​Problem – Universal Display Misses 3Q
Universal Display (OLED), the display industry’s primary supplier of Phosphorescent emitter materials, fell short of consensus estimates for 3Q. 

• 3Q Revenue Miss - Revenue was $139.6 million, down 18.7% q/q and down 13.6% y/y.  below expectations of $166.1 million, down 3.3% q/q but up 2.8% y/y. 
• UDC management indicated that the material pull-ins that they saw during the 1st half were more significant than expected, leading to the shortfall. 
• The company took a one-time charge of $9.5 million that reduced license & royalty for the quarter.  This was to fix an error is recognition that occurred in 2023. 
• Material sales were down 6.8% q/q and down 1% y/y, while license and royalty revenue was down 29.5% q/q and down 28.5% y/y.  Adjusted for the one-time charge License & Royalty was still down 17.0% q/q and down 15.8% y/y.

The company’s guidance range remained the same, $650 million to $700 million, but they pointed expectations for 4Q toward the low end of the range.  In order to meet the $650 million, the company would need to report ~$172 million in 4Q, essentially a record quarter, with those expectations based on the company’s conversations with customers concerning demand.  This calls into question either the company’s ability to translate customer comments into realistic risk assessment, or the inability of customers to predict near-term demand.  This lack of clarity led to a substantial drop in the share price.  We are concerned more about the 3Q mis-read and the potential for same in 4Q than we are about the year coming in at the low end of guidance forecast, as we began feeling that the range should have been lowered a bit as signs of weaker demand began showing in late August/early September but that is water under the bridge.
OLED Capacity Growth – The Gen 8.6 IT OLED Paradox
UDC’s growth rate has leveled off as OLED capacity expansion has been limited.  Future material sales growth is now contingent on increased OLED adoption as the driver for material sales growth until Gen 8.6 IT OLED fab capacity kicks in  While we do see OLEDE adoption expanding, ,we believe investors might be reading too much into the incremental capacity that these new fabs might contribute.  Two critical metrics will be the indicators for the pace for actual capacity expansion, Yield/Utilization and Customer Demand.
Fab Utilization & Yield Challenges  
New Gen 8.6 OLED lines, especially those from BOE (200725.CH) and Samsung Display (pvt), are pioneering the production of OLED panels on large substrates. This new technology introduces significant ramp-up risks.

• Utilization is the rate at which the fab is using its stated production capacity.  Most OLED fabs are set up in 15,000 sheet/month increments, so a 15K fab producing 10,000 sheets/month is running at a 67% utilization rate. 
• Yield is the percentage of ‘good’ panels that are produced, regardless of the utilization rate.  In this example we assume 72 panels can be cut from each sheet equaling 720,000 display panels/month.  If 72,000 display panels are rejected each month, the fab has a 67% utilization rate and a 90% yield. 
• Initial profitability is determined by the combination of these two metrics. determine the fab’s profitability and new fabs are typically not profitable when they first begin commercial production.  In the case of both BOE and Samsung Display, neither has had experience producing OLED panels on large substrates, and both Visionox (002387.CH) and Chinastar (pvt) are using technologies that have yet to be proven in a mass production setting.  This means that yield will take time to build and profitability for these fabs will be a bit far off.

UDC’s Exposure
To UDC, yield is less important than utilization as panels that don’t work when they come off the line still require OLED materials, while fabs that are underutilized use less OLED materials, An ideal utilization rate would be 100%, meaning the fab is producing at full capacity 24/7, and an ideal yield would be 100%, meaning every panel produced is acceptable, however that Is rarely the case as deposition tools need to be cleaned, masks replaced along with a variety of other reasons for down time.  We would expect a new fab of this type to begin mass production at 50% yield and 50% utilization.  Using the model above, the fab would be producing 360,000 displays each month, half of which (50% yield) would not be viable, leaving 180,000 to be sold to customers, likely at a very substantial loss (materials run between 60% and 70% of panel costs)..
In a normal scenario, yield improves with time, the more mature the process, the faster the yield improvement, so investors should expect an extended period when yield remains below material costs, before fixed costs are added.  But what really drives panel production profitability are customers, as they drive utilization
Customers drive utilization
 Fabs operating at 90%+ yield will still lose money if they are running at low utilization.  They cover material costs because the yield is high, but they have trouble covering fixed costs.  This also comes into play when new fabs enter into commercial mass production for the first time.  Unless they have orders, they are producing for inventory, not only a costly scenario but one with considerable risk that the panels will never be sold or will have to be sold for less than expected.  Distributors, OEMs and specialty display producers can buy these panels from the producer, but early run panels or panels that have been sitting in inventory can lose value quickly, so having customers lined up when a fab opens is the first step toward profitability.
Panel price is also a determinant for fab profitability as competitive pricing can destroy a panel production model as quickly as poor yield or low utilization.  In the case of the first two panel brands that will be in mass production, BOE is a very aggressive competitor, likely willing to almost give away early Gen 8.6 OLED production to both grab customers and share.  UDC is in the advantageous position of having both BOE and SDC as customers, so area is most important, but if a fab is already losing money from low utilization or yield (or both) selling below cost is not going to encourage them to expand production.  We expect that SDC has an advantage out of the gate as they are expected to dedicate a large portion of their Gen 8.6 OLED production to Apple (AAPL), indicating that they have been at least tacitly approved by Apple for a number of products.  This is great to have in your pocket when opening a new fab, but plans, markets, and timelines change, and nothing is written in stone until the contract is signed.
Final Outlook: Capacity vs. Adoption
The complexity inherent in building and ramping up Gen 8.6 IT OLED lines with novel technologies introduces numerous variables that can quickly change the market dynamics. While this new capacity will certainly be incremental to UDC's material sales, the key questions for investors remain:

1. At what pace will the Gen 8.6 transition develop?
2. Will this new capacity spur overall OLED adoption or will it lead to an over-capacity situation in the IT OLED segment?

