Heads up, Universal Display Corp. (OLED +10.68%) investors: Your favorite OLED technologist is on deck to report third-quarter 2014 results Thursday after the bell.
Analysts, on average, will be looking for earnings of $0.07 per share on sales of $37.84 million. If you're wondering about the big sequential drop -- Universal Display achieved earnings of $0.44 per share on sales of $64.1 million in Q2 -- keep in mind that it only collects its twice-per-year, $25 million license fee from Samsung (NASDAQOTH: SSNLF) in the second and fourth quarters.
But even then, it's wise to dig deeper to understand what drives those headline numbers. Here are three things I'm watching going into Universal Display's report:
Will Samsung's weakness carry through?
First and foremost, the market has been preoccupied with worry the last several weeks after Samsung warned weak high-end Galaxy smartphone sales would hinder its Q3 results. Samsung is easily Universal Display's single largest customer, and within that relationship, UDC's flagship AMOLED technology was previously limited only to Samsung's high-end smartphones. To be sure, this seemed to be terrible news for Universal Display.
As I suggested earlier this month, however, things aren't quite that simple for UDC anymore. We now know, for instance, Samsung is using AMOLED displays in its new entry-level and mid-range A3 and A5 smartphones, which aren't expected to suffer from the same unit sales weakness as higher-end devices. And likely thanks to recent investments to expand its mid-sized OLED display production capacity, Samsung unveiled two Galaxy Tab S tablets with AMOLED displays in June. Previous iterations of the same tablets featured LCDs. While Samsung's high-end smartphone weakness certainly isn't ideal, these other products should go a long way toward making up the difference.
That said, there's another wild card here -- namely, the potential threat of Samsung's Cheil Industries, which was reported back in May to be working on mass producing green OLED host materials for Samsung's mobile devices in a bid to reduce its reliance on foreign material suppliers. You might recall I outlined my thought process on Cheil back in May, which more or less meshed with Universal Display management's subsequent assertion that they "still expect our host business to be strong this year." Even so, investors should keep a close eye on how Universal Display's host business is holding up.
Any news on other long-term agreements?
Of course, so far we've only taken Samsung in isolation. But Universal Display is also set to enjoy the impending ramp-up of LG Display's (LPL +1.17%) gen-8 OLED TV manufacturing line, which is slated to happen by the end of this year. Even ahead of that ramp, LG Electronics had already reduced the price of those sets by around 75% to $3,500 over the past year, and launched its latest OLED televisions for the first time ever in more than 1,000 bricks-and-mortar Best Buy stores in the United States.
What's more, various sources have effectively confirmed that -- contrary to the market's initial assumption -- LG Display is providing small OLED displays for the upcoming Apple Watch. The Apple Watch probably won't provide a meaningful boost to Universal Display's material sales, given its small size. But again, it's a huge vote of confidence to merely have the folks in Cupertino on board after Tim Cook publicly criticized OLED technology back in early 2013.
This raises the question of whether Universal Display will provide any details of progress toward a long-term, Samsung-esque licensing and material supply agreement with LG Display. As it stands, Universal Display has told investors it's a matter of reaching the appropriate material sales volume before it makes sense for LG Display to move away from its current short-term contracts. When that happens, though, it should only further solidify Universal Display's leadership position.
On guidance
Finally, expect Universal Display to provide color on its full-year guidance. For each of the past two quarters, Universal Display has told investors to expect 2014 revenue to reach the high end of its initial $190 million-to-$205 million guidance range. The market is taking that outlook to heart as analysts' consensus estimates call for 2014 sales of $203.64 million, which would represent a solid 38.9% year-over-year gain.
Whether Universal Display can exceed those expectations remains to be seen. But to be honest, I'd be perfectly happy if it once again reaffirmed existing guidance and put to rest the market's recent concerns. In any case, be sure to check back here after the report to see how Universal Display fared.
