Dim the lights, Universal Display Corporation (NASDAQ:OLED) investors, because your favorite OLED technologist is set to announce second-quarter 2015 earnings later this week, and it's time to start thinking about what to expect.
Universal Display didn't provide specific quarterly guidance with its solid Q1 report three months ago. But that hasn't stopped analysts from trying their hand; consensus estimates call for the company to report a 1.2% year-over-year decline revenue decline to $63.3 million, while earnings per share are expected to increase by a penny to $0.45.
But Unversal Display's business is about more than just revenue and earnings, which is why investors should delve deeper to understand what's driving those results. Here are three things I'll be watching closely:
1. LG Display's contribution
First, recall that Universal Display stock skyrocketed this past January, after the company announced a new long-term patent license and material supply agreement with LG Display (NYSE:LPL). Under the terms of that agreement -- which replaced a series of shorter-term license extensions by LGD -- LG Display not only pays Universal Display for the OLED materials it uses, but it also pays license fees and running royalties on sales of licensed OLED products. Among these products are the displays implemented in LG's smartphones, OLED TVs, and the flexible OLED screens it supplies for use in the recently launched Apple (NASDAQ:AAPL) Watch.
Apart from knowing LG Display is benefiting from volume discounts, however, the terms of the deal still aren't clear. Because those royalties are reflected one quarter in arrears when the amounts are reported to Universal Display, this quarter will be the first to recognize LG Display royalty payments under the new pricing structure. Listen closely, then, for any comments clarifying LG Display's current and future contributions to Universal Display's top and bottom lines.
2. Materials and royalty breakdown
Next, look for Universal Display management's typical breakdown of quarterly revenue. Last quarter, for example, the largest driver of Universal Display's year-over-year revenue decline was a 24% decrease in material sales to $26.8 million. For that, the company blamed an expected decline in sales of host materials, which its customers -- namely Samsung (NASDAQOTH:SSNLF), which acquired OLED host materials producer Cheil Industries for that purpose last year -- aren't required to purchase from UDC, as its patents primarily cover the phosphorescent OLED emitter market. Don't be surprised, then, if material sales continue to drag down year-over-year revenue, partially offset for now by growth in phosphorescent emitter sales.
Finally -- to explain the large sequential increase in expectations from Q1 -- remember this quarter will also include half of Samsung's annual $60 million license fee, which increased from $50 million in 2014 per the terms of their respective long-term agreement with Universal Display.
3. Updates on Apple's plans
Following OLED's long-awaited inclusion in the Apple Watch, I'll also be listening for any hints of Apple's future plans for the cutting-edge display tech.
There's already plenty of speculation surrounding the topic. In April, Samsung reportedly formed a 200-person team to focus exclusively on Apple's display needs. Meanwhile, South Korean news site ETNews reported around the same time that Apple had contacted Japan OLED -- a joint venture launched last year by Japan Display, Sony, and Panasonic -- to produce OLED displays for next-gen iPads by the end of next year.
Only a few days ago, LG Display also revealed plans to invest around $900 million in a new OLED plant in Gumi, South Korea, with the goal of mass production by 2017. This news corroborated reports from South Korean media last month that discussed the Gumi plant and cited sources familiar with the matter as saying, "It is very likely that the first flexible iPhone may be introduced in 2018."
That's not to say Universal Display management would let the cat out of the bag. But it's been known to drop subtle hints at what's to come. During the first-quarter 2013 conference call over two years ago, for instance, Universal Display CEO Steve Abramson piqued my interest by curiously pointing out that Apple had just filed a patent for a flexible AMOLED wrist-worn display.
Finally, look for any revisions from Universal Display on existing full-year guidance. Last quarter, Universal Display reiterated its 2015 expectation for a "base" revenue forecast of $200 million, with a downside range of roughly 5% (to $190 million) and upside of 15% ($230 million). Similarly, analysts' models call for Universal Display's revenue to climb 11% this year to $212.1 million.
Keep in mind that Universal Display also offered the caveat that the OLED industry is "still at a stage where many variables can have a material impact on its growth."Whether those those variables fall into place as the year progresses remains to be seen. But one way or the other -- and if Universal Display's past volatility surrounding quarterly results is any indication -- patient Universal Display investors could be in for another wild ride.