Universal Display’s Awful Q2 Explained by Inventory, Fab Utilization

Published August 17, 2020

Universal Display Corporation (UDC) released its Q2 2020 financial results on Thursday, August 6th, and the company described a terrible Q2 but some positive indications about Q3, and referred to positive developments at DisplayWeek toward commercialization of a blue phosphorescent emitter. We show how UDC’s Q2 results can be explained by analysis using DSCC’s Quarterly Display Fab Utilization Report, and review the Samsung paper in DisplayWeek and its implications for blue.

UDC reported net income of $815,000 on revenues of $58 million for the second quarter of 2020, both figures falling far short of consensus analyst expectations of net income of $13.3 million and revenues of $68.7 million. Revenues plunged 48% Q/Q and 51% Y/Y, while net income plummeted 98% Q/Q and Y/Y. Perhaps reacting to the positive outlook on blue, the company’s stock surged at opening on Friday, but then lost ground, and ended flat for the day but still ended up 7% for the week at $186.51.

UDC sold $31.9 million of material in the first quarter, a decrease of 48% Q/Q and 42% Y/Y, and realized $22.4 million in revenue from royalties and licensing, a decline of 52% Q/Q and 57% Y/Y. The ratio of material sales revenue to licensing revenue for the quarter was 1.43, compared to 1.55 in Q1 2020 and 1.96 in Q2 2019, and although this ratio was lower than the normal range, UDC reiterated that they expect this ratio to vary quarter by quarter within the range of 1.5 to 2.0, depending on the customer mix.

UDC’s revenue picture for the quarter was complicated by one-time factors. As we reported three months ago, UDC had indicated that in both Q4 2019 and Q1 2020 it had sold additional safety stock to its customers, to insure against disruptions first from the US-China trade disputes, and later from the COVID-19 pandemic. UDC had indicated that of the $25 million in Q4 2019, only about half was consumed in Q1, and an additional $20 million was purchased, leaving an overhang coming into Q2 of $30-35 million of safety stock.

UDC revenues declined sharply from both Korea and China, overwhelming small increases in revenue from Japan and the US, as shown on the chart here. China revenues were down 46% Q/Q and 63% Y/Y, while Korea revenues were down 55% Q/Q and 47% Y/Y, and revenues from all other countries exceeded 10% of the total for the first time since Q4 2018. UDC recognizes material sales to LGD’s OLED TV plant in Guangzhou, China as China revenues.

UDC Revenue by Country, 1Q 2017 - 2Q 2020

Source: UDC Financial Statements, DSCC Analysis

While UDC results were disappointing, they should not have been surprising to investors following developments closely. First, it’s clear that the $30-35 million of inventory built up at UDC’s customers by the end of Q1 2020 served as a massive headwind to Q2 revenues, and exaggerated the Q/Q decline in revenues by increasing Q1 and decreasing Q2.

Second, as indicated by the next chart here generated from DSCC’s Quarterly Display Fab Utilization Report, utilization at several key OLED fabs was down sharply in Q2 2020. The chart shows the quarterly UT% for the three largest OLED fabs, all in Korea – Samsung’s A2 Rigid and A3 flexible fabs for mobile panels, and LGD’s P8 Paju fab for OLED TV – along with the overall utilization of all OLED fabs shown as the “Total” line. All the fabs showed sharp slowdowns in Q2, as Samsung struggled with demand for rigid OLED panels and LGD’s OLED TV business struggled to sustain volumes because of the increased price gap to advanced LCD TV.

Utilization at Selected OLED Display Fabs, 2019 – Q2 2020

Source: DSCC Quarterly Display Fab Utilization Report

Area input for P8 was down 30% Q/Q and 29% Y/Y, while that of A2 was down 21% Q/Q and 45% Y/Y. While A3 has for the last several years had low utilizations in the first half, and A3 UT% was down only 2% Y/Y, it was down 36% Q/Q. The slowdowns at these three fabs overwhelmed growth from the rest of the industry, based on capacity growth for mobile OLED in China and the start-up of LGD’s Guangzhou line.

DSCC estimates that total industry input area for OLED fabs declined by 16% Q/Q and by 13% Y/Y in Q2 2020. This combined with the inventory drawdown helps to explain the sharp revenue reductions experienced by UDC in Q2. The good news, consistent with UDC’s comments about Q3, is that utilization is improving in Q3 at all of these major fabs. DSCC expects overall industry UT% for OLED fabs to increase from 50% in Q2 2020 to 68% in Q3 and 73% in Q4, with input area increasing by 64% Q/Q in Q3 and by another 9% Q/Q in Q4.

In his prepared remarks, UDC CEO Steve Abramson mentioned Samsung’s paper on blue phosphorescent OLED emitters, citing the progress Samsung is making in using UDC’s developmental material. The paper was from the Display Week Symposium, Session 6, paper 6.4, entitled “Realizing Deep Blue Emission in Blue Phosphorescent Organic Light-Emitting Diodes”, by Jinwon Sun of the Materials Research Team of Samsung Display.

The Samsung paper describes the problem as extra emission from the material which lowers the color purity and EL efficiency of the blue OLED device. The extra or secondary emission is a superposition of the dopant spectrum and exciplex spectrum that originates due to the charge transfer complex between the dopant material and n-host material. While the peak emission for blue should be in the neighborhood of 460nm- 465nm, this extra emission is substantial at wavelengths above 500nm, as shown in the chart here. By increasing the ratio of p:n host material, Samsung was able to substantially reduce this spurious emission, and thereby improve color purity.

Source: DSCC Quarterly Display Fab Utilization Report

Samsung’s paper concludes that it was able to improve color purity by 30%, EL efficiency by 24% and stability by 5 times, which corresponds to the numbers in bold on the presentation slide. These figures should be used with caution, however, since they are all indexed to a starting point with the p:n ratio of 3:7. The CIEy of the starting point is not 0.100 in absolute terms, but an unknown point, and 30% better may still be far from what is commercially acceptable. Similarly, the T95 lifetime of the starting point is unknown, so while a 5x improvement is certainly an impressive gain, if the original lifetime was 5 hours (for example), even the improved lifetime of 28 hours falls far short of the commercial target.

While UDC justifiably cites the Samsung paper as evidence of progress toward a commercially acceptable blue emitter, the paper gives no solid indication of how close UDC and Samsung are to achieving the commercial milestone. It’s even possible that, by allowing the publication of this research rather than keeping it secret, Samsung believes that it is not a breakthrough that can be used for competitive advantage in OLED.

Other notes from the earnings call:

  • UDC again declined to offer guidance for the full year 2020, citing continuing uncertainty in demand. However, UDC CEO Steve Abramson indicated that revenues had increased strongly in July compared to Q2 levels.
  • UDC highlighted its recent formation of a separate subsidiary to commercialize its Organic Vapor Jet Printing (OVJP) technology. Abramson said that OVJP R&D will continue in UDC’s Ewing, New Jersey headquarters, while process and equipment scale up will take place in OVJP headquarters in Silicon Valley.
  • Despite the reference to Samsung’s DisplayWeek article, 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 in our ongoing development work for a commercial phosphorescent blue emitter system”. UDC has repeatedly said that they cannot predict the timing of such commercialization.
Image Description
Written by

Bob O'Brien