Good day, ladies and gentlemen, and welcome to Universal Display's Second Quarter 2021 Earnings Call. My name is Sherry, and I will be your conference moderator for today's call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.
Thank you, and good afternoon, everyone. Welcome to Universal Display's 2nd quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer and Sid Rosenblatt, Executive Vice President and Chief Financial Officer. Before Steve begins, Let me remind you that today's call is a property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call In any form without the express written consent, Universal Display is strictly prohibited.
Further, this call is being webcast live and will be made available for a period of on Universal Display's website. This call contains time sensitive information that is accurate only as of the date of the live webcast of this call, August 5, 2021. During this call, we may make forward looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic Reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities.
Universal Display disclaims any obligation to update any of these statements. Now, I would like to turn the call over to Steve Avanson.
Thanks, Dallas, and welcome to everyone on today's call. We are pleased to report that revenue in the Q2 of 2021 was $129,700,000 operating profit was $49,900,000 and net income was $40,500,000
or $0.85 per diluted share.
The widespread momentum of OLEDs across a broad range of consumer electronics markets is unmistakable. From wearables and smartphones to tablets, notebooks and TVs to ARVR signage in automotive To the revolutionary world of plastic OLED that is redefining what a consumer products form factor can be, OLED adoption, which is still in its early innings is advancing. Leading global consumer electronics OEMs have adopted OLED displays for watches and phones and now there are numerous reports that their OLED adoption journey is widening. After OLED smartwatches and then OLED smartphones, they are now expected to broaden OLED adoption into new product segments Such as foldables and IT with an initial focus on tablets. Speaking of form factor and IT, 2 tremendous and burgeoning OLED markets.
At SID Display Week, which took place virtually shortly after our Q1 earnings call, Form factor was a major theme from our customers. Samsung Display showcased its S foldable, a multi foldable device that looks like a trifold The display can be folded twice inside and outside and can be used as a smartphone when folded and as a tablet when completely unfurled. Samsung also showcased a slidable OLED panel that was designed to maintain a traditional smartphone's form factor While capable of being slid horizontally to expand the screen size for use cases like multitasking and videos. In addition, Samsung exhibited a supersized 17 inches foldable OLED display, which can be used as a tablet when folded in a 4:three ratio and a PC monitor when unfolded. Also at SID Display Week, Samsung Display presented a paper titled Blue Phosphorescent Organic Light Emitting Diodes for Future Display.
Their experimental blue work was performed using Universal Display Corporation phosphorescent dopant material. Samsung's paper discussed the continued progress and advancements in the development of a phosphorescent blue OLED to Achieve commercial launch. LG Display, one of the major highlights of the show was when its 65 inches rollable OLED TV Won the display of the year award. According to LG, the product was recognized for its cutting edge form factor that has not only shifted the paradigm of displays, but also continues to demonstrate OLED's infinite possibilities when it comes to its application across various important industries, including its use for automobiles and aircraft. BOE also showcased a flexible slidable display.
BOE's 8 inches prototype panel that can The Inmod demonstrated 8.03 inches color filter on touch rollable OLED prototype at the virtual show. Visionox exhibited a number of OLED form factors, including a 12.3 inches rollable scroll like display, A 7.92 inches foldable wraparound display as well as a bifold, trifold and slidable display. AU Optronics presented a 5.6 inches rollable dual sided AMOLA display, which shows images on both sides of the display. On the OEM front, Samsung Electronics announced during their earnings call last week That wants to mainstream the novel form factor of foldables and that expects foldable phones to start contributing to its bottom line beginning in the second half of the year. Samsung is slated to launch its Galaxy Z Fold 3 and Galaxy Z Flip 3 next week It is reportedly targeting shipment levels of 6000000 to 7000000 units, which is up from the 2,500,000 foldable smartphone The company shipped last year.