The uncertainties around yield, utilization, customer certainty, and pricing will determine the actual impact on UDC’s long-term growth and profitability and the complexities of building Gen 8.6 OLED lines with even newer technology adds even more variables to the mix.  Canges in any one of these variable can affect UDC’s growth rate and material sales and the long-term prospects for the company, and then there is blue…

Universal Display (OLED) reported 2Q results of $171.8m in sales, ahead of consensus of $162m, with EPS of $1.40 against consensus of $1.18.  Sales were up 3.3% q/q and up 8.4% y/y, while net income was up 4.4% q/q and up 21.9% y/y, with operating margins of 39.9%.  The company now expects operating margins to come in toward the high end of guidance (35% to 40%) as opex are declining.  Material sales grew 2.9% q/q but declined 7.1% y/y while royalty & license revenue also increased by 2.9% q/q and increased by 27.1% y/y.  The company raised the low end of its guidance range from $640m to $650m and left the high end at $700m. 
From a more granular perspective, UDC management indicated that they had seen some tariff-related pull-ins from Chinese customers in April, although they believe that most were intra-quarter, leaving 3Q mostly intact.  In that regard, China represented 44% of sales in 2Q, the highest thus far, with the exception of a slightly higher share in 1Q 2021 when Chinese OLED producers were building material inventory as they began to move to OLED mass production.  We expect the pull-ins might have had a 1% or 2% increment to China’s share in the quarter, but on a general basis China will likely grow material share more rapidly than Korea over the next few years.

As we noted last week LG Display (LPL) announced that they have reached the commercialization stage  of their blue OLED panels.  While these panels are not quite the final step in the blue saga, as they use a combination of blue fluorescent and blue phosphorescent material to achieve results, they are certainly a step toward the ultimate goal of a three color (RGB) phosphorescent stack (see our 5/1/25 note for more detail).  The development of this panel was conducted with Universal Display (OLED), who has been on the blue phosphorescent material development path for years and is the key supplier of red and green organometallic phosphorescent emitters to the entire OLED industry.

