Uni-Pixel (UNXL) is a production stage company delivering Performance Engineered Film (PEF) products to the display, touchscreen, and flexible electronics market segments. The company specializes in ITO-less touch films and flexible electronic films based on its proprietary UniBoss manufacturing process for high volume, roll to roll printing of flexible thin-film conductor patterns. In plain English: Uni-Pixel designs touch screens using new technology that is both better and cheaper than current ITO touchscreen technology.
Uni-Pixel has been rapidly rising, currently up 60% YTD, but still provides an amazing risk reward opportunity for 2013 and beyond. This is a company with disruptive technology in a quickly growing market (touchscreens) that has a tiny float, no debt, and plenty of cash. I have written about it previously here and here. The company has been also been written about extensively by other Seeking Alpha contributors articulating both bullish and bearish viewpoints. In this article, I will provide a brief overview of the technology, my EPS models for the company, as well as updated information presented in the recent conference call on February 26th. I will also outline what I believe to be the major risks involved and some near-term catalysts. There are many aspects of Uni-Pixel that I do not touch upon here, such as Diamond Guard, as I consider them to be "free call options" embedded into the stock.
Uni-Pixel is a small, $200 million market cap company based in Woodlands, Texas with 28 employees. The company is currently pre-revenue, but is expected to begin receiving revenue in Q1 of this year (more on this later). Uni-Pixel's main business is its proprietary UniBoss technology which is a roll-to-roll process for creating capacitive films used in touchscreen devices. Its main focus for now is "large screen" touch devices, which is generally defined as 10" or larger. This encompasses tablets, touch-enabled notebooks, and touch-enabled All-In-One desktops.
Many people wonder what makes UniBoss better than current technology. Green River Asset's article here explains in detail why it is both cheaper and superior to current ITO technology. In essence, UniBoss touchscreens use 75% less power, reduce resistance by 2,000x, increase scan rates by 10,000x, are significantly lighter and thinner, and, most importantly, are about 40% cheaper than comparative ITO screens. The cost savings largely come from the unique additive roll-to-roll manufacturing process. Uni-Pixel is the only company producing these screens that is truly additive. I want to stress two of the more important parts: It is significantly cheaper and uses significantly less power.
Where do we go from here? The Opportunity:
At the end of 2012, Uni-Pixel signed a partnership with an undisclosed OEM, described only as a large PC Manufacturer. This has largely been rumored to be Dell (DELL) based on industry checks with various companies in Dell's supply line. As a part of the deal, the OEM will pay Uni-Pixel 3-4 payments of around $5M each throughout 2013 as Engineering Licensing fees to help Uni-Pixel build out their manufacturing lines. On the recent conference call (henceforth abbreviated CC), Uni-Pixel announced that the company expects the first $5M payment in Q1. It was also announced that Uni-Pixel will start selling product to the OEM in late March or early Q2 at a rate of approximately 60k units per month, ramping up to around one million units per month by the end of 2013: "the current preferred price and capacity licensee request of 1 million square feet a month." Uni-Pixel will start to receive revenues from sales of UniBoss as early as the end of March (but more likely early Q2) in addition to the licensing fees that the company will be receiving beginning in Q1.
Given that Uni-Pixel was previously a pre-revenue company, a sudden jump to $5M in revenues per quarter will be huge. Also, even at just 60k units per month (or 180k units per quarter), Uni-Pixel can expect to receive an additional $3.6 million in revenues per quarter. As the company ramps its production through the end of the year to meet the OEM's demands of one million units per month, Uni-Pixel will be receiving approximately $60 million in revenues per quarter, or $240 million in revenues per year, which is higher than the current market cap.