It has also been reported that foldable OLED panel production of Google, Vivo and Xiaomi will begin in the Q4 of this year. Bolstered by increasing new models, Foldable smartphone shipments are expected to exceed over 10,000,000 units in 2022. In the IT landscape, Samsung Display continues to lead OLED adoption. With over 10 new Samsung OLED notebook panel models expected this year compared with 5 in 2020, OEMs including Lenovo, Dell and Xiaomi Our unveiling new notebooks with OLED displays. Samsung Display's largest customer for OLED notebook panels is reportedly Taiwan's ASUS.
As a leader in the gaming notebook market, OLED strength, including wider color gamut, high contrast ratio and Fast response times are appealing to ASUS' customer base. According to reports, Samsung Display recently increased its 2021 Shipment target for notebook OLED panels by approximately 45% from 4,000,000 units to the range of 5,500,000 to 6,000,000 units. We are also seeing other panel makers enter the nascent OLED IT market. LG Display is currently offering 13.4 inches OLED panels to Lenovo and our reports that BOE Technology and others may begin shipping OLED notebook in 2022. This is in addition to a myriad of reports on increasing OLED tablet activity The leading OEMs.
We believe that the ongoing transition to OLED in the small and medium markets is prompting the need for new OLED capacity. Very recently, it was reported that Samsung Display plans to spend $2,600,000,000 in OLED backplane capacity and LG Display BOE is expected to begin ramping OLED capacity at its 3rd Gen 6 fab B12 in Chongqing in the Q4 of this year. On the TV front, LG Electronics released its 83 inches OLED TV model during the quarter. This is the latest addition to LG's OLED TV lineup, which currently consists of 48, 55, 65, 70 7 and 88 inches LG commented that as people spend more time at home these days, demand Ultra large TVs to view streaming content and play games is on the rise. The global market for OLED TVs is expected to nearly double this year.
Last week, LG Display announced it with additional capacity and Guangzhou plant is targeting 10,000,000 OLED TV units in 2022, up from this year's target of 7000000 to 8000000 units. And according to reports, Samsung is now expected to launch their hybrid QD OLED TVs next year. The company is Reportedly developing 55 inches 65 inches QD OLED TVs for a market launch in the first half of twenty twenty two with a larger 70 inches model to be offered at a later date. The report also suggests that Samsung may showcase its first 2 d OLED TVs at CES in January 2022. In gaming, Samsung Display announced in mid May That OLED panels received the gaming performance certification from SGS.
According to SGS's test results, Samsung Display's new OLED offers 1.5 times better blur length than conventional LCD, which can be attributed to OLED's very wide range of contrast and fast response rates. This is important in gaming as long blur length can degrade image quality and fast paced video games. Also in OLED Gaming News, Nintendo confirmed last month that it adopted OLED for the first time in its new switch. In OLED lighting, an interesting study was published in nature.com's scientific reports by researchers from the University of Tsukuba In Japan, they compare the effects of LEDs and OLEDs on physiological changes that occur during sleep. The researchers measured energy expenditure, core body temperature, fat oxidation and melatonin levels during sleep.
Exposure to LED lighting before sleep seem to negatively affect health. The researchers pointed out that the reason may be blue light. One of the many benefits of OLED is that OLED devices emit less harmful blue light compared to LED devices. We believe that the runway of growth for the OLED market and therefore for us is long and vast. As a result, We are investing in our people, our infrastructure and in our innovation to advance our first mover advantage and to further enable our customers in the OLED ecosystem.
On infrastructure, we are expanding our global footprint. This includes expanding our Ewing, New Jersey campus As well as expanding emitter production capacity with our new site in Shannon, Ireland, which is being designed with the flexibility of manufacturing On the R and D front, we are fortifying and fueling our innovation engine. As panel makers, customers' roadmaps expand And product specs of color gamut, efficiency and lifetime continue to broaden, demand for next generation materials Novel Technologies continues to increase. Our R and D team in their relentless pursuit for cutting edge Energy efficient and cost effective solutions are discovering, designing and developing new emissive materials and technologies, including new reds, greens, yellows and hosts. With respect to blue, we continue to make excellent progress Our ongoing development work for a commercial phosphorescent blue emissive system.
