What to Expect As Universal Display Continues Its "Year of Building"

By Markets Fool.com

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Image source: Universal Display.

Universal Display Corporation (NASDAQ: OLED) is set to release second-quarter 2016 results this Thursday after the market close. With shares of the OLED specialist up more than 30% year to date and sitting near an all-time high as of this writing, now's a great time for investors to start thinking about what to expect.

First, note Universal Display hasn't provided specific quarterly financial guidance. So for perspective -- and with the caveat that we don't pay much attention to Wall Street's short-term demands -- analysts' consensus estimates predict the company will report 18.2% year-over-year growth in revenue, to $68.7 million, and a 22% increase in earnings per share, to $0.50.

To be fair, that might seem like a big jump from last quarter, when Universal Display saw revenue decline 4.8% year over year to $29.7 million, which translated to net income of $1.9 million, or $0.04 per share. But keep in mind the second quarter will include revenue from Universal Display's long-term license agreement with Samsung Display, under which it recognizes bi-annual payments received in Q2 and Q4 of each year. Together in 2016, those two payments will total $75 million, up from $60 million in 2015.

To that end, listen for Universal Display to break down itsothersignificant source of revenue in material sales. For example, while royalty and license fees outside of the Samsung agreement increased 20.5% year over year last quarter, to $5.3 million, material sales simultaneously declined 9% year over year, to $24.3 million.

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However, that decline also isn't indicative of a lack of demand for Universal Display's OLED materials. During the subsequent conference call, management pointed out that material buying patterns can vary significantly from quarter to quarter in these early stages of growth. And even so, sales of Universal Display's patented phosphorescent emitter materials climbed 8% year over year. And the decline was primarily due to negligible sales during the quarter of host materials, as compared to $4.4 million in host material revenue in last year's second quarter. Remember, unlike its lucrative emitters, UDC customers are notrequired to purchase host materials from the company since they aren't covered under its massive portfolio of over 3,600 issued and pending OLED-centric patents.

To that end, I'll also be listening closely for more details surrounding Universal Display's 87 million euro acquisition of 500 issued and pending OLED patents from BASF, as well as its $36 million acquisition of contract research organization (CRO) Adesis last quarter.

I'm particularly curious about the latter. Adesis, according to Universal Display, worked closely as a partner in the few years prior to the acquisition helping to "advance and accelerate a number of Universal Display's product offerings." And going forward, Adesis' team of 40 chemists will obviously help advance its initiatives and widen the company's already formidable IP moat.

But as I pointed outa little over a month ago, Adesis also served multiple other end markets including pharma, biotech, and catalysis, and reportedly generated annual revenue in the tens of millions last year. Moreover, Adesis president Andrew Cottone indicated that, in addition to supporting Universal Display's OLED ambitions, his company anticipates benefiting from Universal Display's "financial and business acumen to better support our clients [...] and reinforce our positioning for continued growth as a specialty chemical CRO."

It will be interesting to see, then, what kind of incremental financial contribution Adesis is expected to provide from these supplemental markets as it operates as a subsidiary of Universal Display.

Next, keep your ears open for updates on royalties paid by Universal Display's second-largest customer, LG Display (NYSE: LPL). Recall that LG Display pays running royalties on sales of licensed products with a one-quarter lag. So, I was somewhat surprised last quarter by the lack of a significant step up in licensing and royalty revenue considering LG Display previously confirmed that roughly 50% of its OLED TV unit shipments last year were sold in the fourth quarter. However, during the Q&A portion of last quarter's conference call, Universal Display CFO Sid Rosenblatt indicated those reported sales are from products LG display sells toLG Electronics, which means royalties may be paid with "different timing than when LG Electronics reports their sale."

In any case, royalties from LG Display should continue to increase as the company ramps production of OLED TVs going forward (from 400,000 units shipped last year to a target of one million in 2016). But even in these early stages, it would be nice to get a better picture of LG Display's financial contribution to Universal Display's top and bottom lines.

Next, I'd be remiss if I didn't mention the big catalyst so many credit for Universal Display's recent gains: Apple (NASDAQ: AAPL). Namely, the increasing number of reports indicating Apple is planning to expand its use of OLED from "just" the Apple Watch to its other iDevices, starting with its iPhones. That's not to say I expect Universal Display to directly confirm this transition, but considering Rosenblatt himself caused Universal Display shares to rise late last year after asserting he thinks it's "only a matter of time" before Apple puts OLED into its iPhones, you won't find OLED investors complaining if he inadvertently drops hints about Cupertino's plans.

Finally, listen for any changes to Universal Display's full-year guidance, which currently calls for 2016 revenue growth of 15%, plus or minus 5%, equating to a range of $208.7 million to $230.6 million. Again, we're still in the early innings of growth for the OLED industry, and Rosenblatt last quarter reminded investors that they "expect 2016 to be a year of building" as various OEMs invest billions to bolster their OLED manufacturing capabilities. Still, given the short-term-oriented nature of our market, any changes to Universal Display's guidance this year could influence the direction of its stock as impatient investors wait for that growth story to unfold.

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Steve Symington owns shares of Apple and Universal Display. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Universal Display. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.