And this is all from the one OEM that is already signed. Also announced on the call was that "[Unipixel] expects to close another preferred pricing capacity license with an ecosystem provider within the next four to six weeks, maybe earlier." This is a huge statement and probably my second favorite part of the conference call. Management goes on to describe that, in its opinion, an ecosystem deal would be a software company such as Google (Android), Apple (iProducts), or Microsoft (Windows 8); a hardware company such as Intel (INTC) or Qualcomm (QCOM), which could force their customers to utilize UniBoss; or even a supply-chain manufacturing company such as FoxConn. Management also mentioned that any ecosystem deal would be EVEN LARGER than the current OEM deal, thus implying that they would be requesting, at the very least, an additional one million units of UniBoss per month.
The fact that CEO Reed Killion made this 4-6 week statement on the call shows extreme confidence to me. He is taking a huge risk that there are delays and he can't meet expectations, which, in my opinion, means that the deal must already be done and he is simply waiting for the ink to dry. I believe he actually expects the deal to happen much sooner (which is why he said "or sooner"), but gave the 4-6 week timeline as a conservative estimate in case there are any delays. I also assume that since he stated the ecosystem partner would be a "preferred partner" that partner would also be paying Uni-Pixel licensing fees of about $5M per quarter for the next 3-4 quarters, further increasing Uni-Pixel's 2013 revenues.
As can be seen, the numbers get very big, very fast, and that only includes the OEM that has already signed and the Ecosystem partner which is essentially signed (we will know more in just a few weeks). I personally expect that Uni-Pixel will be signing additional partners as well, and that by the end of 2014, Uni-Pixel could be all the way up to 8 million units per month of production.
Do these numbers make any sense though? Is it really possible for Uni-Pixel to sell 8 million units per month? How big is the market?
I have approached the market size from various angles in my previous article here, but I want to provide a brief summary in this article as well. My favorite approach is to ignore estimates of market size in dollars and focus on how many products do we actually expect to be sold. Numerous sources proclaimed that the touch industry is growing very quickly, with the vast majority of the growth coming in the "large screen" market, which is Uni-Pixel's focus.
Morgan Stanley did some analysis in May of 2012 which stated the following about touch devices. From Exhibit 7: Tablets will sell between 200-350 million units per year between 2013 and 2015. During the same time period, there will be about 370 million 'notepad and desktop' sales per year (some of which will be touch enabled). Also, from Exhibits 33 and 40: the two most important factors are price and battery life, areas that Uni-Pixel has huge advantages over the competition.
Also, numerous reports came out of CES this year of notebook manufacturers such as Dell and Lenovo (LNVGF.PK) stating that they plan on converting the majority of their notebooks to touch-enabled notebooks. In the same vein, Intel has recently stated that it will be requiring touch compatibility for any manufacturer integrating its new Haswell microprocessor. And finally, from the Synaptics' (SYNA) recent conference call, the CEO stated: "...market expectations for touchscreen enabled notebooks have dramatically shifted upwards... tablets combined with large touchscreens and notebooks are expected to see 200 million units in 2013, and close to 300 million units the following year."
Clearly this is a growing market. So, at 200 million large touchscreen devices in 2013 and 300 million in 2014, if Uni-Pixel is producing at a rate of 12 million units per year for 2013 and 36 million units per year for 2014, the company will be capturing 6% and 12% respectively of the market share. While these numbers are high, they certainly aren't unreasonable for a new disruptive technology.
But the question remains... how can a tiny $200 million company with 28 employees go from pre-revenue to producing 36 million units of product in just 18 months or less? This is what I have often seen as the major risk for the company, because it does seem to be quite a stretch of the imagination. However, this is where my favorite part of the conference call comes in. But first, let's give some background on the manufacturing.
Uni-Pixel relies on a roll-to-roll process for mass production involving two main machines: printing lines and plating lines. Each printing line is capable of producing approximately one million units per month, while each plating line is capable of producing approximately 100k units per month. Both of these numbers assume that they are operating two shifts daily (as opposed to 24/7, which is generally three shifts). Given the 10:1 ratio of output, in order to produce one million units per month, Uni-Pixel will need one printing line and 10 plating lines, which will cost around $11 million of expenditures (hence the need for the engineering licensing fees). To date, Uni-Pixel owns one printing line and 1-2 plating lines, but has two additional printing lines on order and (I believe) around seven additional plating lines on order. This is almost enough to account for the current OEM at one million units per month, but it may become quite difficult to fully ramp up production as the company grows so quickly.
