I'm going to moderate this session with Darice Liu, IR head of Universal Display, one of the most important OLED supply chain companies. Again, we're going to have mainly for the Q&A session. Okay, over to you, Darice.
Thank you, Simon, and thank you, Bank of America, for inviting us to your conference. You may have noticed I am not Brian Millard. Our CFO, unfortunately, due to unforeseen circumstances, was unable to attend. He does send his regrets, but I am happy to answer all questions. Before I make my remarks, I should just give a quick safe harbor statement. I may make forward-looking statements. Actual results may differ, so we ask everybody to review our SEC documents before making any investments. From there.
Great, Darice. Before we get started, just in case, would you introduce yourself, when did you start at UDC, and what you are currently doing?
Okay. I started with Universal Display Corporation about 12 years ago, actually. I head up communications, including investor relations. It has been a journey. I started the company when our green phosphorescent emitter was just adopted by Samsung for the very first time. Back then, the top three OEMs for OLED displays were Samsung Electronics, Nokia, and BlackBerry. Things have changed a little bit since then.
Wow. BlackBerry.
BlackBerry was one of the early adopters of OLED displays.
That's great. That's the history, but we should look at the long-term trend first. People talking about AI data center, of course, some people talking about display technology. What could be the long-term growth catalyst for UDC?
I think the overall picture for displays and AI really is the added functionality and performance to consumer electronic products and what that then necessitates, which is energy efficiency. When you add more performance, more functionality, whether it's 5G, whether it's AI, you need more efficiency because those added benefits consume more power. You need efficiency elsewhere. One of the things we've been doing for now 30 years is continuously inventing and developing new materials that are much more energy efficient. An energy-efficient display is key for more functionality and more performance if you want your battery life to last as long as your older products.
Okay, these days, a lot of data is getting more trained, and the chip makers focusing on the inferencing. We need a lot of content to be seen through the display. We still see lots of the LCD panels. How come the OLED can replace LCD, and why OLED can be more energy efficient?
When you look at the display market, there are three large consumer electronic segments that display makers, whether it's LCD or OLED makers, all target. It is smartphones, IT, and TVs. Within the smartphone market, we are at 51% penetration rate at the end of 2024, what, 4% within IT and about 4% within TVs. Display makers, just like you saw within the LCD cycle, have a tendency to focus on a certain size initially and then move on to the next size. In the LCD crystal cycle, you saw them go from small to medium to large. We are essentially following those steps. At 51% penetration rate of smartphones, the next stage and where you're seeing a new multi-year CapEx cycle really begin to form is for the medium-sized market, for IT and to some degree automotive.
From there, you're starting to see more panel makers. For folks who attended Computex or Mobile World Congress, you saw more and more OLED displays being showcased. I was at SID Display Week two and a half weeks ago. It was more and more IT displays. Actually, the most automotive OLED displays I've seen in my 12+ years are going to Display Week. The medium-sized market clearly is a focus for panel makers. With the new fabs that are starting to come online, slated beginning next year with Samsung's Gen 8.6 that's slated to come online in Q2 of 2026, BOE is slated for Q4 of 2026. Visionox has not yet announced a timeline, but based on their groundbreaking that started in August of 2024, most are estimating probably end of 2027, early 2028.
That all of that new capacity, which totals about $20 billion in investments, is all for the medium-sized market. We believe that those plans are being formed because of what the OEM roadmaps are entailing for OLED adoption.
Yeah, that's a great point. Lots of the tablets and laptops still based on LCD. The panel makers, they are investing a lot for the Gen 8.6 for new OLED capacity. That capacity will be used for the larger volume of the OLED panel production from 2026.
You'll start seeing Samsung will open up the very first Gen 8.6 OLED IT facility Q2 of 2026, followed by BOE in Q4 of 2026. Visionox will follow after that. There is a lot of chatter that the other panel makers are also looking into plans for IT CapEx.
Okay, that's a great point. Here we go. Maybe we can say three different revenue sources for UDC, Universal Display Corporation, regarding the panel makers' new capacity. Number one, any quick recap or color on the license agreement, IP royalty revenue generation, and then the material sales regarding the new band.
We have long-term agreements with our top customers: Samsung, LG Display, BOE, Tianma, Visionox, and China Star. Those long-term agreements are actually two agreements. It is a materials agreement or a commercial materials agreement, as well as a license agreement. Those agreements, a number of them we have publicly announced, are around five years long. For the materials agreement, we provide for right now red and green pricing through the term of the agreement. No one currently has Blue pricing, which I am sure is one of the questions you have later on. The license side for the right to use IP in one's OLED device, we negotiate each agreement differently because each customer is at a different stage with their plans for OLED capacity. Either they pay us fixed license fees, royalties, or a hybrid of the two.
