can't imagine he would artificially inflate the cost of ITO sensors. I have heard of prices as high as $90 for a 13" sensor. A proper analysis would compare the $25 UniBoss sensor to the $45-$90 ITO sensor.
Wiley made two errors in trying to ascertain the market size for UniBoss. First, somewhat inexplicably he cites market data that is segmented for small screen sizes (while UniBoss's natural market is in larger displays), then he contradicts himself, indicating that UniBoss's market is limited to smartbooks. Neither of these assumptions is accurate.
Wiley's market size numbers are quite misleading. He gets them from a paper which only considered mobile devices under 10.1 inches. This essentially ignores the impact of Windows 8 on the touch sensor market - the key catalyst for UniPixel. Windows 8 opens up large format screens such as desktop PCs, laptops, and ultrabooks/smartbooks, as well as televisions potentially. His $8bn market assessment is not small, but Uni-Pixel is also after some bigger fish.
Wiley then confines UniBoss's opportunity to the smartbook market, and goes on to underestimate the size of that market. According to the controller manufacturers with whom I've spoken, UniBoss is highly competitive from twelve inches and up (i.e. not just smart books). It is competitive in smaller displays, but it doesn't provide as large a cost savings in smaller form factors. Thus, UniBoss is able to address most of the display market (not just smartbooks), but it will be a "no-brainer" sale in the notebook, ultrabook, desktop, monitor, and television markets.
Notebook shipments in 2013 are expected to register at just over 200mn. Craig-Hallum's Mike Malouf noted in his UNXL initiation report that Intel (INTC) expects that ultrabooks (I'm assuming smartbooks and ultrabooks are the same) will comprise 40% of the notebook market. This would indicate around 80mn smartbooks shipped in 2013. If those screens approximate 1 sq ft., then the opportunity in this part of the notebook segment would approximate $1.6bn for UniBoss (not the $220mn that Wiley claims). Of course, Uni-Pixel is not going to sell $1.6bn worth of UniBoss into this market this year, but the point is that Wiley's market size estimate of 24mn sq ft. is woefully off-base.
UniBoss is focused on a wider opportunity that includes the 350mn unit global PC market (desktops and laptops). The company will also be very competitive in tablets, which are expected to number around 125mn units in 2012. As has been noted in many presentations and comments, Display Search gives a much more comprehensive and accurate view of the touch sensor market. The research firm estimates that this year it was just under $15bn and projects it to be a $17bn market by 2015.
Luckily for all of us, we don't have to rely on Wiley, myself, Nanomarkets, Cambrios, or NanoForge to estimate the size of UniBoss's opportunity. A large PC OEM (rumored to be Dell (DELL)) has given us the answer with hard, cold cash and volume commitments. This PC OEM will take whatever UniBoss can be produced. Note that Dell sells over 20mn laptops a year. So, in the scenario Wiley outlines at the beginning of his note where Uni-Pixel sold 6mn units, this would only suffice for 30% of Dell's production. Uni-Pixel would record approximately $240mn in revenue and $3.40 in earnings assuming $20/ft2 pricing.
How much sense would it make for this large PC OEM to give Uni-Pixel $15mn for capacity to produce a film that sold at a 100%+ price premium to ITO (assuming Wiley's claim that ITO is ready to go at $9 ft2)? Are we to believe they would then put this relatively expensive film into several laptop lines? Perhaps what Wiley's trying to imply (like many shorts on SeekingAlpha) is that there is no deal with the large PC OEM. If so, I'm going to have to put Wiley into this bucket.
This deal is real, and there's a lot of evidence to support it. Reed Killion (UNXL's CEO) noted on a conference call following the deal's announcement that the PC OEM had done six months worth of due diligence on UniBoss, including extensive work integrating this OEM's supply chain. All of this work has led to some industry chatter, which is why we know that the PC OEM is Dell. For instance, we have spoken with the controller manufacturer who is working with the PC OEM to supply chips for the touch sensors. This manufacturer is, of course, working closely with Uni-Pixel.
We also know that Uni-Pixel is to be paid $15mn in engineering services fees in the deal. The first payment of $5mn is scheduled to be made in the first quarter according to analyst models. It certainly wouldn't make a lot of sense for UNXL to lay out such a front-loaded milestone schedule if there wasn't a real deal.
Nor would it make sense for people like Bernie Marren, Carl Yankowski, and Bruce Berkoff (all on UNXL's Board) to simply go along with the massive fraud that some shorts imply. Look where these guys came from - President & CEO Western Micro, Founding President Semiconductor Industry Association (SIA), CEO of Palm Inc., President and COO Sony Electronics, CMO Applied Materials, Chairman LCD TV Association. Are we to believe they were all asleep when the press release went out? Do you think they would risk all that they have accomplished over their distinguished careers to make a few bucks on Uni-Pixel?
I've been around small cap investing long enough to understand that there's a lot that I don't know. Though I have done a fair amount of due diligence on Uni-Pixel and the ITO market, and have gained a high degree of confidence with respect to the company and its competitive positioning, the outcome is far from certain. Nothing is definitive until it's in the rear view mirror.
Even so, I can tell readers with great confidence that Ben Wiley's two main assertions that: 1) UniBoss is not economically viable; and 2) UniBoss's market potential is very small, are clearly and demonstrably false. While Wiley has done interesting work in the nanotech space, his analysis of Uni-Pixel reeks of sour grapes. He is likely frustrated because the opportunity Cambrios is pursuing is not all that large, and the firm is struggling to attain profitability. Cambrios's silver nanowire coated film is a direct substitute for plain old ITO film (this may be the source of Wiley's confusion). Wiley's Nanoforge doesn't appear to have found commercial success yet, but it is a young company and could achieve big things in time.
Wiley saw the opportunity to use conductive nano materials as a replacement for ITO before most. He had enough conviction, gumption, and brainpower to create the technology behind two firms that take aim at this opportunity. Even if his companies aren't massive success stories, he still has the chance to gain from his extensive knowledge.
Rather than lashing out at competitors through weak and misleading work, Wiley should use the competitive advantage that his technical knowledge affords him to understand which competing firms and technologies are likely to succeed. Some technologies are destined to create a lot of value, and Ben Wiley can still participate indirectly if he finds a way to lose the "not invented here" mentality.