It is important to keep in mind that Uni-Pixel is building capacity under a contract and preferred licensing agreement, not a "build it and they will come" strategy. There is no reason for Uni-Pixel to build out its capacity as much as it is, and so quickly, unless the company was extremely confident that the demand was already there.
To this end, Uni-Pixel announced the following on the CC:
It is paramount that we scale capacity as quickly as possible to meet demand. To that end, we have started talks with multiple companies about possible joint ventures. While building out our current capacity, we will consider a number of potential joint venture partners. We expect to announce a joint venture with a world class manufacturer in the second quarter.
This is huge news. A JV will not only allow for more efficient and rapid growth, but also it will further validate that Uni-Pixel isn't just some small company with a product, but a world-class company to be reckoned with. This gives Uni-Pixel a brand name to validate its product.
But the most important thing is whether or not Uni-Pixel can even produce the product using its machines. Many bearish articles have been written with the general thesis being that there is no way Uni-Pixel can mass-produce its touchscreens. The claims are that it has been attempted before and failed. One of the articles, written by Professor Ben Wiley, Founder of NanoForge, even pointed out that his company had tried it and it just isn't possible! Which, finally, brings me to my favorite part of the CC: "I was told yesterday by one of the guys that if we had to ship product today, we could." Hallelujah, it works.
So now it is just a matter of signing up more customers and ramping up capacity. Or is it?
As with any company, there are always risks. I want to make sure that I fully detail them as I do believe that they are actually quite small given the opportunity. Some of them I have already mentioned, but will give a brief recap here as well.
As previously mentioned, Uni-Pixel has to prove that it can actually mass-produce UniBoss with high enough yields and quality to ship to its customers. The company believes it can and claims that it has. I trust them, but it is important to verify this. Firstly, one OEM has already signed up and paid Uni-Pixel $5 million, and therefore seems to trust them as well. A second, an ecosystem partner, is apparently about to sign up. Thirdly, a JV is apparently close to being signed. All of these companies must believe that UniBoss can be manufactured. UniBoss has ramped up its employee count from 18 to 28 throughout 2012, mostly engineers and one VP of sales (recent hire Robert Berg). Why add all of these employees if you can't even produce a product?
2. Uni-Pixel Who?
Uni-Pixel is a tiny company and therefore it is possible that many larger companies will either ignore it, or copy it. Even if a larger company's product is slightly inferior, they have the brand recognition that Uni-Pixel doesn't. This is why I believe that the ecosystem deal and the JV are critical to Uni-Pixel's long-term success. Both of these give Uni-Pixel a huge brand name company fighting on its behalf. They will want Uni-Pixel to succeed. Imagine having Intel, Apple (AAPL), Microsoft (MSFT), or Google (GOOG) supporting your product - that will do more in one second than any marketing guy can do in 10 years. And these deals are coming and will help catapult Uni-Pixel into becoming a force of its own to be reckoned with.
As with any small company, there is always the risk of dilution. That risk still exists with Uni-Pixel, but I believe that the risks are minimal. Uni-Pixel has $13 million in cash, $0 in debt, and is about to receive $5M in Q1. The company will begin producing revenues from sales in Q2. Its burn rate is currently about $9M per year. There really is no reason for Uni-Pixel to need to dilute. Also, even if it did dilute an additional million shares, I wouldn't be terribly concerned as the money would probably be spent on ramping up its capacity even faster. Even if the fully diluted share count increased to 20 million shares (which would never happen), the opportunity would still provide a triple digit stock price going forward.
