Organic light-emitting diode researcher Universal Display (NASDAQ:PANL) reports Q2 2007 earnings results tomorrow morning. It's never earned a profit before. Will tomorrow be any different?

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts follow Universal Display, rating it a buy rather than a hold by a 5-to-1 margin.
  • Revenues. On average, the analysts expect to see a 10% rise in revenues to $3.3 million.
  • Earnings. Last year's Q2 loss is expected to shrink by a penny to $0.13 per share.

What management says:
Grand news out of Universal Display this quarter, folks. In May, the firm announced that it has inked a deal with LCD titan LG.Philips LCD (NYSE:LPL) "to supply LPL with certain of the Registrant's proprietary phosphorescent OLED materials for use in specified active matrix OLED display products" through the end of June 2008. The deal will yield both "commercial chemical sales and license fee revenues" for Universal Display.

What management does:
You just have to love Universal Display's mouthwatering gross margins -- but it must be a brief love, as you watch those gross profits quickly eaten up by operating costs.

Things may be getting ready to turn around in that regard, however. Reviewing the firm's results for the last two quarters, I see that while revenues have been flat (more on the revenue mix in a moment), selling, general, and administrative spending fell 12%, and R&D costs dropped 9%. Might we be approaching an inflection point, as Universal Display moves from figuring out how OLED technology works to commercializing it?

























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
It's also heartening to see that Universal Display appears to have the pole position in the OLED race, over archrival Cambridge Display (NASDAQ:OLED). Universal Display has about 30 points worth of gross margin on its foe, and an even larger lead in operating margins.

Our Motley Fool Rule Breakers team updated us on last quarter's results in May, contrasting what we saw: "[A] year ago, [when] commercial chemical sales constituted the smallest revenue category for Universal Display [and] it made almost all its money from contract research, licensing, and development chemical sales" with the new year's news: "Now commercial sales are the largest category, up more than threefold."

This followed a Q4 report in which: "The revenue mix showed a strong shift toward commercial chemical sales and royalties instead of development sales and contract research revenues. Actually making chemicals for commercial sales caused gross margins to drop somewhat, but operating and net margins ... improved substantially."

Personally, I'm not really seeing the alleged "substantial" improvement in operating and net margins -- and least not on the rolling basis shown above. Then again, I don't see much weakness in gross margins, either (again, on a rolling basis). My guess: This is because what Universal Display loses in having to buy raw materials and make chemicals from them, it is gaining back in economies of scale from that "threefold" increase in commercial sales.

What did we expect Universal to Display last quarter, and was the news glowing? Find out in:

And get the Fool skinny on why we like this company -- losses and all -- when you try out Rule Breakers for 30 days, absolutely free.

Fool contributor Rich Smith does not own shares of any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.