Credit: Universal Display.
Turn down the lights, Universal Display Corporation (OLED +0.18%) investors, because your favorite OLED technologist reports third-quarter results Thursday after the market close. After last quarter's surprise net loss on a big inventory writedown, you can bet the market will be watching closely to see what Universal Display has accomplished since then.
The headline numbers
First, Universal Display hasn't provided specific guidance for the third quarter, but did tell investors after Q2 to anticipate a stronger second half of 2015. Analysts, on average, expect Universal Display's third-quarter revenue to grow 28.6% year over year, to $38.3 million, and translate to earnings of $0.08 per diluted share. Keep in mind that this doesn't include one of Samsung's (NASDAQOTH: SSNLF) twice-per-year $30 million royalty payments, which Universal Display receives in the second and fourth quarters of each year.
Last quarter, that royalty payment largely offset the aforementioned $33 million writedown of OLED host material after Samsung -- UDC's single largest customer -- reduced demand more quickly than anticipated due to stronger-than-expected sales of new products that don't use the material. While Universal Display's customers are required to buy and license its patent-protected OLED emitter materials -- the newest of which are incorporated, by the way, into Samsung's latest products -- they are not obligated to purchase host materials from the company if they so choose. Even so, investors should note Universal Display's emitter business has always been its primary expected source of long-term growth.
The LG factor
We should also anticipate hearing comments on LG Display's (LPL 0.23%) latest outlook for OLED TVs. Almost two weeks ago, LG Display reduced its OLED TV sales forecast to between 400,000 and 500,000 units in 2015 -- down from their prior range of 600,000 -- and tentatively suggested 1,000,000 units in 2016 would be realistic -- down from 1.5 million previously. Coincidentally, this very concern led Goldman Sachs analyst Brian Lee to reduce his near-term outlook on Universal Display shares only a week earlier.
Without providing specifics, however, LG Display management also noted that much of this decreased forecast is due to a significant shift in product mix away from 55-inch OLED TV models, and toward larger 65-inch and 77-inch models. And because Universal Display's material sales rely not on units shipped, but rather the surface area of glass covered by that material, it may not negatively affect overall results.
We should also listen for how this affects royalties from LG Display. Rather than paying larger lump-sum royalty payments, as Samsung opted to do, LG Display's agreement dictates that it pay running royalties on sales of licensed products.
Live from Cupertino?
I'll also be listening closely for hints from Universal Display management on whether Apple (AAPL 1.19%) is planning to expand its use of OLED from "just" the display in the Apple Watch, the first version of which is provided primarily by LG Display. After all, in a conference call more than two years ago, Universal Display CEO Steve Abramson raised my eyebrows when he curiously mentioned that Apple had recently filed a patent for a flexible wrist-worn display.
In addition to that hint materializing in the Apple Watch, since then, we've seen an increasing number of reports suggesting Apple may be considering a complete transition away from LCD and toward OLED for its various iDevices. Just last month, for example, Korean news site ETNews suggested that Samsung has not only joined LG Display as a secondary Apple Watch display supplier, but is also being considered by Apple to potentially supply similar flexible OLED Displays for the yet-to-be-unveiled iPhone 7.
Looking forward
Finally, as visibility increases into the remainder of the year, don't be surprised if Universal Display narrows its existing 2015 guidance. Last quarter, Universal Display reiterated that guidance, which calls for 2015 revenue of $200 million, with a downside range of 5% (to $190 million), and -- if the right variables in these early stages fall into place -- "upside potential" of 15% (to $230 million).
At this point, it's also fair to say that long-term investors shouldn't be particularly concerned with that short-term outlook. As long as the industry continues to grow its acceptance and use of Universal Display's flagship technology, I'm still convinced the price of its stock should eventually respond in kind.