4. Pump and Dump / Fraudulent Activity / SEC Violations
I almost didn't include this section, but given recent articles on SA, I thought it might have some merit. Claims that this company is committing fraudulent activity and is just a "pump and dump" are widespread on the internet, but completely unfounded. Again... Uni-Pixel has one large customer already, engineers at industry suppliers speak very highly of Uni-Pixel, and is in constant communication with many other large companies. Also, it already has a working deal in place with both Carestream (for Diamond Guard) and N-Trig (for UniBoss). In addition, they have approved UniBoss with Texas Instruments (TXN).
Many are also concerned that the PC Manufacturer has not yet been named. During the call, Reed Killion stated the following:
It's a very competitive environment out there, specifically for supply. So, some of these eco system partners may or may not want their name mentioned with this but will certainly be working with them and the customer base to get our product designed in and integrated into next generation products for some of the PC manufacturers and even some of the Android folks out there.
It is actually quite common for large customers to remain anonymous when working with small companies. Look at Apple, as an example. Every time an iProduct comes out, it is immediately broken down to see whose parts Apple is actually using. I am hoping that we do not have to wait until September to find out the name of the PC Manufacturer, but even if we do, this shouldn't be alarming.
Finally, Uni-Pixel insider's did sell some shares on Friday, which I have already seen spread across the internet followed by accusations of "pump and dump." This is nonsense as well. Executives at Uni-Pixel are paid relatively small salaries for their positions, and receive most of their compensation in options/warrants. On Friday, they sold off 7% of their total position to give themselves a very nice bonus for their hard work over the past few years. As an example, Mr. Peter Shin, the COO, is paid $180k/year + options. Before working at Uni-Pixel, he was a highly accredited SVP at Samsung (SSNLF.PK), where I can only assume his salary was closer to $500k. He, and many other employees at Uni-Pixel, took large pay cuts for the opportunity to take part in this growing company. Their paycheck comes with their success as the company grows, and on Friday they gave themselves a nice bonus. Most likely they will grant themselves additional shares over the next year anyway, thus fully replacing the shares they sold.
Furthermore, I would also assume that the shares sold were a part of a 10b5-1 pre-arranged plan.
5. Intellectual Property
As per the 10-k recently filed: "The company has 3 patents issued and 71patent applications filed protecting its Performance Engineered Film™ development and manufacturing platforms." Uni-Pixel also has around 20 patent applications that it plans to submit within the next 6 months. All of this will help it protect its proprietary IP.
6. Carclo-CIT lawsuit (credit to Xuhua Zhou for uploading documents here)
CIT, a division of Carclo, is suing Uni-Pixel for breaking an NDA agreement that they signed in 2005. Before I get into the details of the lawsuit, I want to point out a positive spin. Carclo/CIT currently has a ten-year exclusive deal with Atmel (ATML) to develop copper metal mesh touchscreens for Atmel. Carclo/CIT's screens are not truly additive, and therefore do not have the same cost advantages as Uni-Pixel. The fact Carclo/CIT is suing Uni-Pixel means that it clearly feels threatened by Uni-Pixel. In my opinion, this actually validates Uni-Pixel's product and Uni-Pixel as a company. Most likely CIT lost a design win to Uni-Pixel with a major company, which inspired the lawsuit. IF Uni-Pixel was fraudulent, didn't have a product, wasn't in discussions with possible customers, or was greatly exaggerating its advantages, then CIT wouldn't be suing it!
Now, onto the lawsuit itself. If you don't want to read the whole document, I would suggest focusing on Exhibit one (page 31), and Exhibit 2 1 (page 31), and Exhibit 2 (page 35).
