Universal Display Corporation

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Universal Display Corporation (OLED) is a leading player in the OLED display and lighting technology market, known for its proprietary materials and technologies that enable more efficient and flexible displays.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Universal Display Corporation (UDC) is a technology company that researches, develops, and commercializes Organic Light Emitting Diode (OLED) technologies and materials for use in display and lighting applications. UDC operates in two major segments: material sales (which accounts for the majority of their revenues) and royalty and license fees, which come from the commercialization of their proprietary OLED technologies. UDC’s revenue structure is predominantly based on material sales to OLED display and lighting manufacturers, along with license fees and royalties for the utilization of their patented technology. They essentially enable other companies to manufacture OLED displays, they are not a manufacturer themselves.

  • Revenue Distribution:
    • The majority of UDC’s revenue is derived from its material sales, which consists of the sale of phosphorescent OLED materials for use in displays and lighting. These sales are the primary revenue generator for UDC.
    • The second source of revenue for UDC is from royalties and license fees. This includes fees from licensing their OLED technologies to manufacturing firms and for the right to use of UDC’s patented OLED technology and for the know-how related to the production.
  • Trends in the Industry:
    • The OLED display and lighting markets are in a phase of strong growth and are expected to continue in the coming years. Major factors driving this trend are the increasing demand for flexible displays, wider adoption of OLED technology in mobile devices, TVs, wearables, and AR/VR devices, and new applications in automotive and general lighting. The rise in large-area OLED displays is expected to boost material sales.
    • According to the last annual report (2022), the company continued to see strong growth in demand for its OLED materials in mobile, wearable, and IT applications.
    • The company is working to increase OLED adoption in lighting and other commercial applications.
    • The demand from display manufacturers is shifting from standard rigid OLED to flexible and foldable OLEDs, which require new types of materials.

  • Margins: UDC enjoys a good gross profit margin above 60%, but those margins are volatile and it appears the cost of revenue is rising faster than revenues. So there is some pressure on profits. However, the margins for their royalty business are extremely high.

  • Competitive Landscape: UDC faces competition in both materials and technologies markets. Other companies such as LG Chemical, Sumitomo Chemical, and Merck have also developed OLED technologies, but UDC has a lead with its proprietary phosphorescent OLED technology. It’s a technology-driven industry, and newer better technologies are always in development, potentially replacing existing technologies.

  • What Makes UDC Different: The primary competitive advantage of UDC is its proprietary phosphorescent OLED technology and related patents, which offer better energy efficiency, brightness, and color performance than traditional OLED technologies. Additionally, UDC also has built up a large number of licensing deals and agreements with various display manufacturers, and they have expertise in creating OLED devices. It has some barriers to entry in licensing of patented technology, but many display manufacturers make their own materials or have contracts with different material producers.

One interesting point regarding their contracts - they often include a royalty component based on the material usage per display and they have exclusive long-term contracts, meaning that companies will be locked to buy those materials from them. It helps in generating predictable income for the long-term.

  • Other Relevant Information:
    • Universal Display Corporation is a relatively small company compared with the other players in the display market, this leads to some volatility in revenues and profit as sales will often depend on a small group of clients.
    • The company has a strong focus on research and development, which has allowed it to maintain its leadership in OLED technology.
    • The main business risks are competitive challenges, technology shifts, and general economic risks, along with some political and legal risks (as the technology is controlled and produced by the company).

