Wednesday, November 6, 2013. Until recently, Universal Display Corp. (“UDC”; NASDAQ: OLED) had been able to hide the fact that its sales revenue from red emitter OLED materials had been on a dramatic and sustained decline. UDC’s unexpected second quarter red emitter sales losses caused it to issue explanations and justifications. Actual industry sales data shows the magnitude of the loss, and suggest the problem is a far more serious one than UDC has acknowledged. Only when one looks at UDC’s red sales declines relative to the actual growth in OLED display sales volumes can one realize just how meaningful and severe the losses have been for UDC.
According to data compiled from the OLED Association’s quarterly industry sales surveys the number of OLED displays sold for mobile phones increased from 31.5 million units in the second quarter of 2012 to 61.2 million units in the second quarter of 2013, equal to a 94% increase. During the same period UDC’s red emitter sales went from $5.1 million to $3.6 million, equal to a 29% decrease. See our analysis here.
UDC experienced this astonishing sales loss while continually claiming that its patents and its contract with Samsung protect it from competition and that UDC “owns” phosphorescent OLED, suggesting it has a monopoly that protects its pricing and that guarantees it a 100% share of the market. UDC’s reported results contradict these assertions. The OLED Association is an organization that represents the OLED industry, including Samsung and LG, in the areas of public policy, environment, market creation, workforce development and investor relations. The organization maintains a website located at www.oled-a.org.
Comparing the OLED Association data to UDC’s disclosed red sales historically shows a stunning inconsistency that UDC has not explained. Even before UDC’s red emitter sales were down 29% in the second quarter (while industry sales were up 94%), the same disturbing pattern was evident in the data for the first quarter of 2013. OLED mobile display shipments were up 30% in Q1 of 2013 while UDC’s red sales were down more than 41% compared to the prior year quarter.
UDC only commenced disclosing a breakdown of its OLED material sales by color this year. The disclosures of year-over-year comparable data show that last year red material sales were undergoing a tremendous absolute decline that UDC did not disclose to investors at the time. According to UDC’s own disclosures, UCD’s quarterly red material sales declined 45% over the course of 2012 and the first quarter of 2013, going from a peak of $5.1 million in the second quarter of 2012 to a trough of $2.8 million in the first quarter of 2013, even as quarterly mobile OLED display shipments increased 24% over the same period.
Looking at UDC’s red emitter sales per square inch of OLED display sold makes UDC’s weakness even more striking. The analyst at Canaccord found a 66% decline in UDC’s red emitter sales per square inch of OLED display since the beginning of 2012. This includes a drop of 32% in Q3 2012 and 36% in Q1 2013 in UDC’s red emitter sales per square inch on a consecutive quarter basis. UDC didn’t disclose these events at the time, and has yet to explain the conflict between its poor results and the assurances it has given investors. See the Canaccord figures here.
UDC claims the declines are due to undisclosed sales terms that include volume discounts (apparently cumulative) that are supposedly part of its supply contract with Samsung signed in August 2011, as well as to supposed improved production efficiency at Samsung. However, UDC made these claims without disclosing the terms and only after they had a drastic negative impact, not when the Samsung deal was first disclosed or as UDC was experiencing the losses.
The decline in red sales goes to show to weakness of UDC’s negotiating position back in 2011 with Samsung. Unfortunately for Samsung, it signed a deal with UDC in 2005 before the OLED materials market developed and before a string of patent decisions against UDC, which have highlighted the weakness of its intellectual property claims.