This is another area which has been seen to be a large risk, so I have seriously focused on reading up on the PACER documents in order to get a good handle of this case. In essence, Uni-Pixel and CIT (based in the U.K.) collaborated on multiple occasions signing NDAs in 2005, 2006, and 2010. Around December 12, 2012, CIT served Uni-Pixel in the U.K. court with a lawsuit, claiming that the company broke the NDA signed in 2005. My reading of the over 200 pages worth of documents has led me to the following realizations / conclusions:
The 2005 agreement was a 5-year agreement, expiring in 2010. It no longer has any affect. More importantly, the 2010 agreement contained this direct quote: "This agreement is the sole agreement between parties with respect to the exchange of Confidential Information... This agreement supersedes any and all prior agreements." Therefore, the 2005 agreement doesn't matter anyway, as it has been superseded. Even further, the 2010 agreement also states that all discrepancies will be tried in the district court of Texas, not in the U.K. On those grounds, Uni-Pixel is actually now counter-suing CIT for breaching the contract by filing a lawsuit in the U.K. This has been elevated to the Federal court in Texas, where the company is awaiting Justice Sim Lake's ruling as to where the court will eventually be tried.
There have been numerous theories that CIT is just on a fishing expedition so they can get some insight into Uni-Pixel's proprietary formulas. This is supported by the fact that 1. the NDA is expired, and 2. CIT has directly claimed that Uni-Pixel is using inkjet printing technology learned from CIT, however Uni-Pixel doesn't even use inkjet printers.
But most importantly, and this is the real kicker, who cares? Let's just assume that CIT has some waterproof case and wins. Worst case scenario, within reason, is CIT receives some sort of licensing fee from Uni-Pixel for the foreseeable future. Even at 10% (which is extremely large), Uni-Pixel's earnings would still be huge and the stock price would warrant a triple digit price, as detailed above.
I will continue to watch this case through the paid PACER service, but I do not expect any negative surprises.
Finally, and this isn't exactly a "risk" per se, I want to discuss the short interest in Uni-Pixel. As of February 15, the short interest was 3.64 million shares. This is phenomenally huge given that the total float is slightly under 10 million shares and the institutional ownership is 35% (approaching 60% if you include funds reporting through 13Fs instead of filing with the SEC). Using just the 35% institutional ownership, the true float would decrease to around 6.5 million shares, which means that short ratio is 56%! This is unbelievable (and might explain the rampant short attacks all over the internet), especially considering that the stock price has been going up significantly. Such a high short interest could be interpreted as a company doomed to fail, i.e. the shorts know something that the longs do not. However, in all of the bearish Seeking Alpha articles posted so far, the theses have been immediately torn apart by various commentators such as Green River Asset and others.
I personally believe that the shorts are in big trouble, and they know it. On the conference call, Uni-Pixel outlined various catalysts which, if they come to fruition, would especially be troublesome for this enormous short position.
Finally, it is always important when investing to have some sort of near-term catalysts for the stock. Here is my list of catalysts for Uni-Pixel:
Formal announcement of the ecosystem partner (hopefully named) in what is now 3-5 weeks or sooner.
Uni-Pixel stated that it would make a PR when it began shipping product to the PC Manufacturer, which is expected to be in late March or early April.
Once it does begin shipping product to the OEM, I also expect Uni-Pixel to name who the OEM is, probably Dell. However, the 'naming' may or may not occur. If it doesn't, we will probably have to wait until items are on shelves in August/September.
Q1 earnings in late April, early May, which will include the $5M licensing fee.
Official announcement of a JV partner sometime in Q2 (hopefully on the earlier side to line up with the ecosystem partner).
The list continues further into Q3, with the biggest one being the arrival of UniBoss products on shelves in late summer for the back-to-school season. By this point, however, I would already expect the stock price to be well above $50 per share based on the aforementioned catalysts.
Again, Uni-Pixel has no debt, plenty of cash, and no competition that is manufacturing product with a similar or better quality and price. It already has its first huge deal, and will be announcing new ones in the near future. Revenues are going to be growing extremely quickly as the company ramps up production with the help of JVs, and the stock price will be rocketing upwards.
Thank you all for taking the time to read this article. I hope it has provided some clarity to the Uni-Pixel story. I will continue to expect large volatility in the stock going forward, but hopefully that will begin to diminish once we receive one or two more large news items. If you have any questions regarding the content provided here or anything regarding Uni-Pixel, please feel free to leave a comment below or send me a PM.
Disclosure: I am long UNXL.