Universal Display – Keepin’ the Faith
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.
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.
Universal Display - Quarterly Sales - Source: SCMR LLC, Company Data
Universal Display - Quarterly Material Sales - Source: SCMR LLC, Company Data
Universal Display - Yearly Material Sales - Source: SCMR LLC, Company Data
Universal Display - Half-Year Seasonality & Ratio - Source: SCMR LLC, Company Data
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