Why is blue so hard?
​

Commercialization of a blue phosphorescent emitter and host combination that does not rely on blue fluorescent support has proved to be a daunting task due to the high energy associated with blue photons (packets of electromagnetic energy).  These excited particles can break chemical bonds in their own molecules, degrading them, or can create new non-radiative molecules that reduce the efficiency of the blue emitter.  Additionally, the host material that the blue emitter sits in has to have a higher energy level than the blue emitter itself to keep energy from leaking back to the host as heat or non-radiative energy.  So finding a blue phosphorescent emitter that meets all specifications is only part of the process, as the host material  development can also be challenging.
So, we know the development of a blue phosphorescent emitter has been difficult to say the least, as some potential blue emitter materials have high efficiency and a deep blue color point but only last for a few minutes, while others have a longer lifetime, and proper color, but are too inefficient to be used commercially, and some have excellent efficiency and a long lifetime but can’t quite produce the deep blue that is needed.  While Universal Display has completed ‘commercial verification’ with LG Display, UDC continued to record blue emitter/host revenue in 1Q as ‘developmental’, which is required until the product using the material is commercially available.  As the timeline for LGD’s panel production is still unknown, the key to understanding whether the LGD panels are being used in a commercial device will be when UDC begins recording the blue material as ‘commercial’.
What about Samsung?
Obviously, there are other OLED panel manufacturers working to bring a full phosphorescent blue emitter to market, particularly Samsung Display (pvt), who is also working with UDC along with their own development team.  As the leader in small panel OLED displays, they have a very big stake in this process but tend to be a bit more ‘purist’ when it comes to OLED processes.  SDC did not believe that LG Display’s TV panel, which uses a single color OLED and a color filter to create red, green, and blue, was the right way to produce large panel (TV) OLED in 2013 and concentrated on smaller RGB OLED displays, eventually settling on a blue OLED with quantum dot s to create colors for their QD/OLED TVs.
As the LG Display panel uses both fluorescent and phosphorescent blue emitters, we suspect that the current blue phosphorescent host/emitter that LGD is using as part of its stack might not meet Samsung Display’s requirements yet.  Samsung would likely be most interested in using blue phosphorescent material in mobile devices (smartphones and tablets) where the higher efficiency of a phosphorescent blue emitter will be key to either a power consumption reduction or an improvement in brightness, but as mobile devices have individual sub-pixels for each color, we expect their requirements might be a bit more stringent.  That said, we do expect SDC will find a way to incorporate a blue phosphorescent system in some product this year.  It could be a similar fluorescent/phosphorescent blue emitter base for their QD/OLED TV/Monitor panels, or it could be a higher specification deep blue phosphorescent emitter for an RGB architecture for mobile devices, but we find it difficult to imagine that SDC will cede the first ‘blue year’ to LGD.
All of that said, changing from a blue fluorescent emitter to a phosphorescent emitter is much more complicated than just switching materials.  In a large panel (TV), the OLED materials are deposited across the entire panel and the driving circuitry is the same for every sub-pixel point, as each sub-pixel is the same (white) color until it reaches the color filter or quantum dot.  In current RGB (small panel) displays, the driver for the red and green sub-pixel can be the same but as the driving characteristics for the fluorescent sub-pixel (blue) as different, the circuitry for the blue driver is different, adding to complexity.  In an all phosphorescent RGB display, all three sub-pixel circuits can be the same (in theory), which means not only does the material stack change, but the driver circuitry also changes, adding another level of complexity to designing an all phosphorescent display.
Timeline?
Not only do all of these issues need to be worked out, but they also need to be tested both at the pilot level and in a mass production setting, and this can take time.  The issue then becomes where do they start?  Does the OLED producer have enough ‘spare’ capacity that they can convert a line to producing all phosphorescent RGB OLED displays, or are they capacity constrained enough that they cannot afford to dedicate a line to all phosphorescent OLED production?  As was the case when green phosphorescent emitter material became commercially available, adoption took time.  With the first commercial product using a phosphorescent green emitter was released in 2013, UDC’s green emitter sales increased but then stayed relatively flat for ~15 quarters, being adopted by one of two major customers. In 2017, sales increased as a second large customer adopted the material and continued to grow quickly through 2021.  While still growing to a lesser degree, as the industry has universally adopted green phosphorescent emitter  material, growth is more tied to capacity expansion and new product applications, although the adoption of multi-layer OLED displays could lead to incremental material sales.
Adoption?
So the question now becomes will the adoption take 15 months, as it did with green or will it be faster or slower?  These are essential questions for UDC’s longer-term prospects, as while OLED capacity growth continues, the addition of a third primary material revenue stream is a godsend for any material producer.  We expect the adoption of blue will be faster, but with some caveats.
Why faster?
Numbers – in 2013 there were two OLED producers, Samsung Display and LG Display.  Tianma (000050.CH) built their first OLED fab that year but did not ship commercial product and BOE (200725.CH), China’s largest OLED producer, did not build their first OLED fab until 2016, so the adoption of green phosphorescent emitter material was dependent on only two producing entities.  Now there are over a dozen producers, all of whom are looking to differentiate their OLED displays from others and blue is a perfect differentiator.
Experience –Samsung Display and LG Display had been involved with OLED display development for over 10 years when green phosphorescent emitter material was released commercially by UDC, yet much OLED production was still problematic, and yield was always an issue.  At that time making major changes to formulas, architecture, processes, and equipment meant a long learning curve before returning to decent production yields and carrying substantial losses that could erode potential funding and adoption.  The current experience level across the industry is considerably higher than 10 years ago and producers are more likely to see a change that could give them an edge over the competition as one they are willing to take after years of managing commercial production.
Quality – A true blue phosphorescent emitter will give display designers a greater ability to balance their systems.  As a more efficient material they can maintain brightness with less power and less power means longer battery life for mobile users and a longer lifetime for the material, putting a damper on the ever-present burn-in question.  They can maintain the current power level and produce a brighter display to compete with other display modalities that are encroaching on the OLED space, or they can use blue as a differentiator that will separate their display from those without blue phosphorescent emitters.
Advertising – The idea of the display industry is to sell displays, and in order to sell displays there have to be lots of products that use them.  As the display industry can find itself in a somewhat stagnant position, with few new enticements for consumers, any new technology affords the industry a shot at incremental unit sales. We expect the industry will be enamored with the promotion of blue when it starts and will start a new line of promotion for OLED devices to counteract Mini-LED, Quantum Dots, and eventually Micro-LED displays.  However unless there is a truly discernable difference between all phosphorescent displays and what we have now, price will remain the most important factor to consumers as the blue enthusiasm wears down.  UDC however will have a new revenue stream , one that can eventually be bigger than red or green.
Why bigger?
In order to produce white light in large OLED displays, one can combine a blue emitter and a yellow/green emitter and then send the light to a color filter to create red, green, and blue sub-pixels, essentially the way LG Display’s WOLED TV panels work.  Samsung Display’s QD/OLED panel is similar but based on a blue[1] OLED material that gets converted to red and green by quantum dots. Smaller devices use individual red, green and blue sub-pixels, directly creating all colors.  WOLED displays uses UDC’s yellow/green phosphorescent emitter with a blue fluorescent emitter.  If a phosphorescent blue emitter became available, UDC would have the potential to be able to put both materials in every WOLED TV.  In Samsung’s QD/OLED the blue material used is fluorescent, with UDC providing no substantial OLED emitter material.  If a phosphorescent blue emitter became available, UDC would have that potential new stream.  In RGB display (phones, tablets) the impact would not be as significant as UDC would only be adding a third phosphorescent emitter to the two they already supply, but the volumes are extremely high, so all in, UDC benefits unless someone comes up with a better phosphorescent blue.  That said, even in that scenario UDC still has device patents that cover the use of phosphorescent emitters in OLED devices, so they might lose the OLED material sale to someone else but should still be able to capture a device royalty stream as before.
Why Not?
Cost – Fluorescent emitter materials tend to be less expensive than phosphorescent ones.  In premium OLED displays, the additional cost can be absorbed, but as one migrates to lower price tiers, the cost will be more difficult to absorb, and adoption will be slower.  We expect however that many brands will bite the bullet and eat the additional material cost in order to compete, at least for some products.  The cost of converting formulas, structure, and process also must be considered, and some who have been producing OLED displays for years at a loss might hesitate, unless they can convince funding sources to foot the bill.
Complexity – While there are certainly issues that will make adding phosphorescent blue to OLED production more complex, at least at the onset, OLED producers are so used to phosphorescent materials that they will likely adapt to required changes more quickly
 So?
We note also that UDC has contracts with all major OLED producers.  Some are based on a flat fee license, and some are based on a per unit royalty, and some cover only current phosphorescent (red & green) emitters.  In some cases UDC will have to strike new deals for blue that follow current contract formats.  While developmental OLED materials are expensive their volumes are low, but when they become commercial, they tend to be priced according to volume, so large, early adopters could have an advantage over small lower volume producers, unless their current contracts cover ‘all phosphorescent materials’.  UDC will have to balance their production cost and volume tiers against their desire to encourage blue adoption, ideally setting smaller price/volume increments in the early years against the opposite in later years. 
All in, blue is good, especially for those who produce it, but regardless of the headlines that are calling for a new ‘blue’ era in the display world, we expect most investors will expect too much too soon.  Panel producers need to make money and if they are producing at profitable utilization levels, they are going to want to keep doing so as long as possible, putting aside any changes that might reduce volume or profitability.  Most will talk the ‘blue’ talk but the implementation might be a bit less than the rhetoric.  We believe the adoption of blue phosphorescent emitter material will certainly be a positive for the industry and for the consumer, but technology hype is just that whether it is AI hype, metaverse hype, or 5G hype.  How consumers see ‘blue’ will be the deciding factor as it always is.


