Universal Display Corporation (OLED 4.36%) announced fourth-quarter 2015 results Thursday after the bell. With shares of the OLED technologist down 14% as of this writing, it's apparent the market isn't pleased.
So what happened? Let's start with the headline numbers.
For the full-year 2015, revenue came in roughly flat over 2014 at $191 million. That's below Universal Display's latest guidance, which it narrowed last quarter to call for 2015 revenue of $200 million, plus or minus 3%.
"Our fourth quarter results were less-than-anticipated," explained Universal Display CFO Sidney Rosenblatt, "which we believe was primarily due to year-end inventory management by our customers and product mix weighing more to our lower priced emitters. As we have noted in the past, short-term forecasting in this emerging OLED market environment is difficult, even though we are confident that this is a long-term growth market."
Even so, quarterly revenue rose 11% year over year to $62.3 million, including a 23% increase in royalty and license fees to $34.4 million, and a 1% decline in material sales to $27.8 million. On the former, note royalties include a $30 million payment per the terms of Universal Display's patent license agreement with Samsung Display. Universal Display receives these payments in the second and fourth quarters of each year.
Also similar to last quarter -- and as I suggested in my earnings preview earlier this week -- material sales declines came primarily as a $4.9 million increase in emitter sales was more than offset by a $5.3 million drop in host material sales. Remember, Universal Display's host materials don't enjoy the same patent protection as its phosphorescent emitters, so customers are not required to buy host materials from the company should they find a suitable alternative. That's why Samsung last year acquired an affiliate company -- and OLED host materials producer -- then named Cheil Industries, which is likely the primarily culprit behind UDC's host material sales declines. Also of note here: Remember there's a one-quarter lag in running royalties received from licensed OLED products sold by LG Display (LPL 0.51%), which recently confirmed around 50% of its total OLED TV unit shipments in 2015 were sold in the fourth quarter alone.
Meanwhile, Universal Display's operating income for the fourth quarter rose 56% year over year to $26.6 million, primarily as cost of materials fell 33% to $8.1 million. On the bottom line, Universal Display's net income rose 38.2% year over year to $18.1 million, and climbed 39.3% on a per-share basis to $0.39. By comparison -- and while we typically don't lend much credence to Wall Street's short-term expectations -- analysts' consensus estimates predicted Universal Display would achieve fourth-quarter revenue of $71.5 million and earnings of $0.51 per share.
The light at the end of the tunnel
But that certainly doesn't mean Universal Display's long-term growth story is broken.
"We believe that 2016 is poised to be a year in which the OLED industry builds meaningful new capacity for the continued proliferation of OLEDs in the marketplace," Rosenblatt elaborated. "This groundwork is paving the foundation for the next wave of expansion in OLED mass production, which we believe is set to commence in 2017."
During the subsequent conference call, Universal Display CEO Steve Abramson reiterated this thought, saying this year panel makers are in what they describe as a "capacity build mode." Further out, Abramson says, 2017 revenue "can grow significantly based on new production capacity growth of at least 50% from 2015."'
In the first half of 2017, for example, LG Display is not only slated to begin mass production on flexible mobile OLED displays on an $800 million Gen-6 manufacturing line in the first half of 2017, but also plans to invest $700 million to increase its Gen-8 OLED TV manufacturing capacity by more than 40%. That's not to mention LG Display's Nov. 2015 announcement of a massive new $8.5 billion OLED TV and flexible OLED panel plant, which will cover an area equivalent to roughly 14 football fields and aims to begin mass production in the first half of 2018.
Meanwhile, Samsung Display has confirmed it will maintain a much higher rate of operations and profitability from its OLED business in 2016, driven partly by its decision to diversify its customer base away from affiliate Samsung Electronics. In addition, Abramson noted China-based display leader BOE -- with whom Universal Display most recently signed an expanded evaluation agreement in mid 2014 -- is set to start operations on its own $3.4 billion Gen-6 AMOLED plant in the first half of 2017.
In the meantime, however, there isn't a tremendous amount of new manufacturing activity commencing in 2016. As such, Universal Display anticipates revenue in 2016 will climb 15% year over year to roughly $220 million, plus or minus 5%, or to a range of $209 million to $231 million. By contrast, analysts' consensus estimates predicted 2016 revenue of $246.3 million.
This also comes with the caveat that we're still in the early stages of Universal Display's long-term story where, as the company says, "many variables can have a material impact on its growth." Nonetheless, if there's one thing the market hates more than being effectively told to "hurry up and wait," it's uncertainty -- even if that uncertainty is only expected to persist only through this year. In the end, while I'm personally content with Universal Display's position as a shareholder, it's no surprise the market is bidding shares down today.