Okay.
Great. Awesome. Well, we're live. Hello, everybody. My name is Matt Cost, the Morgan Stanley U.S. Internet team, pinch hitting for Meta Marshall here this morning. Very excited to be joined by the CFO of Universal Display, Brian Millard. Brian, I know you have some comments you want to make before we kick it off, so please go ahead.
Yeah, thanks, Matt. Before we get started, I just wanted to have a quick safe harbor statement. I may make some forward-looking statements today as part of my remarks. Our actual results may differ materially from those forward-looking statements, so we would encourage anyone considering investing in the company to review our filings with the SEC.
All right. So maybe let's kick it off and think high level for a second. So obviously, you're a leading materials provider in the OLED market. I think it would be helpful to get a lay of the land on OLED adoption across various products, so TVs, IT, smartphones, et cetera.
Yeah, so we are, as you said, a leading OLED materials company. We've invented many technologies related to OLED and display technology. The three kind of key markets that we currently have that we assess are TVs, IT, and smartphone, as you said. So taking each of those individually, currently today, roughly 55% or thereabouts of the smartphone market is penetrated with OLED.
T hat's approximately roughly 1.2 billion units annually of smartphone sales globally, and more than 50% penetrated with OLED. So all of the premium models today of smartphones have OLED displays in them a nd what we've seen in recent years is many of the mid-tier models are also continuing to adopt OLED. E ven some of the lower-end models are adopting OLED. So a lot of exciting trends, and we think there's certainly room for that to continue to increase penetration going forward in the coming years.
On the TV side, roughly 3% penetrated with OLED, so that's off of roughly 200 million units globally of TV sales annually, and that's been relatively consistent. I think the TV market has been challenged more broadly, and OLEDs have been more or less in the 3% penetration rate for a number of years, but we certainly see that as a significant opportunity for us because of the fact that our materials and the square area of those displays is very compelling because there's much more of our material needed to create those displays.
So that's a key opportunity for us going forward, and we believe that OLED displays continue to win all the consumer awards for TVs and many display technologies, so there's a lot of momentum and enthusiasm. But there's also LCD being the competing technology, and how can OLEDs continue to differentiate on price and benefits that they bring to the consumer.
Lastly, the IT market, which is a key growth driver for us in the coming years. So right now, we're on a very low penetration rate. This year, roughly 3%-4% penetrated, a nd that's on roughly 440 million units, thereabouts. There's been a number of adoptions of IT products.
Most notably, this year, Apple adopted OLED displays in the iPad Pro back in May when they launched that product a nd there's a lot of many OEMs in the coming years that we expect to adopt OLED display technology across their IT portfolios. IT we define as tablets, laptops, and monitors. So significant opportunity across many OEMs.
Our customers are all very focused on the IT market as a key driver for their business. We have a few customers who have announced significant investments that they're making in new capacity for IT, starting with Samsung Display, which is our largest customer. They've announced a $3 billion investment that they're making in a new fab for IT. That's expected to come online in 2026. BOE, which is our largest Chinese customer, they've announced an approximately $9 billion investment in a similar fab for IT.
L astly, Visionox, which is another of our Chinese customers, recently announced an $8 billion investment in new capacity for IT. If you put all that together, that's $20 billion of new investments that have been announced in the last year and a half or so, all geared for the IT market.
C early, they're making those investments because they have an understanding of the OEM community and what the needs are going to be and the demand going forward and a key opportunity for us for a number of reasons. One, the size of those IT displays is a multiple of a smartphone. A lso, some of the technology that's being used for the IT market is what's called a tandem structure.
So the iPad Pro that was launched this year was a tandem model, a nd what tandem means is there's two emissive layers in that display, which is an incremental material opportunity for us. Probably not 2× , but certainly greater than 1× what we have in a single layer in terms of UDC material per square inch. So a lot of neat opportunities in IT and a key growth driver for us in the next few years.
Great. So we talked about opportunity. Let's talk about competitive environment. I mean, how are you seeing that landscape change, I'd say, both in China as well as globally? T hen what are your biggest competitive differentiations?