[1] Actually a combination of fluorescent blue and phosphorescent green.

Back in August we noted a few points about the development and adoption of blue phosphorescent OLED materials (“Singing the Blues”) and also indicated some hesitancy about the excitement that had gathered around the pending development of a blue phosphorescent OLED emitter material next year.  While the development of same by a number of companies, including Universal Display (OLED), Samsung Display (pvt), Sumitomo Chemical (4005.JP), Idemitsu Kosan (5019.JP), Merck (MRK), and Lumiotec (pvt), as well as a number of well-known universities, continues, the actual adoption of a blue phosphorescent material into a commercial OLED stack is a more difficult task and one that is likely not to adhere to the aggressive timelines than many hope for.
Universal Display began reporting commercial revenue from phosphorescent emitters in late 2005, primarily from its red emitter.  Previously the company’s sales came from developmental materials sold to customers and developmental contracts.  The first color OLED smartphone was the Samsung (005930.KS) X120, released in 1Q 2004, which had a 1.8” OLED display, was able to reproduce 65,000 colors, with a resolution of 128 x 128 pixels., and the following year BenQ (2352.TT) released the A520, which sported a 1.5” OLED display (128 x 128) and a smaller 96 x 96 display.  To compare that to what is available currently, the Xiaomi (1810.HK) 14 Pro released this month has a 6.73” OLED display that can reproduce 68 billion colors and has a resolution of 3200 x 1440 pixels.
We have been tracking sales of Universal Display’s OLED materials for more than 10 years and while the company announced its first commercial green phosphorescent green emitter material in the summer of 2010, Samsung Display, UDC’s biggest customer did not release a smartphone using both red and green phosphorescent emitters until the Galaxy S4 in April of 2013, almost 3 years later.  We expect Samsung Display had integrated the green emitter into the display stack for some time before the stack was stable enough to be used commercially, and while the OLED industry is far more adept at making stack material changes, we expect there will be a learning curve with blue phosphorescent emitter material when it is made available commercially.
At a seminar yesterday in South Korea, UBI research, a local consultancy, stated that Samsung Display had set a goal of applying blue phosphorescent OLED material to devices in the 2nd half of 2025, rather than in mid-2024 as previously expected.  We believe this is in reference to materials being developed by SDC, and while we assume they are working with UDC on that development, that remains unconfirmed.  UBI went on to state that they believed the current version of SDC’s blue phosphorescent emitter material is not efficient enough to be used as is, although they believe that SDC would be willing to use a more efficient version, even if the lifetime was only 55% of the fluorescent emitter materials it will replace.  Given that color point (deep blue), efficiency, and lifetime are all variables that determine the commercial success of an emitter material, it has been difficult to ‘blend’ the three major parameters to create a commercially viable blue phosphorescent emitter material.
To complicate matters further, the other components of the OLED stack, most of which are developed and produced by other material suppliers, must also work efficiently with the OLED emitter materials, and that combination must be formulated by the panel producer.  UDC and others will develop their blue phosphorescent emitter with host materials, but there are typically at least 4 layers (usually more) of additional materials that create the environment under which the emissive materials work best, so even if a panel producer decides to use a commercial blue phosphorescent emitter, all of the layers in the stack are likely to be redesigned to produce the most efficient stack combination, a time consuming task, and one that involves considerable testing. 
Why Blue?  The quest for a blue phosphorescent emitter material is not a frivolous one, as a proper phosphorescent blue emitter will improve the stack’s power efficiency.  Estimates seem to range for an improvement of between 20% and 35%, although we expect that the actual result will depend on both the blue material specs and the other stack emitters and materials.  Anything that can reduce the power consumption of a mobile device is of immense value to device designers who can add additional hardware or functionality or reduce the size of the battery, while maintaining or improving the overall display specifications. 
Why has it been so hard?  UDC and others have been on the trail of a blue phosphorescent emitter material for almost as long as commercial OLED materials have been around, but like other ‘blue’ structures, such as blue LEDs, the characteristics that create blue light are specific to what are known as ‘high bandgap’ materials.  In an OLED device, ‘holes’ (think: ‘anti-electrons’) are injected into the stack at the Highest Occupied Molecular Level (HOMO), while electrons are injected at the Lowest Unoccupied Molecular Level (LUMO), with the space between those two ‘points’ called the bandgap.  As the world of electronics always strives toward a neutral state, the two ‘migrate’ to the bandgap mid-point and when they pair, they release light energy and cancel each other.  The frequency (color) of that light energy is proportional to the size of the ’gap’ between HUMO and LUMO, with larger gaps creating higher (blue) frequencies and small gaps creating lower (red) frequencies.
Unfortunately, the larger the bandgap, the more unstable the materials tend to be, which means they have short lifetimes, just as in nature animals or insects with high metabolic rates tend to have shorter lifetimes than those with slower rates, and this has been a fundamental problem for OLED material scientists.  In theory, a lighter blue should be more stable and have a longer lifetime, but a deep blue is essential to balance the phosphorescent red and green already being used in RGB OLED displays, so the quest to find a material with a large bandgap with a stable structure continues.  Eventually a material will be found that meets the necessary criteria, but once it becomes commercialized, it will take time to find its way into OLED stack, just the way green phosphorescent emitter material did, along with the more predictable issues surrounding cost, availability, and IP that overhang current OLED emitter materials.  It’s coming and its going to create a stir when it does, but aside from the initial hoopla, blue phosphorescent OLED emitter material is just a part of the OLED stack and will be subject to the same starts and stops as other OLED materials.

