What Can We Expect on Q2 Panel Maker Earnings?

Published July 20, 2020

This coming week starts the cycle of earnings results from flat panel display makers, with LGD typically starting off the releases and AUO scheduled next week. With panel prices falling in the first part of Q2 but then recovering in June, and the coronavirus raging, what can we expect from the earnings announcements?

First, let’s set the stage with an industry overview of margins, in the first chart here. Margins shown a steady downward trend since the last industry peak in summer 2017, and operating margins fell to negative for the industry as a whole and for most individual players in Q4 2019 and Q1 2020, while EBITDA margins have been hovering in the high single digits for the last year.

Display Maker Quarterly Margins, 2015-1Q 2020

Source: DSCC Display Supply Chain Financial Health Report

The second chart shows the operating margins of the larger companies in the industry on a shorter timescale of 2017-1Q20. While the downward trend is clearly seen, there is a wide divergence of outcomes, with Tianma and SDC sustaining positive operating margins in most quarters, while AUO, Innolux, and LGD have all run operating losses for five consecutive quarters.

Display Maker Quarterly Operating Margins, 2017-1Q 2020

Source: DSCC Display Supply Chain Financial Health Report

In terms of guidance, all companies expressed some caution around guidance in their Q1 earnings calls in late April and early May, as the effects of the COVID-19 pandemic on demand were little known and poorly understood. Each of the bigger Korea/Taiwan ‘pure play’ panel makers expressed confidence in IT demand but concern elsewhere:

  • LGD expected demand for IT panels to increase by 20-30% Y/Y, offsetting a decline in demand in TV and mobile.
  • AUO saw increased demand for IT and medical monitors but slower demand for TVs and auto displays.
  • Innolux expected robust IT demand, with TV panel demand recovering gradually quarter by quarter.

Only Innolux gave guidance on shipments, expecting a significant increase in large panel shipments Q/Q with a low single digit ASP decline, and small/medium panels up mid-teens Q/Q with a flat blended ASP.

For the Taiwan players, because they report monthly revenues and shipments we now know that their combined revenues increased 25% Q/Q as large-area panel shipments increased 35% and small/medium panel shipments increased 37%.

The table below shows analyst expectations for Q2 for the six panel makers with analyst coverage, according to marketscreener.com. We can see that analysts expected revenue and margin improvements, but at least in Taiwan the panel makers outperformed these expectations for revenue.

Given the better profitability of IT panels and the improved picture of TV demand and TV panel prices, I expect that operating profit margins will also come in better than consensus estimates, although I don’t expect the Taiwanese companies or LGD to report operating profits.

We have reported that Samsung will receive a payment from Apple for underperformance of the OLED panel business, and this payment will allow SDC to swing to a positive operating profit in Q2.

Perhaps just as important as the results will be the guidance given about Q3. Since LCD TV panel prices are now increasing, we expect that the Q3 guidance will be cautiously optimistic, with the level of caution related to uncertainty of the impact of the pandemic.

Image Description
Written by

Bob O'Brien