The hybrid of the two is probably the most popular. That is how we generate our main revenue lines. For this year, we've guided for the material to royalty licensing ratio to be 1.4 to one. Material revenues will continue to be the dominant revenue stream, especially when Blue comes into play, because Blue we believe will be a significant new material revenue opportunity.
Yes, but the management has been talking about the Blue opportunities for over the past two years, but still current revenue.
Over the last 10 years, yes.
Okay. When do you expect the Blue can be the great contributor to the growth or revenue enhancement?
It's a good question. I think Blue has clearly been a question, especially since LG Display's announcement. The questions have increased since then. For folks who don't know, on May 1st, the morning of our earnings call, LG Display announced that they were showcasing at SID Display Week a Blue phosphorescent panel and that they were the first ones to verify commercial performance level of a Blue phosphorescent panel in a mass production line. I was actually at SID Display Week two and a half weeks ago, and what they showcased was a 13-inch tablet-sized OLED panel, which was your typical tandem OLED next to a hybrid tandem phosphorescent blue panel. The images were great, same images, so you can compare and contrast.
The big difference was they had an instrument next to each one showcasing the energy efficiency difference, and you saw that the phosphorescent blue hybrid panel was more efficient than the typical panel. LG Display has noted they expect to see a 15% increase in energy efficiency with their hybrid tandem phosphorescent blue panel.
That's a very great footprint to see the Blue commercialization then.
It was great for LG Display to announce that they've been able to verify the commercial performance level. Now it's really up to them and the OEMs. I think it's a little bit hard for us to say when the commercialization will happen. Unlike semiconductor companies who work directly with the OEMs, we're one step removed. We work with the panel makers who then work with the OEMs. Right now, it is with the panel makers and the OEMs on their discussions on where, for what product, with who, and et cetera.
Yeah. Maybe we can continue the blue theme discussion. How about the competitive landscape? Because some Korean panel makers can try internal blue color development, material development. Why not Japanese fluorescent material guys also can do some of their own phosphorescent blue? What's your view? You don't see any meaningful competition in the blue color area, very UDC-specific area?
We think all roads to high-efficiency Blue go through us. There are companies out there who are working on phosphorescent emitters. For Blue, we believe all roads to high-efficiency Blue go through us. Whether it is a hybrid tandem approach, a PSF approach, a single-stack approach, we believe the road to phosphorescent blue goes through us.
What could be the technological barrier for the existing phosphorescent blue material suppliers? Why they cannot upgrade their current production capacity or technology for the phosphorescent from the fluorescent?
I just want to make sure we're on the same page. Adopting phosphorescent blue does not mean any significant new CapEx. The tool set is still the same. Vacuum thermal evaporation, because you're still using small molecule materials, whether it's a fluorescent small molecule material or a phosphorescent small molecule material, you do not have to purchase a whole new equipment set for it. Just like when our phosphorescent green was adopted in 2013, replacing the fluorescent green, you still use a vacuum thermal evaporation tool or VTE tool. There is no significant—you are going to have to tweak it, obviously. You have new recipes, new mass sets that come into play. The adoption of phosphorescent blue is not a significant CapEx factor.
Yeah, yeah. Maybe a little bit different angle regarding the Blue. Some Asian material companies, they are working on the Blue, but maybe different, like host area or HTL versus your top one. Would you recap why the materials or functions for Blue different, maybe UDC versus some other supply chain companies?
Okay. An OLED stack is multiple layers. You're talking at least 11 to 13 plus different layers within the OLED stack. The heart of the OLED stack is the emissive layer. That's where the colors come from: red, green, and blue. Within the emissive stack, and we can go into the other stacks in just a second, within the heart of the stack, within the emissive stack, you have what you call emitters or dopants and hosts. The analogy that we like to use to describe how you can describe both of them is, how do you make a glass of chocolate milk? You have a glass of white milk. That's the high-volume commodity portion of the equation. Then you have the chocolate syrup. You only need a couple of drops of it, but it's the key ingredient to making your end product.
That's equivalent to the dopant or the emitter. We provide emitters. That is our main material business of providing red emitters, green emitters. For Blue, we plan to present the option of purchasing both the emitter and the host. Whenever we invent emitters, we always invent corresponding hosts to create an emissive system to spec out our emitter. There are other players. It is more commodity-oriented, the host. There are players out there who are partners who work with us that are developing Blue hosts. The other layers, whether it's transport layers, injection layers, and things of that sort, those are the other layers that surround the emissive layer. We do not play in those layers, but there are other players within the market.
Yeah, yeah, great. You know, obviously, people talking about some China-U.S. tension or tariff or U.S. export control to China. Number one, would you recap your material, currently the green and red, how to manage the global supply chain from Europe, the U.S., and Asia?
