UDC Hits Record Q4 Earnings But Disappoints Investors
Universal Display Corporation (UDC) finished 2020 on a high note, reporting record revenues and profits in its Q4 2020 financial results reported on Thursday. The company gave an outlook for revenue growth in 2021, but they expect gross margins to decrease, and their overall outlook seemed to disappoint investors.
UDC reported net income of $53.9M on revenues of $142M for the fourth quarter of 2020. Both figures greatly exceeded consensus analyst expectations of net income of $31Mand revenues of $113M. Revenues increased 21% Q/Q and 39% Y/Y, while net income jumped 33% Q/Q and 104% Y/Y. Despite these strong results, the company’s stock tanked on Friday, dropping 5.2% after the earnings announcement to close at $224.80. UDC stock is down 1% since the beginning of the year.
UDC sold $62.5M of material in the fourth quarter, a decrease of 9% Q/Q but an increase of 3% Y/Y, and realized $75.0M in revenue from royalties and licensing, increasing 68% Q/Q and 99% Y/Y. The ratio of material sales revenue to licensing revenue for the quarter was 0.80, a big change compared to 1.54 in Q3 2020 and 1.61 in Q4 2019. UDC CFO Sid Rosenblatt explained that $17M of the royalty revenue was a “catch up” of royalty because of a diminished outlook for material sales:
“As part of our ASC 606 review at the end of 2020, we look into COVID-19 impact to our business and the OLED market forecast. With the reduction in 2020 and 2021 market forecast, we are now estimating lower material shipments in our ASC 606 estimates. This then results in higher license and royalty fees per material shipment. This is what was reflected in the cumulative catch-up adjustment of $17 million in 2020. Most of it was recognized in the fourth quarter.”
For the full year 2020, UDC revenues increased 6% over 2019 to $429M, but net income declined by 4% to $133M. Material sales declined by 6% but royalties increased by 23% and revenues from technology development and support increased 19%.
UDC’s Q4 2020 revenues increased in Korea but decreased Q/Q in other non-US regions, as shown on the chart here. Korea revenues were up 44% Q/Q and 59% Y/Y, while China revenues were down 8% Q/Q but up 11% Y/Y, and revenues from all other countries decreased 53% Q/Q and 31% Y/Y. UDC recognizes material sales to LGD’s OLED TV plant in Guangzhou, China as China revenues.
UDC Revenue by Country, 1Q 2017 - 4Q 2020
UDC exceeded its guidance for revenue in Q4; the company had guided 2020 revenues to be in the range of $385-400M but it beat the top end of that range by 7%. For 2021, UDC gave the following guidance:
- Revenues to be in the range of $530M to $560M.
- The 2021 ratio of material to royalty license revenues will be in the ballpark of 1.5 to 1.
- Material gross margins to be in the 65% to 70% range.
- Annual overall gross margins for the year are expected to be approximately 80%.
- 2021 operating margins are expected to be approximately 40% to 45%.
- Operating expenses of SG&A, R&D and patent costs in the aggregate are expected to increase in the range of 20% to 25% year-over-year, with R&D up about 25% and SG&A up about 15%.
- Effective tax rate to be approximately 19% give or take a few basis points.
The mid-point of UDC’s guidance for 2021 calculates to a net income of $173M, an increase of 30% over 2020, with revenues increasing by 27% Y/Y.
Other notes from the earnings call:
- In its prepared statements, UDC continued to use identical language compared to prior quarters in describing their blue emitter material development: “we continue to make excellent progress in our ongoing development work for our commercial phosphorescent blue emissive system.“ UDC has repeatedly said that they cannot predict the timing of such commercialization.
- UDC stated that they are making advancements with Organic Vapor Jet Printing manufacturing technology for direct printing of large-area OLED panels. UDC’s wholly owned subsidiary OVJP Corporation’s first milestone is to develop an alpha system, which is anticipated to be ready in 2022.
- UDC’s outlook for material gross margins was downgraded from the 70% to75% seen in prior years to an estimated 65% to70% for 2021. UDC stated that the gross margin hit is based upon developmental materials – as the number of customers has increased and the complexity of its product line has increased, UDC needs to make more developmental materials, which hurts its gross margins. UDC also indicated that the larger number of customers and products led to higher R&D costs.