Yeah, I think the competitive environment, certainly, there's been in recent years an increased competitive environment. There are companies, as you mentioned, in China specifically that are trying to compete with us. A number of competitive reasons why we think that there's a high barrier to entry and why UDC will continue to be the predominant player in the OLED material space. Firstly, our patent portfolio.
We have more than 6,000 patents, which cover a broad landscape of not only materials that we supply our customers, but also device architectures, methods of manufacturing, and a variety of other key patents that are needed for display, OLED display technology, a nd we believe that there's not another company that has that size and that breadth of a portfolio in OLED display technology that would enable them to compete with us in a meaningful way.
In addition, we have the highest quality materials. We've been at this for 30 years. Our company celebrated our 30th anniversary this year. We have a lot of experience in material science, material development. We continue to innovate and invent next-gen materials and put new tools to bear to do that.
Additionally, we have longstanding customer relationships. I mean, we have very strong partnerships with our customers. All those reasons line up to us believing that we'll continue to have a very strong market position going forward. We are mindful of the competitive landscape and do certainly monitor it closely.
In the smartphone market, I mean, how are you seeing adoption trends differ across high versus mid versus lower tier, and then how does AI-driven replacement cycles factor into that now?
Yeah, so the premium models all have OLED displays. I mean, regardless of whether it's a Samsung product, an Apple product, or many others, all the premium offerings have OLED displays. The mid-tier models, and that's a lot of the brands in China that we've seen adopt OLED display technology in recent years across all the mid-tier.
T hen even some of the lower-end models have recently adopted OLED a nd there's a few things that are expected next year also in terms of some of the lower-end models expected to continue to adopt. So we see that as a key differentiator. A t the lower end of the OLED display technology, the price difference between an LCD technology, an LCD display, and a lesser-cost OLED display is really not that different. So we think that adoption rate's going to continue to increase.
AI we see as a key opportunity for OLEDs to continue to penetrate for a number of reasons. One is the energy efficiency of the OLED display is significant, and that will also enable the power to be freed up for AI, which is a power-consuming feature. On the replacement cycle side of things, we see that there's been a lot of excitement around the new AI features coming to the phones.
I think that some of the initial feedback has been positive, but not necessarily. We haven't seen the full pull-in of the replacement cycle yet. We certainly expect that over the coming years, as more OEMs deploy to the fullest extent AI features to their technology, their devices, that should spur a replacement cycle and should cause folks to, one, replace their device to be able to get access to those AI features. T hen on an ongoing basis, hopefully be able to pull in the replacement cycle in a broader way.
Great. I mean, sticking with smartphones, I guess a priority for you is to increase energy efficiency of those displays, so where do you see the most opportunity to achieve that?
So if you look over the last 10 years or so, we've been able to increase the energy efficiency of our material by roughly 60%-70%. So if you look at the performance of our material in 2014 or 2015 relative to today, we've significantly improved the performance of our red and green material.
J ust as background, we currently sell red and green phosphorescent emitters to our customers. Blue, which I'm sure we'll get to, is our third color for display technology that we are very close to getting commercial performance of our material and commercializing that product. But our red and green material, we've significantly improved the energy efficiency of it over the years.
On an ongoing basis, I mean, that's really the thing that every year on an ongoing basis, when we sit down with our customers and we look at what do they need for their next product launch, energy efficiency is always front and center in continuing to improve the energy efficiency of our material. There's three things when we develop material that we assess.
One is, what is the energy efficiency? What is the color point? So in the case of green, is it a light green or a dark green? T hen thirdly, what's the lifetime of the material? So how long does it last when you put electrical current to it in a display? A ll three of those metrics, we've seen significant improvement in performance over the years a nd we expect that to continue to be the case going forward.
Great. Let's talk about the IT market. I think you talked last quarter about it being the primary driver of growth. I guess what gives you confidence in the opportunity there? T hen I think a number of the customers in that space have announced new capacity investments. So how do you see demand shaping up over the next few years, a nd where's the biggest opportunity?
Yeah, so IT, we've for a number of quarters in the last few years have really seen that as a key opportunity. I think it's because of the fact that right now we're sitting on such low penetration rates in the 3%-4% range, as I mentioned earlier. T he benefits of OLED clearly are evident in smartphone.