The holy grail in the OLED material space is phosphorescent blue emitter material, with the reason being that in current RGB OLED displays (all OLED smartphones and IT devices but not OLED TVs) the OLED stack is comprised of a Red phosphorescent emitter, a green phosphorescent emitter, and a blue fluorescent emitter.  The nuance between phosphorescent and fluorescent is a big one in the OLED material space as broadly, fluorescent materials generate less light per unit of energy than phosphorescent ones.  By converting the blue fluorescent emitter material currently used in most OLED stacks, to a phosphorescent one, the amount of power consumed by the emitter stack could be reduced by ~25%, an important point for mobile devices, and with numerous labs and companies working toward the commercialization of a blue phosphorescent emitter, the long-term stakes are high.
It seems that the average investor believes that when blue phosphorescent emitter material is commercialized, the winner of the race, whoever that might be, is due to see a windfall in terms of OLED material sales, but while we believe that is the case over time, we are less sanguine about an immediate and significant jump in revenue from blue phosphorescent sales, as both physics and marketing must be figured into such equations. 
There are two factors that come into play when planning OLED pixels.  First is the efficiency of the materials, or their ability to convert electrical energy into light, and the 2nd is the eye’s sensitivity to each color.  If we assume the efficiency of both red and green phosphorescent emitter materials is the same (its not), for both colors to look equally bright to the huma eye, the pixel would contain two times the amount of red material to green material, but in practice that ratio is closer to 2 (red) to 3 (green), and again assuming the same efficiency for blue phosphorescent material, the theoretical ratio for blue would be only 16.3% of red, or 33% of green. So if red emitter cost $1,000 per kilogram (arbitrary price), the theoretical cost of a display that used 1 gram of red emitter would be $1.67, consisting of $1.00 of red, $0.50 of green, and $0.17 of blue, remembering that these are theoretical not practical ratios.
Back to reality, just by looking at a common pentile pixel layout, those ratios are not even close, especially as the efficiency of fluorescent blue (currently used) is considerably lower than that of (hopefully) phosphorescent blue, so ‘more’ fluorescent blue is needed currently to make up for that inefficiency, which leads to the idea that if fluorescent blue is replaced by a more efficient phosphorescent blue emitter, wouldn’t that mean that less blue is needed?  If all were of equal efficiency, yes, but that is certainly not the case with OLED materials. 
OLED material developers must find a balance between three major factors.  Color point (such as deep blue, not sky blue), efficiency, the ability to convert energy applied to light, and lifetime, or how long it takes for the material to degrade to a set point.  Finding a true deep blue phosphorescent material is not an impossible task, but finding one that has a reasonable efficiency is much harder, and finding one that is deep blue, with a high efficiency, but does not degrade in a few hours is very difficult, so material scientists continue to wrestle with materials until the right combination is found.  Even at that point however, we don’t know what the efficiency of this new blue phosphorescent material will be, and that will be a determinant in how much blue phosphorescent emitter material is needed to balance existing red and green phosphorescent emitter materials, which will also determine how much blue phosphorescent emitter material an OLED panel producer must buy when incorporating it in a new OLED display, so the variables are truly ‘variable’.
With all of those physical issues, there is another one as important, and that is the manufacturing cost of this new blue material.  Again, in theory, the amount of heavy metal, in this case iridium, needed to produce the increasingly higher energy levels of green and blue emitters, would make a phosphorescent blue emitter more expensive to produce than green or red, and under the assumption that the cost of raw materials for emitters is ~40%, this does represent a bit of an incremental cost, along with a relatively immature manufacturing process and considerable R&D that needs to be amortized, so the price/kg of a blue phosphorescent emitter is going to have to be higher than red or green.
That said, while the cost of a blue phosphorescent emitter material will be higher than that of a fluorescent blue emitter, less will be needed (in theory) unless the efficiency is low, which will make the changeover less onerous from a total OLED stack cost.  However it is important to understand that the adoption of a blue phosphorescent emitter material will not happen overnight, just as the adoption of a green phosphorescent material took time, as shown below.  While we expect the idea of being able to reduce power consumption by 25% or have an OLED display that is brighter than is currently possible, will be an attraction to OLED panel producers, but implementing new OLED materials into existing manufacturing processes takes time and considerable effort, and could affect yield for an extended period of time.  Typically such a change would be implemented on a single line, so once the new materials are proven, they would be expanded across other lines over time.
All in, while it will be exciting to see a commercial blue phosphorescent emitter material to complete the OLED stack, we hesitate to build in the high early expectations that are typical in the OLED space and take a more conservative view of how such a new material will be adopted.  With Universal Display (OLED) expected to have an all-phosphorescent stack commercially available next year, expectations will be high, but we expect adoption to the levels seen for current red and green phosphorescent emitter materials will take some time and investors should be wary of building in high expectations at the onset.

