Apple Supplier Japan Display Braces for iPhone 8 OLED Shift

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On Wednesday, Apple (NASDAQ: AAPL) display supplier Japan Display, reported its financial results for the first quarter of its fiscal 2017.

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The company said that its revenue of 188.6 yen ($1.7 billion) came in "modestly" ahead of its forecasts , as display shipments to the United States and Europe made up for a "slowdown" in the company's shipments to China.

Unfortunately, the company reported an operating loss of 14.4 billion yen ($130 million) -- larger than the 3.4 billion yen ($31 million) loss it booked in the same quarter a year ago -- as the company sped up development of organic light emitting diode (OLED) display technology and began mass production at its Hakusan manufacturing plant.

Although Japan Display is clearly investing heavily in trying to develop OLED technology -- its research and development costs rose from 3.4 billion yen ($31 million) in fiscal Q1 2016 to 5.6 billion yen ($50 million) in its most recent quarter -- the company's tardiness to the OLED party will take a toll on its financial results this fiscal year.

The OLED transition and price competition are hurting demand

Japan Display said in an investor presentation that due to the confluence of "major customers" adopting OLED in their devices, and "severe price competition" among suppliers, it expects demand for its smartphone displays to "be stagnant for [the] immediate future."

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I'm not sure if "stagnant" was the right word choice here, as it implies somewhat flattish sales. Japan Display went on to say that it could potentially see sales plunge by between 15% and 25% during its fiscal 2017.

A perfect storm

Japan Display's problem is twofold. Firstly, the company was already struggling to turn a profit even when all of Apple's iPhone models, as well as many other flagship smartphones, used LCDs.

With the industry apparently shifting to OLED-based displays -- which Japan Display can't yet supply -- the company is clearly headed for, at a minimum, a short-term revenue decline. And that's what the company is guiding for.

At the same time, Japan Display must step up its investments in OLED technology so that it has a shot at being a relevant display supplier to Apple and others in the future. This combination of lower sales and elevated research and development spending means rather wide operating losses are on the horizon.

If Japan Display can weather these losses and develop the OLED display manufacturing capabilities that will be required to stay competitive in the smartphone marketplace (and to keep Apple as a customer), then the company could have a reasonable future ahead of it.

But if it can't ramp credible OLED technology into production in a timely fashion (and catch up with giants like Samsung (NASDAQOTH: SSNLF) Display, which word has it will be the sole supplier of OLED screens for this year's premium iPhone), it might find itself so far behind that it's impossible for it to get back into the race again.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.