Universal Display Corporation (NASDAQ:OLED) released strong third-quarter 2015 results Thursday evening, driven by a healthy increase in sales of its flagship OLED emitters. The market responded in kind, driving shares of the OLED technologist up nearly 13% Friday.
Let's tackle the headline numbers first: Universal Display's quarterly revenue rose 19.8% year over year, to $39.4 million, which resulted in 62.8% growth in net income to $7 million, or $0.15 per diluted share. By contrast, analysts' consensus estimates only called for earnings of $0.08 per share on revenue of $38.3 million.
"We are pleased to report strong revenues, operating income, and earnings in the third quarter as demand increased from customers, due to higher fab utilization rates and new capacity coming online," added Universal Display CEO Sidney Rosenblatt.
Driving Universal Display Corporation's top line was a 24% increase in material sales to $34.1 million, including a 56% increase in the company's flagship phosphorescent OLED emitter sales to just below $31.5 million, and a 63% decline in host material sales, to $2.7 million.
Regarding the latter, customers are not required to purchase OLED host materials from Universal Display in order to utilize its patent-protected emitters. And this decline likely stems from Samsung's (NASDAQOTH:SSNLF) decision not to use Universal Display's host materials in its newest devices -- a development that notably resulted in last quarter's big inventory writedown as demand for older products using Universal Display's host materials declined faster than expected. As I suggested in my earnings preview earlier this week, however, emitters have always been Universal Display's primary growth driver, so the continued decline in host sales isn't cause for concern.
Meanwhile, Universal Display's royalty and license sales declined roughly 2.5% year over year, to just over $5.2 million. But note this doesn't include one of Samsung's twice-per-year, $30 million license fees (up from $25 million apiece in 2014), which Universal Display receives in the second and fourth quarters of each year. This also reflects a one-quarter lag in running royalties paid on licensed OLED products from LG Display (NYSE:LPL), per the terms of LG Display's own long-term license signed with Universal Display earlier this year.
The LG factor
Abramson also pointed out that, in August, LG Display announced plans to invest $8.5 billion through 2018 in advanced displays, with nearly all of those capital expenditures allocated to OLED development. In addition, LG Display's manufacturing yields for 55-inch OLED televisions are now comparable to competing LCD TVs, and it should be able to achieve similar yields -- and thereby significantly reduce prices -- for its larger 65- and 77-inch models in the coming quarters.
Relatedly, several analysts during the call also predictably quizzed Universal Display management on the effect of LG Display's recent move to reduce its forecast for OLED TV unit sales. Recalling LG Display's ambitious planned investments into the technology, Rosenblatt responded that Universal Display continues to "believe that LG is committed to OLED TV and expanding their own base and their OEM customer base," and that "LG believes that the OLED TV business is one that will propel them going forward."
At the same time, Abramson admitted that LG's move to reduce its near-term OLED TV outlook "clearly does have an impact on [Universal Display's] business for the year," and partially contributed to Universal Display's own narrowed guidance.
More specifically, Universal Display still expects 2015 revenue of roughly $200 million, but narrowed its guidance range to plus or minus 3%. Previously, UDC's outlook called for full-year revenue of $200 million, with a downside range of 5%, and "upside potential" of 15%.
That might not sound like a good thing at first; but with Universal Display stock still down around 10% during the past three months even after today's pop -- in part thanks to a downgrade last month centered around these very OLED TV concerns -- investors are likely relieved the negative effect of LG Display's near-term forecast wasn't even more pronounced. Combine that relief with Universal Display's solid third-quarter financial performance, as well as its overwhelmingly positive long-term potential, and I think the stock has plenty of room to run from here.