You can see we're at the 50% + penetration rate now, a nd why would that not be the case in IT products, in laptops, in tablets, in monitors? Why would you not want the premium display offering in that product, which has energy efficiency benefits, the true blacks, the contrast ratio, the vibrant colors of an OLED display?
S o especially as many more consumers continue to leverage tablets and laptops as their primary source of entertainment and communication and otherwise, we believe that adopting a premium display to continue for the OEMs to continue to differentiate their products and have new offerings to bring each cycle. S o that's our belief.
I t's also evident in the fact that, as you mentioned, the capacity investments that are being made, the three I mentioned earlier on, Samsung, BOE, and Visionox, collectively $20 billion of capital being deployed to meet the IT demand. T hose customers, our customers, are doing that because they know their customers, the OEMs, expect to introduce OLED displays into their IT products in the coming years a nd there is a lack of sufficient capacity to meet that expected demand.
So '26 and beyond, once those new fabs come online, we think is a real significant opportunity for us in the industry to continue to see additional adoption in IT. Many of the analysts that follow this in the display industry have estimated that by 2030, we should be at a roughly 20% penetration in IT, OLED penetration. So a lot of room to grow off of the 3%-4% we are today.
So I mean, when you think about moving from the smartphone to the larger IT screen size, is it just linear? Is it scaling per square inch of space on the screen?
Generally speaking, yes. If it's a single-layer approach, it would be just a simple linear extrapolation based on the number of square inches in an IT product versus a smartphone. The one differentiation is the tandem factor that I mentioned earlier. Not quite 2× the material opportunity, but probably somewhere between 1.5× and 2× the material opportunity per square inch compared to a single layer. Definitely a key opportunity for us that we're excited about.
Great. I guess on the auto side, where do you see that market going? I mean, given that OLEDs are primarily in the electric vehicle segment right now, does the downtick in that industry impact your view at all?
Yeah, so IT, or I'm sorry, automotive right now is a relatively small portion of our overall revenues. I think that the number of units of vehicles on an annual basis and the percentage of those that have OLED displays in them is quite small today. So not a key revenue driver for us at the current state.
I think it's an interesting growing opportunity in the years ahead. As you mentioned, EVs is the key opportunity there because of the fact that the energy efficiency of the display, and clearly, that's front and center in EV technology. We haven't seen, and we don't expect that the current EV market challenges or slight near-term issues are going to be a long-term challenge for us.
Part of that has to do with the long cycle for designing in an automotive, being many years ahead when those displays and other technologies need to be designed in. Over a longer-term basis, we think OLEDs have applicability not just in EVs, but more broadly in automotive. We've seen that.
I mean, there are some combustion engine vehicles that do have OLED technology in them, whether it be cockpit technology or also many of the taillights. Audi's actually been a big leader of adopting OLED technology into taillights. We think that's another opportunity going forward.
Got it. I guess on the TV side, clearly a bigger market. I mean, there's been some challenges over the last few years, but growing volume this year. How confident are you in the continued growth out of that market next year?
Yeah, I mean, TVs, if you look at a lot of the analysts that project the industry, OLED TVs are expected to grow. It's going to be kind of mid-single-digit growth, something thereabouts in the coming years is kind of what's expected, b ut that's clearly a key opportunity for us, the size of those displays and the quantity of our material that's needed to produce them.
Even if it's growing at a relatively slow rate, we think it's a great opportunity for us. I think, as I mentioned earlier, just continuing to differentiate the quality of the OLED offering and the display relative to alternatives is going to be really important. The price has come much more within reach. There is still a price gap between OLED TVs and LCD TVs. But that gap has definitely narrowed in the last few years.
So I think from a consumer perspective, continuing to have our customers and the OEMs be able to sell the quality of the display and have the price continue to be more competitive in the years ahead should increase further adoption.
Got it. So you foreshadowed blue a little bit earlier a nd now I'm excited to ask this question because as a novice in this industry, even I know this is really important. So let's talk about phosphorescent blue. I mean, obviously, you mentioned recently that it's been pushed out slightly. Talk about the opportunity there, how meaningful it is, and maybe what's driving that push out.