Risks to the Moat and Business Resilience: * Technological Disruption: Rapid technological advancements could result in new display technologies that render OLED less relevant, such as micro-LEDs, or quantum dot displays. This would severely affect UDC’s competitive advantage and its future revenues. * Loss of Patents: UDC’s patents on its OLED technologies will eventually expire, which may enable more companies to offer similar materials and increase competition. If they do not have new technology to replace the old patents, then they might lose their moat. * Reliance on a Few Customers: UDC’s revenue is dependent on a few large-scale manufacturers, which could put their revenue under pressure if one of these clients were to encounter financial troubles or decide to switch suppliers. As UDC sells to LG Display, Samsung, and other manufacturers which are large players in this market, losing one of them could be devastating to the revenues. Also, relying on a few customers puts UDC at the mercy of negotiations, and can affect margins negatively. * Competition: Competing technologies or competitors making similar materials could impact their business negatively. These companies include LG Chem, Sumitomo Chemical, Merck, etc. and these competitors are always innovating. * Macroeconomic Fluctuations: Changes in global economies, geopolitical environment or other macro factors could affect demand for OLED displays and thus for UDC’s materials, leading to volatility. * Supply Chain Issues: Raw material sourcing and transportation of the components can face issues and hinder production and profitability. * Management Challenges: As a growth-stage company, UDC’s growth depends very heavily on strategic partnerships and business decisions. Any errors here could derail the business.

Financials: UDC has demonstrated remarkable growth in revenue and net income over the last few years, indicating that its business is strong and that the company’s technologies are in-demand. Revenue grew by about 40% each year from 2020 to 2022. Revenue has not been quite as good in the last few quarters of 2023. Operating expenses and the cost of revenue have also increased in recent years. Net income has also grown substantially. UDC has shown impressive profitability and generates a lot of free cash. UDC has maintained a stable balance sheet, low debt, and significant cash, cash equivalents and short-term investments.

  • Income Statement Analysis:
    • Revenue has been volatile over the past year, with revenue dropping from 173 million USD in Q1 of 2023 to 120 million USD in Q3 of 2023. Sales recovered quite a bit in Q4 2023, jumping up to 163 million USD.
    • As mentioned above, gross profit has generally been above 60%. This is due to high margins on material sales, but it appears that this margin has started falling.
    • Operating profit margin is very strong.
    • The volatility of revenue makes it hard to make accurate predictions. The cost of sales has risen in recent years. However, net income has remained highly positive, but has also fallen in the last quarter.
    • They have also had some impact on their revenue due to changes in FX rate and inflation, which is expected to continue into 2024.
  • Balance Sheet Analysis:
    • UDC has substantial cash and cash equivalents and short-term investments on their balance sheet.
    • The company’s debt burden is limited.
    • They have a decent amount of good will and other intangible assets. They should be watched to see if they generate returns on capital or if they are written down in future reports.
    • They have a strong working capital position.
  • Cash Flow Analysis:
    • UDC has had strong positive cash flow from its operation during the last few years.
    • They have low capital expenditure compared with the total revenue and cash from operations, indicating they are not very capital-intensive.
    • The company also uses a lot of the generated cash for buybacks.

Recent Concerns, Controversies, and Management View: Management has expressed that UDC’s revenues are volatile and are subject to some short term issues with demand and production issues, but they are optimistic of the future and are focused on the long-term opportunity. One key trend for UDC is the growth in flexible and foldable OLED displays. The company’s CFO confirmed on the call that UDC has seen no increase in the price of materials because of inflation or other economic factors and that they are monitoring the situation closely. In the latest quarterly calls, some analysts were wary of slower revenue growth and falling sales compared to the previous year. UDC management believes they are in a strong place for long-term growth and to capture future opportunities. On the last earnings call, UDC management had to clarify many questions about the slowdown in revenues. The CFO said it’s due to changes in consumer spending habits as well as some issues with the panel manufacturers which will be temporary.

Understandability: 4 / 5: UDC’s business model is fairly easy to understand, that they are a technology company that licenses its proprietary technology and sells the materials needed to make OLED displays and they have strong returns on capital. However, their financial statements are a little more complicated and the business is heavily dependent on a small number of large customers.

Balance Sheet Health: 4 / 5: UDC has a strong balance sheet with substantial cash reserves and very little debt. Its cash flow position is impressive, indicating its strong profitability. However, UDC is subject to potential writedowns due to goodwill and other intangible assets. Its operations are not capital intensive, giving it the benefit of lower capital requirements.