What happened
Shares of Universal Display (OLED -2.06%) were down 15.5% as of 12:30 p.m. EST Friday, after the OLED technologist announced better-than-expected fourth-quarter 2017 results, but followed with light guidance for the coming year.
More specifically on the former, Universal Display's quarterly revenue increased 55% year over year to $115.9 million, bringing full-year sales to $335.6 million. By comparison, Universal Display's latest guidance called for 2018 sales in the range of $310 million to $320 million.
Adjusted net income also climbed to $44.3 million, or $0.93 per share, up from $25.8 million, or $0.55 per share, in the same year-ago period. Investors were looking for adjusted earnings of only $0.85 per share.
IMAGE SOURCE: UNIVERSAL DISPLAY.
So what
The underlying drivers of Universal Display's business were encouraging. Revenue growth comprised a 105% increase in materials sales to $59.8 million, and a 23% increase in royalty and license fees to $53.8 million. As expected, the latter included the second of two $45 million license payments this year from Samsung Display -- UDC's single largest customer -- which renewed its long-term license and material supply agreement with Universal Display earlier this month.
For the full year of 2018, however, Universal Display expects revenue in the range of $350 million to $380 million, representing modest year-over-year growth of 4.3% to 13.2%. Though we don't normally pay close attention to Wall Street's demands, consensus estimates predicted higher 2018 revenue of $398.2 million.
Now what
During the subsequent conference call, management explained that the fourth quarter included roughly $15 million to $20 million in purchases of OLED material that were pulled forward from the first quarter of 2018, likely related to customers' inventory-building. Of course, Universal Display's Q4 revenue would have arrived near the high end of expectations even excluding those purchases. But that also negatively impacted the company's forward guidance.
CFO Sidney Rosenblatt elaborated:
After an extraordinary year-and-a-half of new capacity installs, we expect industry capacity growth to take a bit of a breather this year as panel makers build the framework for the next wave of high volume OLED production, which is expected to ramp next year. 2019 is poised to be a meaningful year of growth. Based on current production timelines, we estimate the installed capacity base, as measured in square meters, will increase by approximately 50% over the next two years.
In short, Rosenblatt says, Universal Display's decelerating near-term growth is primarily a function of a brief pause in the "multi-year OLED capex growth cycle." And even then, the orders pulled forward from the first quarter make that deceleration look more severe than it actually is.
So while today's pullback isn't all that surprising as skittish investors take profits off the table -- the stock was, after all, up nearly 130% in the year leading up to today's report -- Universal Display's long-term story remains firmly intact.