​Universal Display (OLED) indicated that they will be showing, for the first time, a demo of their OVJP (Organic Vapor Jet Printing Systems), which the company has had in development for a number of years.  Based on a series of patents developed by the University of Michigan, University of Southern California, and Princeton University, with whom UDC has IP sharing agreements, particularly with work done by Dr. Mark E. Thompson and Professor Stephen Forrest, early OLED researchers.   OVJP differs from more typical OLED material deposition methods which use fine metal masks, essentially screens, to pattern OLED materials. OVJP heats the materials into a vapor, mixes the material with a carrier gas, and sends it to a print head that precisely places the material. 
As opposed to ink-jet printing, which mixes the OLED materials with a solvent, OVJP uses existing vaporization technology and direct printing, but does not liquify the OLED material, nor mix it with a solvent.  OLED materials that are miscible in solvents have different characteristics than immiscible OLED materials, which means formulations must be tailored to IJP systems, while OVJP can use the same OLED material sources as current mask-based deposition systems.  While the idea of OVJP has been around for some time, it has never been commercially developed until Universal Display took up the cause officially in 2014 when it created OVJP Corp. to design and build a commercial OVJP system.
OVJP is run by Jeff Hawthorne, former CEO of Photon Dynamics, a producer of automated inspection equipment for the display space that was acquired by Orbotech for $290, who was later purchased by KLA-Tencor (KLAC).   Company is still in the early stages of OVJP development, with the development of modules that will eventually become an alpha system, but the company will show its first 200mm x 500mm OVJP demo on a glass substrate, along with a 7-layer mono-color phosphorescent OLED device that was made-up on an OVJP R&D system, which will point to ‘proof-of-concept’ for the process.  The next step in OVJP development will be assembling an alpha system of size, likely about 6x the surface area of the current demo, and eventually scaling the system to commercial production sizes.
As the OVJP concept is one that is based on two existing technologies, it is not a far-fetched concept and essentially takes the best parts of both.  However there is substantial engineering involved and considerable competition from other deposition technologies and alternative materials, which are also in development.  The risk to UDC on OVJP is that other developments obviate the need for OVJP before it is commercially viable, so time is certainly a factor in its development, but the demos being shown by UDC do indicate progress is being made which is certainly encouraging.