As you are aware, Our target is to deliver an all phosphorescent RGB stack, which will further enable higher energy efficiency and high performance OLED applications across the consumer landscape. Organic vapor jet printing is our novel manufacturing process for maskless, Solventless, dry direct printing of full color OLEDs. We believe that OVJP has a potential to revolutionize the manufacturing of OLED TV panels. OVJP Corporation's 1st major milestone will be an Alpha system build in 2022. On that note, let me turn the call over to Sid.
Thank you, Steve, and again, thank you everyone for joining our call today. Revenues for the Q2 of 2021 were $129,700,000 Compared to Q1 2021's $134,000,000 and Q2 2020's $58,000,000 Our total material sales were $77,400,000 in the Q2 of 2021 compared to material sales of $79,800,000 in the Q1 of 2021 and $31,900,000 in the Q2 of 2020. Green emitter sales in the Q2 of 2021, which include our yellow green emitters were $57,800,000 This compares to $60,500,000 in the first quarter of 2021 $24,200,000 in the Q2 of 2020. Red emitter sales in the Q2 of 2021 were $19,500,000 This compares to $19,100,000 in the Q1 of 2021 $7,500,000 in the Q2 of 2020. As we have discussed in the past, material buying patterns can vary quarter to quarter.
Some of the contributing factors include COVID-nineteen issues as well as consumer product demand cycles, capacity ramp schedules, Production loading rates, device recipes, product mix, material ordering patterns, 2nd quarter 2021 royalty and license fees were $48,200,000 This compares to $50,900,000 in the Q1 of 2021 $22,400,000 in the Q2 of 2020. 2nd quarter 2021 Adesis revenues were $4,000,000 This compares to 3,300,000 dollars in the Q1 of 2021 $3,700,000 in the Q2 of 2020. Cost of sales for the Q2 of 2021 were $28,000,000 This compares to $23,300,000 in the Q1 of 2021 $12,600,000 in the Q2 of 2020. Cost of material sales were $25,300,000 translating into material gross margins of 67%. This compares to 74% in the Q1 of 2021 and the comparable year over year's quarter material gross margins of 68%.
As we have noted in the past, material gross margins can vary quarter to quarter. 2nd quarter 2021 operating expense excluding cost of sales was $51,800,000 Compared to last quarter's $47,100,000 and the year over year comparable quarter's $46,500,000 We are investing in our research and development, including OVJP Corporation, our infrastructure, including our new Shannon site and in our people to fortify our growth opportunities in the organic electronics landscape. Operating income was $49,900,000 in the Q2 of 2021 compared to last quarter's 63,600,000 and year over year's comparable quarter's operating loss of $1,200,000 Operating margin was 38% for the Q2 of 2021 47% in the Q1 of 2021. For the first half of twenty twenty one, operating margin was 43%, and we believe that we are on track for our operating margins to be in the range of 40% to 45% for the year. 2nd quarter 2021 income tax rate was 19.2%.
Net income for the Q2 2021 was $40,500,000 or $0.85 per diluted share. This compares to last quarter's $51,700,000 or $1.08 per diluted share and the comparable year over year's quarter of $800,000 or $0.02 per diluted share. We ended the quarter with approximately $733,000,000 in cash and equivalents or $15.49 of cash to be in the range of $530,000,000 to $560,000,000 or revenue growth of approximately 30% with the ratio of materials to royaltylicense revenues expected to be in the ballpark of 1.5:one. And lastly, our Board of Directors approved a $0.20 quarterly dividend, which will be paid on September 30, 2021 to stockholders of record as of the close of business on September 16, 2021. The dividend reflects our expect this continued positive cash flow generation and commitment to return capital to our shareholders.
