Shares of Universal Display (OLED 0.68%) are raising Mr. Market's eyebrows this morning after immediately popping more than 17%.
If you're searching for the reason, look no further than the OLED technologist's second-quarter earnings results, which absolutely annihilated analysts' estimates.
Specifically, Universal Display's revenue grew 65% year over year, to $49.4 million. What's more, net income came to $15.4 million, or $0.33 per diluted share, which is up 40% and 43%, respectively, from the second quarter of 2012.
For reference, analysts were expecting earnings of just $0.26 per share on revenue of $38 million. That revenue growth, for its part, was led by a whopping 111% increase in material sales, which jumped to $27.1 million last quarter as Universal Display's customers continue to incorporate OLED into an everwidening array of products.
Next, royalty and license fees grew 37%, to $21.2 million, primarily thanks to UDC's twice-annual collection of a chunky licensing payment from Samsung Display, which management previously told us would rise by a third, to $20 million this year.
On licensing...
Of course, that brings up another interesting question: Why, exactly, is Universal Display only collecting $1.2 million in licensing fees from its dozens of other customers? Sure, Samsung is by far its largest customer, so it makes sense they would pay more... but $20 million?
To answer that, remember that Universal Display has a couple different models for how customers can purchase its technology and materials.
With the first -- which most UDC customers employ -- the customer pays a higher price for a smaller amount of the materials, and a lower price for short-term royalty agreements.
As that volume grows, however, it makes more sense for UDC customers to negotiate a lower average sale price for a higher volume of material purchases. In exchange, UDC gets to enjoy a long-term agreement with larger licensing payments. As it stands, though, Samsung is currently the only customer selling enough OLED-enabled products -- and thus purchasing enough materials -- to merit utilizing the second option.
Surprise?
If you thought you sensed just a little sarcasm in the headline, you would have been mostly right.
Why mostly? Because analysts are admittedly getting a little better at forecasting Universal Display's revenue and earnings -- they weren't off by a full $20 million on the revenue estimates, after all -- but they're still having a heck of a time gauging just how fast Universal Display's material sales are increasing.
But for those of you keeping track, this pop wasn't really a surprise at all, but instead, simply looks like more of the same from Universal Display. Remember last quarter? Yep, that was the one where I cautioned shareholders not to panic after Universal Display plunged 16% after posting a "surprise" loss.
In fact, extending the five past knee-jerk reactions I pointed out last time around, this marks the sixth time in as many quarters that Universal Display has either popped or plunged at least 10% as a seemingly direct result of whether the company is due to collect its chunky licensing payment from Samsung.
For future reference, then, let me break it down: In the first and third quarters of each year, Universal Display does not receive its licensing payment from Samsung. In the second and fourth quarters, it does!
Of course, that doesn't mean these predictable swings are guaranteed to last forever. Eventually, as OLED displays permeate the marketplace, and material sales continue to grow, more customers should opt for long-term licensing agreements, and Samsung will no longer be the deciding factor for whether Universal Display actually turns a profit.
Foolish takeaway
So who's next? If I was a betting man, my money would be on LG Display (LPL 3.01%), which recently launched the first large screen OLED televisions at select brick and mortar Best Buy locations here in the U.S.
If you recall, earlier this year, LG told investors that it is dedicating more than half its 2014 capital expenditures budget to advancing the technology and building out its OLED infrastructure, all in an effort to stay ahead of the curve, as other companies including Samsung, Sony, and Panasonic are breathing down its neck with yet-to-be-launched gorgeous OLED TV offerings of their own.
Of course, those electronics manufacturers all stand to make a pretty penny by selling the next big thing in displays, but it's no mystery that I'm convinced they're not the best place to park your investing dollars to benefit from the trend.
In the end, I've said it before, and I'll say it again: When it comes to profiting from the coming onslaught of OLED devices, all roads lead to Universal Display.
