Higher Materials Costs Crimped Universal Display's Q3 Gross Margin

Universal Display Corp. CEO Steve Abramson warned investors on a Q3 call Thursday not to read too much significance into the decline in sales to panel maker BOE, its third-largest customer. Universal drew only 7% of its revenue from BOE in Q3, half the share it contributed in the year-earlier quarter, said UDC's 10-Q.

“Customer ordering patterns can be lumpy" quarter to quarter "for various reasons,” said Abramson. In BOE's case, the Chinese panel maker bought “a significant amount of inventory” from Universal in 2021's Q1, he said. Though BOE’s Q3 panel sales were sequentially lower than in Q2, the “substantial order” it placed in Q1 fulfilled most of its purchasing requirements “pretty much for the year,” he said. BOE’s buying activity is “in line with our expectations,” he said.

UDC lacks the ability to pass on the higher costs of iridium and other raw materials because “all of our long-term contracts have pricing built into those contracts,” said Abramson. Its Q3 cost of sales increased by $8.1 million from the 2020 quarter, said the 10-Q. Gross margin as a percentage of revenue fell to 78% from 80%, “primarily due to the increase in costs associated with the introduction of new red and green emitters,” it said. Supply shortages pushed iridium costs exponentially higher since earlier this year, reported Statista.

The OLED materials and technology leader continues making “excellent progress” on a commercial phosphorescent and blue-emissive system for OLED screens, said Abramson. It believes a commercial phosphorescent blue system for OLED displays “is a question of when and not if,” he said.

UDC sees organic vapor jet printing technology as "a multibillion-dollar revenue opportunity," though the commercial launch of OVJP "is still a few years away," said Abramson, repeating the messaging from past earnings calls. OVJP is a "novel" printing process that will enable panel makers to use a gas vapor stream to dry print red, green and blue small-molecule materials directly onto a substrate without the need of a mask set or solids, potentially lowering OLED panel costs and increasing production yields, he said. UDC teams are working on "the key subsystems to prove the viability of OVJP for large area manufacturing," he said. "Achieving this milestone is a critical element in the building blocks for alpha system design."

OLED displays are expected to penetrate about 3% of the “addressable TV market” by the end of 2021, said Abramson. “While 3% is a low-single-digit number, it also shines a tremendous light on the incredibly large adoption curve potential for OLED TVs,” he said. Panel makers and OEMs are preparing for “a new wave of investment and product proliferation” into “budding consumer opportunities” in augmented and virtual reality, smartwatches, gaming, automotive and lighting, he said.

The year began with OLED penetrating about a third of global smartphone shipments, which is expected to widen to about 45% penetration by year-end, said Abramson. OLED adoption in smartphones is “broadening beyond the premium segment and into the mid-range,” and even into some low-end product, he said. As more panel makers jump into OLED smartphones, panel pricing is expected to decline and penetration “is poised to expand further,” he said.