With that, I will turn the call back to Steve.
Thanks, Ed. As OLED momentum continues to grow in 2021 and beyond, we are incredibly excited and confident about our leadership position in the OLED ecosystem and advancing our mission to enable an energy efficient, eco friendly consumer world. Energy efficiency and sustainability are Key cornerstones of our universal OLED technology and materials. The discovery of UDC's proprietary phosphorescent technology was an enabling breakthrough in the OLED industry. With efficiencies that are up to 4 times higher than conventional OLED materials.
UDC's patented and award winning phosphorescent OLED technology and universal OLED materials are proven to be integral in enabling high performance, low power consumption and energy efficiency in OLED displays and lighting. In addition to phosphorescence, plasmonic OLED is our most recently announced fundamental groundbreaking device architecture that is expected to extend the lifetime and enhance the efficiency of OLED panels. Our energy efficient Phosphorescent materials and technology are key to better battery life in mobile OLED products and less electrical consumption in wall plug in OLED products. And we are contributing to the world's objective of creating a sustainable and low carbon future. Samsung Display recently announced that due to low power OLED panels, the company was able to reduce its Greenhouse gases by 110,000 tons and the effect is equivalent to the amount of carbon that can be absorbed About 17,000,000 pine forests are built over 5,600 soccer fields.
In 2020, the total power consumption of Samsung's OLED panels for smartphones, notebooks And smartwatches decreased by 2 39 gigawatt hours, which is about 30% of the power consumption in 2017, while maintaining an average annual output of 400,000,000 units. According to Samsung, power consumption of electronic devices, especially mobile devices is a very important issue, not only in terms of user convenience, but also in terms of global warming. And finally, I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart Elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, And with that, operator, let's start the Q and A.
Thank you, Mr. Our first question is from Krish Sankar with Cowen and Company. Please proceed.
Good quarter. Just kind of curious, how much did any of those inflationary costs from the raw materials play a part this quarter versus customer mix? And do you still expect full year gross margins for materials to be the 65% to
70% range? And then I have a follow-up.
Yes. The first part of your question was cut off a little bit, but I think what you asked was About the mix, what was in terms of cost versus customer mix. Is that correct?
That's right, yes.
Yes. I mean,
we don't really break it out between the 2, but clearly they are Some of the things that impact our gross margin and it is customer mix, product mix and costs.
Got it. And the second part of the first question, materials, gross margin is still 65% to 70% for this year?
Yes. For the year, we continue to believe that our 2021 material gross margins will be 65% to 70
And then just as a quick follow-up, Sid, I know in the past you mentioned that the component tightness do not impact you directly. I'm guessing freight cost is not a big deal given your shipment quantities are very small. But I'm just kind of curious over the last few quarters, have you started seeing any derivative impact from either the component tightness with your customers or freight costs impacting your business or are you still too detached from it at this point?
We previously mentioned iridium pricing and increase in development of material affects our gross margins. So and in terms of supply chain, we haven't seen any material issues with our supply chain. Got it. Thanks a lot, Tim. Thank you.
Our next question is from C. J. Muse with Evercore ISI. Please proceed.
Yes, good afternoon. Thank you for taking the question. I guess first question, I was hoping you could help me with your annual revenue guide. In the press release and on the call, you reiterated the up 24% to 31%, but at the same blush, you referenced Up 30%. So are you tightening the guide to 30% growth?
Is the range still appropriate? And what kind of visibility do you have into calendar Q4 sitting here today?
Well, I mean, we do expect solid double digit growth year over year revenue and we did say approximately 30% in 2021, we are comfortable with our current guidance. At the same time, there are some uncertainties No, that are related to chip shortage and the pandemic, that we're keeping an eye on to see whether it's going to impact it.
Okay. But I guess I you guided to 2 different numbers.
Yes. No, I'm sorry. The 30% is really just the midpoint.