Universal Display (OLED) reported 1Q results of $130.467m in sales, 4% below consensus, down 22.8% q/q and down 13.3% y/y.  EPS was $0.83, slightly above consensus of $0.82, down 38.8% q/q and down 20.8% y/y.  While the numbers look poor compared to last quarter and last year, given the weak results seen from a number of consumer electronics companies who are UDC customers, there was considerable apprehension that UDC’s results and/or guidance could have been worse.  Most significant was the fact that UDC management did not change the full-year guidance that was given during the 4Q ’22 call.  We summarize that guidance below, along with how the 1Q results mesh with that guidance:

On a more general basis management reiterated their view that 2H will be better than 1H, which they believe is confirmed by conversations with major customers.  This has been the mantra for most CE companies, citing typical seasonality, new model releases, or a more generally improving economy, but we can only point to one or two realistic demand changes that will have an effect on 2H.  One would be the release of the iPhone 15 family, which will drive OLED display production starting in late July or early August, and the other a more general build toward the 4Q holiday season.  While the magnitude of the initial iPhone display orders from Apple (AAPL) will be based on their demand outlook toward consumer spending and their confidence in the feature set of the 15 series, the holiday build for most CE companies will be based more on inventory levels going into 3Q and an overall view of demand.
From the perspective of UDC, the 5-year average ratio between 2H and 1H is 1.22:1.  This includes two unusual years where the 1st half was unusually weak, resulting in a high 2H ratio.  When looking at an 8-year average, excluding those two years (2020 and 2018), the average is 1.1:1.  UDC gave no guidance for the 2nd quarter, so we would expect material sales to improve between 7.5% and 9% q/q and the royalty/license ration to also improve to 1.38.  If we put a 1.14:1 ratio on the 2nd half, it implies full-year sales of ~$572m, a bit below the mid-point of guidance.  However this leaves a considerable burden on 2H results, and that remains worrisome, especially after expectations for a ‘recovery’ across the CE space in 4Q and 1Q this year did not materialize.
That said, those with a longer-term perspective should understand that Samsung Display (pvt) has already committed to a large spending plan to upgrade a number of OLED lines to Gen 8 production for IT products, which will begin in 2024.  LG Display (LPL) and BOE (200725.CH) will also upgrade either existing small panel OLED lines or build out new Gen 8 OLED capacity in order to compete with SDC, which will drive additional OLED adoption.  That said, while the industry might be painting a rosy picture of the trend toward larger size OLED displays, adoption in IT devices will take time.  Apple’s OLED timeline for its more IT oriented products will likely set the tone for adoption, so new fabs will likely start out at low utilization rates and the industry will likely take some time before the cost is low enough that OLED in IT becomes commonplace.  UDC is certainly the beneficiary of that change, but it will not be a straight line, and as the small panel OLED display business matures macroeconomics will have an increasing effect on OLED material usage.  Calling 2023 a ‘transition year’ sounds a bit like a cop-out, but with only a few markers to go on so far this year, full-year results are highly speculative.  Additional details upon request.

​In a recent interview, Mike Hack, a VP of Business Development at Universal Display (OLED), indicated that regardless of whether UDC or another company was able to develop a commercial blue phosphorescent OLED emitter material, they would still have to obtain a license from UDC, which we assume, would entail paying royalties.  The conversation came about as Samsung recently purchased the IP assets of blue TADF developer Cynora (pvt), without actually purchasing the development team or other assets.  This implied that Samsung was either protecting its own development program by trying to cover a large swath of potential TADF IP, or they were trying to keep another party from acquiring same.
Additionally, the CEO of Samsung Display indicated that the company was working on the development of its own ‘blue’ , which was a bit unusual in that most emitter materials are developed by companies such as UDC, along with customers who tend to provide parameters and leave the actual chemistry to others who have background in material science.  We are still not convinced that the statements made by SDC were quite what they seemed and more likely SDC is involved in the development of a blue emitter material with a partner, although perhaps a bit more deeply than in the past, but those statements opened the door to further questions about who will be the first to commercialize a blue emitter and how it might be licensed.
US patent law is about as complex and arcane as law can be and requires very specific knowledge that can require understanding both science and the nuances of language, but we expect Mr. Hack was referring to UDC’s ownership of Utility patents that cover the use of heavy metals in organic phosphorescent materials and their use in a light-emitting device.  The metals involved are Iridium, Osmium, Platinum and others, so if someone were to find another way to produce a phosphorescent emitter that did not use heavy metal ligands, they might be able to bypass the material side of the IP, but if they were to use a phosphorescent material to produce a light-emitting device, they would have to license the IP as Mr. Hack suggested and while such a new material could be produced and sold by other than UDC, its use in any device would require licensing. 
We are the first to admit we are not patent attorneys or organic material scientists, but after reading hundreds of patents relating to organic materials we have some knowledge of how the system works.  For reference…
There are requirements that must be met to apply for patent protection, and here is where things get fuzzy.  The first requirement is it has to be ‘patentable subject matter’, which seems obvious until you ask what is patentable subject matter, and that is somewhat open to legal interpretation.  Some of the things that are not patentable are natural phenomena, abstract ideas, printed matter, and business methods, however the last item is no longer part of the ‘no’ list as new rulings have allowed certain business processes.  Additional requirements are the patent has to be novel, it has to have utility, it has to be non-obvious, and it has to be subject to ‘enablement’, with each of those being subject to interpretation.  In terms of just ‘utility’ or the ability to garner a ‘utility patent’  the subject has to be a process, a machine, a composition of matter, a manufacturing process, and an improvement over existing process or IP.  If that doesn’t prove that IP is a subject that could lend itself to an almost infinite amount of conjecture, and if the US patent courts are any indication, it does.
That said, while the specific IP relating to Mr. Hack’s comments were not given, the fact that every commercial OLED manufacturer (or at least those producing full color OLED displays with phosphorescent materials, which is most of them) licenses UDC’s device  and material patents, is a good indication that the vast UDC IP portfolio covers all aspects of using phosphorescent materials in a light-emitting device and that regardless of who is the first to commercialize a blue phosphorescent emitter, license negotiations will occur with UDC. 

