Universal Display Corp. (OLED 0.77%) just released third-quarter results, and the market is punishing the stock with a 12% plunge in after-hours trading. Quarterly revenue rose slightly year over year, to $32.9 million, which translated to net income of $5.5 million, or $0.09 per diluted share. Analysts, on average, were looking for earnings of just $0.07 per share on higher sales of $37.8 million.
To explain the top-line shortfall, Universal Display CFO Sid Rosenblatt pointed to "industry dynamics resulting from weaker-than-expected high-end mobile phone sales and lower host material sales as the result of our host materials not being used in certain new product offerings."
But what's really hurting the stock right now is Universal Display's assumption that those trends will continue for the remainder of this year. As a result, Universal Display lowered its full-year revenue guidance to a range of $183 million to $185 million. Previously, Universal Display was expecting 2014 revenue to reach the high-end of its old $190 million to $205 million range.
Two culprits
First, and just as many had feared, it appears Samsung's high-end smartphone weakness is negatively affecting Universal Display -- at least in the near term. A quick glance at Universal Display's SEC Form 10-Q shows phosphorescent emitter sales grew just 8% year over year, to $20.2 million, representing a significant deceleration from the 42% year-over-year growth Universal Display has achieved so far in 2014.
This happened despite Samsung incorporating OLED displays into several new products, including two Galaxy Tab S tablets, and its recently launched mid- and entry-level A3 and A5 smartphones. I can't help but wonder how steep the decline would have been had Samsung chosen instead to continue using LCDs in those new device lines.
Second, UDC's 10-Q also shows host material sales simultaneously fell by 37%, to $7.3 million. It's unclear whether this came from Samsung's recently absorbed affiliate, Cheil Industries, which was said to be preparing a few months ago to mass produce green host materials for use in Samsung devices. For reference, host materials are used together with emitters in the emissive layer of an OLED.
However, Universal Display customers are not required to buy host materials from the company in order to utilize its ironclad, patent-protected phosphorescent emitter materials. As a result, the host materials business is significantly more competitive, offers lower margins than emitters, and is by no means a guaranteed win for UDC.
The silver lining
Does this mean Universal Display's business is doomed? Hardly.
First, management insisted during the subsequent conference call, "We are not giving up on our hosts business at all." Further, they continue to expect to sell host materials to a range of customers going forward given their expertise in emitters.
Next, royalty and license fees in Q3 more than tripled over the same year-ago period, to $5.4 million. Of course, that doesn't include the $25 million license payment Universal Display receives in the second and fourth quarters of each year from Samsung. But it does speak to the continued growth and diversification of Universal Display's customer base, which not only introduced new OLED tablets and smartphones in Q3, but also offered new wearables and TVs on a broad scale during the quarter.
As Rosenblatt stated, "We believe that this growing proliferation of OLED displays is setting the stage for panel makers' investment plans for 2015 and beyond to increase." Also during the subsequent call, management reminded investors that the OLED industry is still young, and called these trends a "temporary blip" in Universal Display's long-term story.
In the end, while this "blip" certainly isn't ideal for agitated short-term investors, try to remember that the road to riches is seldom a straight line upward.