Okay. All right. And I guess the second question would be on the IT side of things. Obviously, you sound pretty bold up about that opportunity. I'm wondering if you're seeing that translate into capacity additions, particularly would love to hear your thoughts on the potential for Gen 8.5 to serve that market.
And if so, what's the timing there and when would you be able to update us on kind of a new growth Path for capacity. Thank you.
Well, in terms of the growth phase for capacity, at the end of the year, We've talked about 50% growth year over for a 2 year period. And we intend at the end of the year in our call To give you what we think next year would be like, but the increase in the capacity, there's been a lot of chatter about it, particularly I think that You talked about Gen 8.5 and we are seeing increases and our customers are all talking about Increasing in the IT market. And I think the Gen 8.5 reference you talked about was Related to someone that talked about building that for IT purposes. So I think it is something that right now The IT market is barely 1%. Ebola is barely 1% of the IT market.
And that's about 450,000,000 units. So it's there is a lot of runway for growth on the IT side.
Thank you.
Thanks, C. J.
Our next Question is from Sidney Ho with Deutsche Bank. Please proceed.
Thanks for taking my question. So my first question is on The revenues from your largest customer in the 2nd quarter, that seems to be a little stronger than how they described the business on their earnings call. I guess, question is how should we reconcile that? Is this just a timing thing when one day maybe buying the materials ahead of the ramp? Or Are there other inventory dynamics we should be thinking about?
I don't think there's any real inventory dynamics in terms of Safety stock or repurchases that but as you're well aware, our material purchases have been lumpy from time to timed by our customers. And if you're talking about where our customers are in terms of what they sold, We are on the input side. So as they build inventory, they may be buying more from us that you may see And then you will see that in the subsequent quarter. But I don't see anything in terms of any different this quarter than other quarters in terms of lumpiness.
Okay. That's helpful. Maybe just along the same line asking a different set of customers. Revenue from your Chinese customers, if you exclude LG Display, seems to have fallen a little harder than I thought. In hindsight, was there any inventory thing going on in Q1 that we should be aware of or especially for the one customer that is no longer a 10% customer in Q2?
Thanks.
Yes. We believe that the 'twenty one buying patterns are lumpy and they have been particularly with Chinese customers in the past.
Our next question is from Atif Malik with Citigroup. Please proceed.
Hi, thank you for taking my questions. I have a question on the progress of the blue phosphorescent material. Obviously, Samsung presented a paper, SAG content. I'm curious what your thoughts are on their progress and the progress they have made in terms of the lifetime impurity on blue phosphorescent?
Well, Thank you for the question. We have a as you know, we have a strong relationship with Samsung Display and the relationship spans approximately 2 decades. We believe that we're making excellent progress with our ongoing development work. And as we've noted in the past, We believe the commercial phosphorescent blue is a matter of when and not if. While we have not provided a specific timeframe, We can say that our excitement on phosphorescent blue continues to grow.
Great. Steve, I have another one. In your prepared remarks, you talked about the adoption of form factors like tablets For OLEDs, you mentioned Samsung, Lenovo. Apple has announced iPad Pro this year using mini LED And there's also a talk about we need them using OLED next year. So I'm curious, how should we think about the inflection of OLED in tablets versus Competing mini LED technology.
We think that as Sidney mentioned earlier, we think that OLEDs has great promise Into the tablet market, it's a next size up from the smartphones and the like. We think we're going to see a significant increase Of tablets in the next few years with OLEDs in them.
Great. Thank you.
Our next question is from Shannon Cross with Cross Research. Please proceed.
Thanks. I was curious about how you're thinking about TV demand in this year and next. I know Corning, when I talk to them, are pretty positive on the opportunity for larger screen sizes. It seems as if pricing for larger screen OLED has come down. So wondering how you're sort of gauging things?
Thanks.
