Ever since Universal Display (OLED +1.99%) signed its 6.5-year deal with Samsung (NASDAQOTH: SSNLF) back in August 2011, the market just can't seem to figure out how to get a handle on its quarterly earnings.
Image source: udcoled.com.
Per the terms of the agreement, Samsung must both purchase a predetermined minimum amount of OLED materials from Universal Display, as well as pay the OLED technologist a significant license fee during the second and fourth quarters of each year. That license fee, for its part, increases by an undisclosed amount each year, with this year's bi-annual payment rising by a third from 2012 to $20 million.
However, while Universal Display's material sales have relentlessly marched higher over the past year and a half, Mr. Market has consistently punished the stock every quarter it hasn't received Samsung's license fee, with drops of at least 16%. Then, when the payment predictably arrives three months later, Wall Street does the exact opposite, heaping praise and driving up UDC's shares.
Is it time to brace ourselves?
I suppose its understandable, then, why Universal Display investors might be a little on edge this week. After all, the company is scheduled to release its third-quarter earnings results on Thursday after the market close, the numbers for which absolutely will not include that $20 million check from Samsung.
For reference, this time last year shares of Universal Display plunged by 18%, after the company reported a $0.12 per share loss on revenue of $12.5 million. Then again, analysts weren't even in the ballbark by hoping for a $0.02 per share profit on sales of $18.6 million.
But does that mean investors should be running for the hills this quarter? Not necessarily.
To analysts' credit, Universal Display management did say material sales during last year's third quarter reflected what they believed "to be a temporary slowdown in industry growth." However, that slowdown appeared to be solved as healthy growth resumed by the end of the year.
This time around, analysts are looking for a much more conservative $0.04 per share loss from Universal Display, albeit on significantly higher sales of $21.75 million. But that itself isn't an entirely unreasonable assumption, especially when we consider Universal Display also stated in Q2 it expects 2013 revenue to reach the high end of its $110 million to $125 million guidance.
What's more, Universal Display's revenue at the halfway point this year stood at $64.3 million, which means they were assuming second half revenue of $60.7 million -- that is, of course, if we take the highest point in their range. Back out the $20 million license payment they're still set to receive from Samsung in Q4, and that leaves just $40.7 million unaccounted for in the form of combined Q3 and Q4 material sales, and short-term license agreements from Universal Display's other smaller customers.
Here's why this time could be different
So what's stopping a similar industry slowdown from happening now?
For one, consider the fact South Korean electronics giants Samsung and LG Display (LPL 5.01%) not only each launched their own large-screen OLED televisions in stores during the quarter, but also each unveiled their own respective curved OLED smartphones just last month.
LG Display's curved 55-inch OLED television. Source: LG Display
That's also not to mention LG Display's rumored pending conversations with Apple (AAPL +0.04%) to supply small, curved OLED displays for use in a not-so-mysterious device to be launched sometime in 2014. And remember, two quarters ago my ears perked up when Universal Display CEO Steve Abramson curiously felt the need to point out during his company's earnings conference call that Apple had only recently filed a patent for a flexible OLED wrist-worn display.
Sure, Samsung has already launched an OLED smart watch of its own in Galaxy Gear, and any revenue stemming from such tiny displays -- even from Apple -- is likely to pale in comparison to the torrent of sales stemming from smartphones or televisions. But at the very least, an Apple win would serve as a massive vote of confidence in Universal Display's offerings.
Samsung's Galaxy Gear smart watches. Source: Samsung
I suppose we shouldn't be surprised, then, that CFO Sid Rosenblatt also said something particularly intriguing in last quarter's earnings report:
Given the rate at which the market is adopting our energy efficient, high-performance UniversalPHOLED materials and technology, we believe the market has achieved a level of sustainable commercial technology adoption that can drive strong top line growth.
Call me crazy, but the undertone of that comment seems to indicate Universal Display's target markets have officially reached a tipping point -- one which won't require Samsung's huge twice-per-year license payment to propel the company's operations into the black.
We'll see what happens on Thursday, but don't be surprised if this time is finally different.