Just a quick backdrop. We are a fabless company. Our manufacturing partner for 25 years is PPG. Actually, we celebrate 25 years this year with them. We invent and develop everything in-house. PPG manufactures for us. They manufacture both in the U.S. and now in Shannon, Ireland. We announced back in 2021 that we were opening up a third manufacturing site in Shannon, Ireland. The first two are in the U.S. That started mass production in July of 2022. We have been making and shipping materials from Shannon, Ireland, to all of our customers in Korea and China. Not all of the materials are made in Shannon, Ireland. Right now, if you look at the overall business, probably it is 50-50. 50% are made and shipped from the U.S., 50% are made and shipped from Shannon, Ireland.
We do have a lot of room to grow within Shannon, Ireland. If there's a need for us to expand our facility there, we can do so and actually are doing so.
Great. At least the investors no need to worry about any China heavy reliance on the local China's materials or metals or rare earths.
Yeah, rare earths, that does not come into play for us. We are a global company. We have a global infrastructure. We are able to make and ship within the U.S. as well as outside the U.S. and Europe.
Yeah. Obviously, people usually ask the U.S. tariff impact on the technology product. Any direct impact of the U.S. tariff?
There is some direct impact. We get raw materials from all over the world. Some of it does come from China. It is not the dominant source of our raw materials, but we are a global company, so we have a global supply chain. It is not very significant, at least not this year. With tariffs being reset, so far things are okay. In terms of the indirect impact, as we noted on our May 1st, 2024 conference call, we did see some stockpiling occur in the first week of April. As you may recall, with the tariffs being implemented and retaliatory tariffs being stated by China, our customers basically ordered quite a bit of materials in the first week of April before the retaliatory tariffs came into effect. As a result, we did see a surge in orders because of that.
Since then, ordering patterns have come back to the normal pace. Also, we've seen the tariff situation reset a little bit. Things are, as we noted on our conference call, we see the year in line with what we expected, which is why we reaffirmed our guidance.
Yeah. That's the point. In the second quarter, usually the low season for the smartphone supply chain. Then even other IT products, usually second quarter, not strong. How do you assess your second quarter business, still in line with the seasonal weakening trend or a little bit above the seasonal trend?
I think it's a little bit different for us, right? Because our customers are the panel makers. It's not a one-to-one meaning they're going to make a product that's going to come into the market tomorrow, right? It really depends on their fab operational plans. If their utilization rates remain high, then they're continuing to buy at the same pace. If they decrease or increase, that then impacts their purchasing from us. It isn't quite one-to-one with the end markets. Overall, for the year, we're still looking at $640 million to $700 million. We will say, as we noted on the call, that Q2 in April, we did have a very strong month, but for the quarter, it's pretty much coming in line, maybe a little bit better than expected.
Okay, yeah. Some investors really expect a foldable phone, particularly for the U.S. phone makers. Do you believe that can be the great catalyst for UDC, the foldable phone? People will get excited.
I think there's a lot of chatter with foldables, especially as it's rumored that certain OEMs will be adopting foldables for the first time. Foldables, from a direct standpoint for us, is great because it's more square inches. More screens means more materials. From a personal standpoint, foldables are great, right? Two-in-one products, portable products. It's something that you've started to see a few, not just Samsung, but you've seen Oppo, Vivo, Xiaomi, and others introducing foldable products. At SID Display Week, we saw trifolds, we saw rollables, we saw scrollables. I think form factor will be an ongoing trend within consumer electronics. As more OEMs adopt it, I think demand will also increase.
Yeah. Looking at another product category like tablet area, because last year, street expectations were very high, but toward the end of 2024, sentiment a little bit muted. What is your view on the very high-end tablet, which will be based on more and more OLED rather than LCD? Do you still believe the OLED demand for the tablet will be continuous or strong or so-so?
I think OLED adoption within the IT landscape, including for tablets, laptops, and monitors, will continue to grow. I think that's also part of the reason why these Gen 8.6 facilities are being constructed, is to meet the growing demand for IT. It will take some time, just like it did with smartphones, but there are definitely a number of OEMs looking to expand their portfolio of OLEDs within their IT product line.
Yeah. Obviously, here in San Francisco, Waymo, getting popular. Have you tried? I already tried yesterday. It was very exciting. No driver, but Waymo really works right here. I saw the very large screen, obviously OLED panel. What do you see the overall OLED demand from the automotive industry?
The automotive industry is very interesting. We talked about within consumer electronics, the three largest end markets that display makers target are smartphones, IT, and TVs because of the size of number of units. Automotive is interesting because there are about 90 million cars sold a year, but the number of displays within it is a multiple of that, right? We talk about, you know, if you look at the full dashboard, for example, Mercedes' flagship EV product, the EQS, they market that as a 55-inch, 56-inch hyperscreen. That is actually three different OLED displays. You have opportunities within side view mirrors, rear view mirrors, passenger seats. The number of display opportunities within a car is actually multiple. You are seeing, I mentioned to you the Gen 8.6 for medium size. IT is definitely a primary target, but automotive is also an area that folks are looking at, especially EV makers.
