Update: Universal Display Corp. Earnings

Aug.11.14 | About: Universal Display (OLED)

Summary

Universal Display reported 2Q14 earnings.

While my industry checks were very accurate on material volumes, that prediction wound up being useless due to unexpected pricing pressure.

Non-headline numbers from the report are the most important data points for predicting the pace of continued growth.

Last week, Universal Display Corp. (NASDAQ:OLED) reported another excellent quarter, with earnings of 44 cents per share on $64.1M in revenue, both of which beat average estimates. Commercial material revenue broke down as follows:

Material Revenue ($M) Growth vs 1Q14
Red Emitter 4.4 13%
Green Emitter 15.0 -13%
Green Host 13.2 6.5%
Total 32.6 1.5%
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It turns out that the industry checks mentioned in my last OLED article were right on, but still useless due to unexpected pricing pressure in green emitters. To explain: since green materials are a little over 3 times red, and management stated that green emitter volume was flat, we can deduce that overall material volume sold did indeed increase by just under 5%. However, the relative volumes also mean that pricing pressure on green emitters has an out-sized effect, so total material revenue growth was only 1.5%. Since UDC just started selling new, higher performance red and green emitters this quarter, I speculate that the pricing pressure was a deal to move inventory in older green emitters. However, management said that pricing pressure is likely to continue. A future article may go into more depth on the details of what I think is going on behind the scenes here. I also will begin modeling in host revenue (with declining margins) as it's simply too big a factor to ignore.

The most important numbers, though, are the increases in development revenue both in materials (83% QoQ) and licensing (72% QoQ, 250% YoY). While the absolute numbers are small, they are the best sign that UDC is making progress toward finally diversifying its revenue base. This is almost certainly from LG and the Chinese manufacturers mentioned previously. Based on the development growth, I don't expect a second commercial customer announcement in the current quarter, but I do continue to expect one with LG in the coming year. In 2015, JOLED (Japan's public/private venture) may become more important than either. Japan's VAT (Value Added Tax) was a surprise this quarter, and represents a small, but potentially increasing, drag on results going forward. UDC apparently has more work to do on the business side when it comes to taxes, as management flip-flopped on the expected tax rate for 2014, raising it from zero to the longer-term outlook of 30%. On the other hand UDC has done a decent job of conservatively buying back shares at below market prices (234,800 shares @ $29.81 average price). All in all, the picture affirms the long-term potential I've been discussing for over a year now, but the possibility of short-term hiccups in the next quarter or two still can't be completely ignored. Look for further developments at the following events:

Date Event
8/12 Oppenheimer Technology, Internet & Communications Conference
9/16-18 OLED World Summit
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Disclosure: The author is long OLED. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.