Yeah, so phosphorescent blue is, as I mentioned earlier, the third primary color used in display technology is blue a nd our phosphorescent material and the benefit of it relative to fluorescent, which is the material that's currently used for the blue color, is energy efficiency. I mean, across all of our colors, phosphorescent material relative to fluorescent energy efficiency is the main value proposition.
O ur phosphorescent material has 100% energy efficiency, whereas the fluorescent material is only 25% energy efficient. So simply by adding phosphorescent blue into a display technology, you increase the energy efficiency of that display by 25%.
T hat's a key opportunity for the OEMs and our customers to be able to continue to deliver increased technology, leverage energy efficiency for other things in the display, whether it be AI or otherwise. We've been at our phosphorescent blue technology for a number of years performing R&D.
In 2022, for the first time, we set a timeline. We said that in 2024, we expected to have commercial performance of the material. A s you mentioned, we did recently in August announce that we're going to need more time beyond 2024 to achieve that commercial performance. By no means are we suggesting that the project is off track or there's been a significant something that's changed our belief in the outcome of the project.
This is really just a matter of needing more time. It's a very complex project, complex chemistry involved a nd as you get to the final stages of something like this, additional time can be needed to get to the goal line a nd that's where we are at this point. So we're working very closely with a number of our customers on blue development programs. That's been the case for the last few years.
We've had increasing sales of development quantities of blue as our customers perform experimentation with our material and continue to perform the R&D that they need on their side to get it to commercial performance b ut we need more time. W e're very confident that it's going to be commercialized and it will be significant in the value it will bring the industry.
But additional time is needed beyond this year. We've characterized the additional time as months and not years. So the next question is how many months, which we can't give an answer to other than to say we're working very closely and continue to believe in the promise of the technology.
Got it. I mean, let's talk about commercialization, which you mentioned just a second ago. I mean, where would you expect this to be initially adopted across your end markets?
Yeah, with energy efficiency being the key value proposition, it probably makes most sense that it's something battery-powered that it would first be adopted into, whether that's a smartphone or an IT product or something like that. We're really at this point focused on getting to commercial performance, and that enables the door to open for our customers and the OEMs to determine exactly what the first application is.
So it's a little premature at this point to speculate on that other than to say it has applicability across all form factors, whether that's smartphone, IT, TV, so both battery and plugged-in devices, we believe it has applicability for the energy efficiency, as well as it doesn't have any heat emission. So phosphorescent material also doesn't have any wasted heat.
S o that's another value that it will bring to things like TVs, where there won't be any heat emission of the material, which means other things can be modified in the device to not have to compensate for heat emission. So we believe it has applicability across all factors, but hard to speculate at this point until we get to commercial performance exactly where it goes first.
Right. So on the manufacturing side for blue, I mean, talk about what your capabilities are up to this point and then whether you're going to need incremental capacity.
Yeah, so we have three manufacturing plants today, two in the U.S. and one in Ireland, a nd all three of those are operated by PPG, which is our long-term manufacturing partner. Our blue capacity, we built out capacity in Ireland when we acquired that site in 2021 for blue. So we have capacity ready for what we can foresee as commercial volumes.
So we're not concerned about having any issues there. We'll have the ability to produce it in the U.S. and in Ireland, but we expect that Ireland will probably be our primary manufacturing location for blue.
Got it. W ill it be more costly to produce versus your other materials, just given the complexity a nd does that improve as you increase yield? How does that impact, I guess, dialing back to finance? How does that impact margins for this product?
Yeah, it is a more complex material. I mean, if you just think of the number of raw components that go into manufacturing one of our blue molecules, it is more complicated than some of our red and green materials today. Additionally, the first time we manufacture anything, whether it's red, green, or blue material, it is initially more costly to manufacture. That said, we do believe there's a path to take costs out of that over time, b ut we do expect it'll be initially more costly to manufacture.
We also believe that from a pricing perspective, we have a premium price associated with blue compared to our red and green materials. W e've had preliminary discussions with customers on pricing a nd we believe that it's understood there is a premium price. Now it's a matter of, as we get closer to commercializing the material, determining with each customer individually exactly what that price scheme is.