You know, there's for two reasons it's interesting for EV makers. One, an overall statement in terms of our car is not a box. If you can make a display on plastic and curve it to the design of a car, that is much more preferable. The second factor is energy and efficiency and EVs go hand in hand, and OLED is a key part of that. You have seen a number of makers, whether it's Mercedes' EQS, the Mini Cooper EV product, or some of the Chinese EV makers from BYD subsidiaries and Zeekr Intelligent Technology Holding Limited adopting OLED for EV. It is something that is growing in interest.
That's a great area. One more application area. Guess what? TV. Sometimes I do see very large size of the LCD TV, very cheap, and also even the Micro LED TV. How do the OEMs can promote the OLED TV, beating the LCD or Micro LED TV?
I think with it, TVs, when you look at an OLED TV, everybody says it's a great TV. And so it is, you know, OLEDs without a doubt, from consumer electronics, has noted as the best TV for multiple years in a row. Right now, TV penetration for OLEDs is probably about 4%. It's really more for the premium segment. Market research firms do have that segment growing, but at a slower rate. I think because panel makers are right now focused on the medium size, I think eventually they're going to move on to the large size, but I think right now the focus is medium size.
Yes, yeah. All right, we discussed all the details for the industry. How about if we discuss more company-specific things? Number one, when we look at the panel makers, their margins are very low, except one company, Samsung, still showing very good margins. Your company margins are even better than the semiconductor sector average, I guess. What's the magic thing we're gracing and how long a company can sustain such a high margin profile?
Our guidance for this year for gross margins is 76% to 77%, with operating margin guidance of 35% to 40%. We have strong margins. We continue to expect to have strong margins going forward. Part of it has to do with the licensing business, but also part of it has to do that we continue to deliver very state-of-the-art materials to our customers. You know, this isn't just a catalog business where I have one red and one green. You know, we're continuously working with our customers hand in hand to invent and develop new materials for them and next-gen materials for them. That is part of the working relationship we have with them. At the end of the day, even though our margin profile is high, we are a small portion of the bill of materials.
Most analysts estimate that our total red and green emitter content per smartphone is about $0.10 to $0.20. We add a lot of value for what we are within the bill of materials.
Again, you do not worry about any cheaper materials coming from Asia or China. When you look at the, for example, EV batteries or some even display panel, lots of the products are available in China at very low price. But your materials cannot be replaced by Chinese materials.
I will say that there are always, as the OLED industry grows, as I mentioned, when I started, the industry was very small. We're now at over $50 billion in the OLED market. You're going to have more players wanting to get into the market. For us, we expect to continue to be a leader in the industry. We're continuing to develop new materials and next-generation materials, as well as next-generation technologies. Our focus is to continue to be a leader. With that leadership and maintaining our strong relationships with our customers, that has been what we've been doing for 30 years, and we plan to continue to do that.
Yeah, great track record. High margin and the timeline growth with the OLED industry growth, obviously you will have lots of free cash flow. Would you recap your maybe net cash position and then how you're going to return lots of cash to the shareholders?
We do believe in returning cash to shareholders. We instituted a dividend program back in 2017. We have grown that dividend every year since we instituted the program. We plan to continue growing that dividend as we grow. On our May 1st conference call, we also announced a $100 million buyback program. That buyback program will be used as an opportunistic tool from the management company. It is something that if the opportunity arises, the company will purchase stock back.
Yeah. How about, it's almost the last question. If you still own a lot of cash, and here in the U.S., we do see many startup companies or some AI-related, so maybe two follow-up questions regarding the M&A. To enhance your business opportunity in the OLED area, maybe how about the inorganic growth or M&A activities? Then based on your great know-how, resources, and partnership with Samsung, LG, or Chinese companies, how about the other areas, some AI-related M&A, non-display-related, any consideration? Thank you.
A few years ago, we formed UDC Ventures, which is our corporate venture arm. We have made multiple investments. Some of them are display-oriented, some of them are non-display-oriented. We have not publicly announced all the different investments, but we are looking at different opportunities where we can grow both organically and inorganically. The inorganic side is something that UDC Ventures looks at in terms of opportunities for us. Obviously, the focus is also organically through next-gen materials as well as with blue and new technologies.
Excellent. Everything sounds so great. Thank you very much, Darice, and hopefully Brian can recover quickly.
Okay.
Thank you so much.
Thank you, Simon.
We end this session. Thank you, guys. Thank you. Thank you very much. Yeah, we covered everything. Thank you so much. Yeah. Oh, sure. Yeah, yeah. Thank you. Yeah. Oh, okay.