As we have noted many times, typical small OLED devices such as smartphones and tablets operate using RGB (Red, green, blue) sub-pixels to create color.  The RGB process differs from large panel OLED manufacturing, which coats the substrate surface with a combination of OLED materials that create white light, which is then passed through a color filter, essentially a sheet of red, green, and blue dots, to create color.  The RGB process is more complex, involving separate process steps for each color and has limitations on the size of the substrate, but the color filter in the WOLED process reduces the amount of light that reaches the user while the RGB stack does not.  The red and green (and yellow/green in the case of WOLED) OLED emitters are phosphorescent materials, which simply put, generate much more light than fluorescent materials, such as the blue emitter material used in both instances, as a commercial blue phosphorescent emitter does not exist…yet.
There are a number of large companies involved in R&D to develop a blue phosphorescent OLED emitter as its use would vastly improve the characteristics of the OLED stack, but, as opposed to red and green OLED emitters, the energy levels of blue emitters makes them unstable and limits their lifetimes.  Universal Display OLED) the primary supplier of phosphorescent OLED emitters to the industry spends ~$20m/quarter on R&D, and while not all of that goes toward the development of blue phosphorescent emitters, we expect a large portion of that budget does.  Of course, OLED panel producers, the buyers of phosphorescent OLED materials, have a particular interest in the development of a blue phosphorescent OLED emitter, both from the standpoint of improving the efficiency and quality of their OLED display products, and from a competitive standpoint.  The quality side is easy to understand but owning the IP to such a material, as does UDC for red and green, would be an enormous asset and would allow the owner to license (or not license) or sell (or not sell) the material to other OLED display producers.
All  OLED producers test emitter materials, both the emitters themselves and host materials in which the emitters are ‘doped’, looking for, in the case of blue, a phosphorescent material that is ‘deep blue’, has a high efficiency, and a long lifetime, but as manufacturers their job is to produce OLED panels, not research new OLED materials, and most do not have the resources to do so, however Samsung Display (pvt), the largest producer of small panel (RGB) OLED displays and affiliate of Samsung Electronics (005930.KS), the largest producer of OLED smartphone, does.  In our 8/26/22 note, we mentioned that the CEO of Samsung Display indicated that it expects to move from using fluorescent blue emitter material to using blue phosphorescent or blue TADF emitter materials.  While we believe all OLED producers have the same plans ‘eventually’, when a commercial blue phosphorescent emitter is developed, we expect SDC or SDC and a partner will be the first to commercialize such a material.
SDC has applied for a number of patents, both in Korea and in the US that relate to blue OLED materials, particularly those that have a Boron component along with the more typical heavy metal ligand structure that most phosphorescent materials are based on.  By substituting Boron and Nitrogen for Carbon in some of the molecular ring structures, the IP filing states,
“The organometallic compound…may emit blue light having an emission wave-length of about 450nm or greater and less than 490nm.  When the organometallic compound…is included in the emission layer of an organic light-emitting device, formation of an eximer and exiplex with a host may be suppressed.  Accordingly, the colorimetric purity and lifespan of an organic light-emitting device including the organometallic compound may be improved.”
What that means is that by changing the molecular structure of the blue phosphorescent emitter material, some of the pesky ‘byproducts’ of phosphorescence that reduce lifetime can be removed, and while the IP noted here did not give an indication as to the lifetime of such substitutions, the indication was that the blue emitter material’s characteristics improved.  We note that given the 161 pages of potential molecular structures in the SDC IP we reference, the specifics as to whether SDC is just covering its bases by listing almost an infinite number of possible chemical combinations and structures that would help it build a case for an IP lock on any blue phosphorescent organometallic Boron-based material that might come to market, or whether it is purposefully obscuring a specific material structure that it believes would have commercial value, is a question we cannot answer. 
We note that other R&D teams have made many similar broad claims as to improvements in blue phosphorescent material characteristics, although the industry still lacks a commercial blue phosphorescent OLED emitter material.  UDC has given a loose timeline for commercial production in 2024, with industry specs met by the end of this year and TADF material developers have promised a commercial blue as far back as 2020 but have been unable to meet those goals.  That said, Samsung recently purchased Cynora (pvt), one of the few TADF developers that have been working toward the commercialization of a blue OLED emitter with phosphorescent characteristics, but actually only purchased the company’s IP, more likely as a way to cover a broader swath of potential blue material development than it would have had as an investor. 
So as the activity toward a commercial blue material gain momentum, it would seem that Samsung Display is not only using dollars and IP to keep itself in the game, but is also working toward the possibility of an internal development, or one jointly with UDC (the logical choice) or another partner.  UDC’s IP and supply contract with SDC will expire at the end of this year, although it can be renewed for two additional years, and while the terms of the contract are not public, we believe the current contract only covers red and green (and similar derivatives) phosphorescent IP, with blue to be negotiated when necessary.  It would be difficult to disaggregate a change in contract terms between UDC and SDC that would relate to blue IP, but it is something to watch as we head into 2023.