Well, as you're aware, I mean, LG this year, they're talking about an increase from last year's number and then they're talking about going to approximately 10,000,000 OLED TVs next year. And I think it is something that obviously there's more and more OEMs that are branding them and you're hearing chatter about Samsung entering the OLED TV market, so we're actually very bullish on the TV market and I think that has consistently been Stated that the OLED TVs are the best TVs ever.
Okay. And then maybe just from a Margin perspective, I'm curious how much of the incremental costs do you think are sort of transitory versus inflationary? And how are you planning ahead? I know you've increased your capacity with PPG, but Just in general, how are you sort of balancing it as you look forward to the next year or so? Thanks.
Yes. I mean, we Specifically, cold out over the end of the year pricing has gone up and that does have an impact on it and also impact the product mix. We're always looking to be more efficient in terms of our manufacturing process. But our gross margins do vary quarter Quarter and there's a number of factors that always impact them from 1 quarter to the other. But we fully expect for the year to be in the 65% to 70
Our next question is from Brian Lee with Goldman Sachs. Please proceed.
Hey, everyone. Good afternoon. Thanks for taking the questions. I might have missed it. I had to jump on a little bit late here.
But Sid, you're maintaining the revenue outlook for 2021. It does imply a more flattish seasonal trajectory in the back versus what you've historically seen in prior years. So is that based on ordering patterns you're seeing right now? Or is there anything unique about the second half of this year to drive kind of that view versus what you've historically been
I don't think there's anything specific. I mean, it really is There are some things related to the chip shortage and the ongoing pandemic issues. And based upon Everything we continue, I mean, we are still comfortable with the $530,000,000 to $560,000,000 for the year.
Okay, fair enough. You mentioned the chip shortages, and I think it's Widely known that there's different areas of different supply chain seeing some constraints. Are you seeing That impacts your customer buying patterns at all? I know it's not easy to gauge Necessarily what's flowing through the manufacturing line versus what might be getting built in stock. But In the past, you've had some handle on it.
And I think you said, especially with some of your customers like the Chinese, you have a better handle. Do you think there's buffers being built at all? Or are we seeing sort of a true reflection of demand in terms of your shipments and ordering patterns at the moment?
As you mentioned, you're well aware of it. Industry OEMs have talked about it And our customers on their conference calls have also referred to the chip shortage and what it So it isn't anything specific that we can point to that has done that. This is just based upon Obviously to our customers and internal forecast and this is where right now we're very comfortable with where we are.
Okay, fair enough. And then maybe last one for me, I'll pass it on. The 50% industry capacity Expansion view, you've maintained, I don't think you mentioned it on the call. I'm assuming it's still intact for the end of 'twenty one for that There's been more chatter, it feels like about the potential for 8.5 gs capacity being built across Industry focused on IT products like notebooks and tablets and others. Is there any of that Baked into your 50% capacity view and can you just speak at a high level around any kind of medium term visibility you might have for those types of new Expansions that could obviously improve the medium term growth outlook for you guys?
Thank you.
I think as you're aware that the way we when we talk about 50% capacity from the end of 'nineteen At the end of 'twenty one, it is installed capacity. It doesn't mean that it's actually turned on, but it is installed capacity. I think there is a lot of chatter about $10,800,000,000 but I don't think to be perfectly honest, that's new. And when we looked at this at the end of 2019, whether or not even the Gen 8.5 is very small, it's not a lot. So I don't think that's going to be impacting I don't believe it's going to impact this number for 2019, 2021.
Maybe in our next forecast when we talk about it. And the pandemic and component shortages may have some impact on this 50% number When we get to the end of the year, it could actually take a look at what it really was.
Okay. Thanks a lot. Appreciate it, guys.
Thanks, Johnny.
Thank you. This concludes a question and answer session. I would like to turn the program back to Sid Roseblet for any additional closing remarks.
We would like to thank you all for joining the call today and we wish you all a good evening. Thank you.
Thank you. This does conclude today's conference call. You may now disconnect.