Shares of OLED technologist Universal Display (PANL +0.12%) are putting on quite a show today, falling more than 16% so far during intraday trading after the company's first-quarter results disappointed investors.
The numbers
One one hand, the company reported a quarterly net loss of $4.8 million, or $0.10 per diluted share, compared to a net loss of $0.03 per share in the same year-ago period. However, that number was still in line with analysts' estimates.
Sales, on the other hand, rose 19% year over year to $15 million, beating analysts' expectations, which called for just $14.0 million. These gains were largely helped by a 21% increase in total material sales to $12.8 million, which itself included 40% growth in commercial material sales to $10.6 million.
Of course, investors expected that growth considering the impressive efforts put forth by Samsung to sell more of its OLED-enabled smartphones, and Universal Display CEO Steve Abramson reminded investors during the earnings conference call "that orders for Samsung's Galaxy S4 have been so explosive they cannot meet demand."
Even better, Abramson also felt the need to point out Apple's (AAPL +0.11%) recently filed patent for a flexible AMOLED wrist-worn display. This goes to bolster my stance that Apple will eventually adopt OLED displays in their product wheelhouse, despite Tim Cook's seemingly disparaging comments about the technology earlier this year.
Still, nobody likes to see red on the ledger of a growth company like Universal Display, especially when that red is increasing each year.
What happened?
Given all this growth, why are Universal Display's losses getting bigger?
Look no further than operating expenses, which rose a whopping 56% from the first quarter of 2012 to $22.1 million.
Included in that number was an extra $2.7 million in amortization, which is primarily associated with Universal Display's recently acquired portfolio of 1,200 OLED patents from Fuji.
In addition, research and development expenses rose $2.3 million, including $1 million to scale up a new red emitter material to commercial status -- believe it or not, that's a great thing to see from a cutting-edge tech company like Universal Display, which absolutely needs to continue innovating to stay ahead of the technology curve.
Finally, cost of materials rose $2 million "due to an increase in the quantity of materials sold, changes in product mix, and increased raw material costs for certain products."
The infamous Samsung payment
If Universal Display sold so much more material than last year, why are they still losing money at all?
Well, remember that 6.5-year contract Universal Display signed with Samsung near the end of 2011? The one for which Samsung only pays Universal Display in the second and fourth quarters of each year? Yep, that's the one.
Of course, this just so happens to be the first quarter of 2013. As expected, then, no revenue was recognized by Universal Display under the terms of that agreement. And because Samsung is easily Universal Display's largest customer -- at least until production ramps up for OLED TVs from other companies including LG Display, Sony, and Panasonic -- Universal Display has no choice but to rely heavily on Sammy to pay the bills for now.
And while each payment from Samsung will rise by a third this year to $20 million, shareholders will need to wait until next quarter to see the fruits of Universal Display's labor.
More of the same
That's certainly no reason to turn your tail and run from Universal Display. Unfortunately, though, that's exactly what investors have done for the past year.
To be sure, take a look at the market's knee-jerk reaction to Universal Display's last several quarterly reports, keeping in mind Samsung's payment's only arrives in the second and fourth quarters of each year:
- Q1 2013 (today): Shares fall 16%
- Q4 2012: "Universal Display Lights It Up," shares rise 16%
- Q3 2012: "Why Universal Display Shares Are Going Dim," shares fall 18%
- Q2 2012: "Why Universal Display's Shares Soared," shares rise 17%
- Q1 2012: "Why Universal Display Shares Plunged," shares fall 11%
Kinda sad, isn't it? Despite the fact nothing has negatively changed the long-term story for Universal Display, Mr. Market panics every time the company doesn't receive its payment from Samsung. Then, when the company predictably gets paid, Mr. Market rejoices by bidding up its shares.
Make no mistake, though: When (not if) economies of scale kick in and other big customers like LG, Sony, and Panasonic come aboard for the long haul, I'm convinced these wild swings will eventually come to an end. When that happens, and when Universal Display becomes consistently profitable, you can bet I'll still be holding onto my shares.