Got it. Maybe sticking with RGB technology versus a white OLED, what are the differences and then pros and cons?
Sure. So today, any of your smartphones are RGB technology. So that's red, green, and blue subpixels side by side that are deposited onto that substrate. The white OLED technology today is used primarily for TVs and very large monitors, and that's where an LG Display is our customer who's primarily operating in that space in a major way.
They have significant capacity for white OLED TVs and large monitors, and what they do is they deposit material to create a white color, and then they put a color filter on top of that to create the colors in the display, so most of the TVs that are sold today, for OLED TVs that are sold today, have white OLED. Both are great technologies, t hey just have different applicability.
We have developed a printing technology called OVJP, which is Organic Vapor Jet Printing a nd that is a printing process that can be used to create RGB large areas. So you can create a TV-sized display using an RGB architecture. W e've scaled that technology meaningfully in the last few years up to a Gen 4 system that we've created to be able to produce those displays.
Let's stick with that on the OVJP side. I mean, talk a little bit more about that opportunity, especially, and you just gave the definition, but for investors who are less familiar with it, unlike myself, who's an expert, and the R&D efforts there and where you think the applicability is.
Yeah, so we set up a subsidiary in 2020 in California with a number of equipment industry folks to scale the technology. It's been under development at UDC for many years, but we really needed additional eyes on it to get it to the next level.
Over the last four years, we've made significant progress. As I mentioned, it's really a TV technology. But in recent years, in the last year or so, we've had all of our customers through our site in California. The feedback we've received has been very positive in terms of the technology. There's a lot of interest in it. Right now, the challenge is a lot of our customers are focused on investments they are making in IT.
We mentioned earlier the $20 billion that's being deployed for IT capacity among just three of our customers and the TV capacity being sufficient currently for the demand in the future, so we recently announced last week, actually, that we've hired a new leader for the OVJP business.
He's based in Singapore, a nd we are going to transition our operations for OVJP over to Singapore and have him also evaluate if there's other opportunities beyond display technology where OVJP could be applicable. So if you think about printing technology and the need maybe potentially for medical devices that have printing technology or other things maybe in the semi space or otherwise where printing technology could, our OVJP system could be applicable.
So we want to perform some research with our team in Singapore to evaluate those other opportunities while we continue to look for the long-term opportunity in the display industry.
Great. Maybe we'll close out on one or two on the financials. I guess last quarter, you talked about a strong first half, but maybe some softer near-term demand trends. What are you seeing there now, and then what drove that downward revision?
Yeah, so earlier in the year, we had raised guidance slightly in May, raised slightly in August. I think a lot of that was on enthusiasm that some of the smartphone cycles this year would be a little stronger than they panned out to be.
They've been good. I think all the sales have been quite good, but not necessarily the massive replacement cycle we planned that we maybe had thought it would be earlier in the year. There's also been certain units of some IT products that haven't necessarily taken off as well as had been thought earlier in the year. S o there's a few model-specific things that have driven in part the guidance change that we made back in late October.
Additionally, as we approach the end of the year, our customers tend to look at their inventory levels and how many weeks of our inventory they're holding on hand and make some adjustments, so there's a little bit of that that we also saw heading into the year. All in all, our original guidance for the year was 625-675, so we're still going to expect it to be within that range, albeit at the lower end of that, and I think it's just really short-term things related to the factors that I just mentioned.
Got it. Maybe we'll close out just one on operating leverage. I mean, you've historically had a very strong profile. Do you have any areas to highlight where you see the most opportunity to continue it as you scale?
Yeah, if you think of our manufacturing network and largely fixed costs in that, plant depreciation, labor, that we have at the site that doesn't necessarily need to scale as volumes increase. There's a lot of leverage, we believe, in that, as well as we have a very lean SG&A organization, one that is well-sized for what we're going to need in the years ahead. So we see a lot of opportunity for the operating leverage as we continue to grow.
Great. Maybe we will close it out there. Brian, thanks for being here.
Thanks, Matt. Appreciate it.
Thank you.