Why Universal Display Is Expanding Its Research Capabilities

By Steve Symington Markets Fool.com

Universal Display Corporation(NASDAQ: OLED) has roared to new highs in 2017, thanks to the accelerating proliferation of devices featuring its flagship OLED technology. But the company won't rest on its laurels anytime soon. To the contrary, late last week Universal Display took a step toward sustaining its innovative edge with the purchase of a 47,500-square-foot building in New Castle, Del.

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More specifically, the facility was purchased by Universal Display subsidiary and contract research organization (CRO) Adesis, which had already leased roughly 25,100 square feet of the building. But how, exactly, will nearly doubling Adesis' available workspace benefit Universal Display?

UNIVERSAL DISPLAY'S PROPRIETARY PHOLED EMITTER MATERIALS, IMAGE SOURCE: UNIVERSAL DISPLAY

Taking the next step toward long-term growth

For perspective, when Universal Displayannounced its $36 million acquisitionof Adesis almost one year ago, Universal Display CEO Steve Abramson lauded the move as "part of [Universal Display's] strategic growth plan."

With last week's announcement, Abramson stated:

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We are pleased to help scale up Adesis' operations as it continues to grow its CRO work in supporting the pharmaceutical, chemical, biomaterials, and catalysts industries. The integration of Adesis has progressed extremely well, and we believe the purchase of the building is the next step in facilitating the business' long-term growth plans. This will also support our increasing technical capabilities, as we expand our OLED product portfolio for new red, green, yellow and blue emitters and hosts.[emphasis mine]

What investorsshouldn't expect

Adesis' contributions won't arrive in the form of direct incremental revenue on any meaningful scale. Contract research services generated sales of just $1.9 million last quarter -- a tiny sliver of Universal Display's latest outlook for consolidated 2017 revenue of $260 million to $280 million.

When asked to elaborate on the expected growth and "linearity of" Adesis' business during this quarter's earnings conference call, Universal Display CFO Sidney Rosenblatt added, "We don't really believe Adesis for the foreseeable future is really going to move the needle in our revenue stream."

Speaking more to the emphasized portion of Abramson's conference-call statement, note that Adesis worked for years before its acquisition as a partner to Universal Display in advancing and accelerating the development and commercialization of its bread-and-butter phosphorescent OLED (PHOLED) emitter materials.And for perspective, recall that in the fourth quarter of 2016, Universal Display invested $15 million in a manufacturing facility owned by PPG Industries to help double the production capacity of its next-generation emitters. Sure enough, earlier this month Universal Display shares skyrocketed when its first-quarter results revealed that material sales had climbed an eye-popping 92% year over year to $46.6 million, a new company record.

That's not to say Adesis isn't planning for a ramp-up in growth across its various supplementary end markets. But given the stunning growth at greater scale that's currently under way in the OLED industry -- with electronics industry titans such asSamsung Display, LG Display, and even Apple investingbillionsto build and secure new manufacturing capacity for OLED displays -- Universal Display's primary focus right now lies in ensuring it will remain a central enabler and beneficiary of that trend. By giving Adesis more breathing room to expand its work to that end with this new facility, Universal Display is doing just that.

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Steve Symington owns shares of Apple and Universal Display. The Motley Fool owns shares of and recommends Apple and Universal Display. The Motley Fool has a disclosure policy.