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Universal Display Suffers a Short-Term Hiccup

Image source: Universal Display.

Universal Display Corporation (NASDAQ: OLED) released weaker-than-expected second-quarter 2016 results Thursday after the market close, and reduced its full-year guidance to boot. With shares down around 9.5% as of this writing, it's apparent the market isn't pleased.

But before we get to why, let's cast some light on how the OLED technologist capped the first half of what management has dubbed a "year of building."

The headline numbers

First, keeping in mind that Universal Display did not provide specific quarterly guidance, second-quarter revenue grew 10.8% year over year, to $64.4 million, and translated to net income of $21.8 million, or $0.46 per diluted share. That's up from a net loss of $11.8 million, or $0.25 per share, in last year's second quarter, which was due to a $33 million writedown of inventory consisting of existing host material and associated work in process. One additional note on this quarter: UDC's bottom line also included $1.8 million of currency loss related to its acquisition during the quarter of 500 issued and pending OLED patents from BASF.

For perspective -- and while we typically don't pay much attention to Wall Street's quarterly demands -- analysts' consensus estimates predicted Universal Display would turn in slightly higher revenue of $68.7 million, and net income of $0.50 per share.

Digging deeper into Universal Display's top line, material sales fell 8.3% year over year, to $22.3 million. But as I warned in my earnings preview earlier this week, this drop was primarily due to a $2-million decline in sales of OLED host materials -- which, unlike its patented phosphorescent OLED emitter materials, UDC customers are not required to purchase from the company, as they aren't covered under its treasure trove of more than 4,100 issued and pending patents.

Meanwhile, royalty and license fees climbed 24.6% year over year, to $42 million, including $37.5 million recognized under Universal Display's long-term patent and material-supply agreement with Samsung. As a reminder, Samsung's license fee this year is $75 million, up from $60 million in 2015, and is recognized in two equal payments in the second and fourth quarters of each year.

On acquisitions, new license deals

During the subsequent conference call, Universal Display also offered some color on its two acquisitions in Q2. First, regarding its $36 million acquisition of contract research organization Adesis, Universal Display CEO Steve Abramson stated the purchase "centers on bolstering our technical capabilities to help us reduce costs, accelerate product cycles, and expand our product portfolio."

UDC had worked with Adesis for more than five years prior to the acquisition, and ultimately grew to represent roughly half of Adesis' business. So now that Adesis is a wholly owned subsidiary of UDC, its primary goal is to expedite the material cycle from invention to process development and production.

Next, the aforementioned BASF OLED patent acquisition primarily centers around IP for phosphorescent blue emissive systems. Abramson further noted that, while BASF had invested in OLED technology for the past 15 years, it had not progressed its technology to the commercial stage. Universal Display believes that it will be able to better leverage this IP with its enormous complementary patent portfolio and existing commercial blue emitter research.

Finally, in conjunction with today's earnings, Universal Display also announced a new long-term license and material supply agreement with Chinese display panel-maker Tianma Micro-electronics. However, we shouldn't expect to see significant revenue recognized under this agreement just yet.

Universal Display management stated that, based on recent reports, Tianma is building an OLED production line at its Gen-5.5 display-fabrication plant in Shanghai, and is currently planning to set up a separate line at its Gen-6 plant in Wuhan with a flexible OLED display capacity of roughly 30,000 plates per month. But production for these facilities is tentatively slated to begin in the second half of next year. Nonetheless, this is an encouraging development as Universal Display works to continue diversifying its customer base.

Looking forward

Universal Display put a temporary damper on all this enthusiasm by revising its guidance. More specifically, Abramson explained during the call that the underlying growth fundamentals of Universal Display's long-term outlook remain intact. But over the near term, the company now anticipates its impending ramp in revenue growth will be delayed roughly six months due to a combination of delays in the adoption of higher-margin new emitters, current revenue trends, and UDC's belief that its customers are utilizing materials more efficiently and optimizing recipes ahead of their respective expansions in manufacturing capacity.

Universal now expects full-year 2016 revenue to be in the range of $190 million to $200 million. That's a reduction from previous guidance, which called for 2016 revenue to grow 15% year over year, plus or minus 5%, or to a range of $208.7 million to $230.6 million.

That guidance also came with the disclaimer that "the OLED industry is still at a stage where many variables can have a material impact on its growth." While it's disappointing to see those expectations fall, it shouldn't be entirely shocking to see Universal Display adjust its outlook as it gains more clarity into its near-term growth. In the end, with this decline closely following Universal Display shares hitting all-time highs earlier this week, I won't be surprised if long-term investors use this as an opportunity to open or add to their positions.

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Steve Symington owns shares of Universal Display. 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.