OLED provider Universal Display (NASDAQ:OLED) reported Q2 FY2023 results topping analysts' expectations, with revenue up 7.33% year on year to $146.6 million. Universal Display made a GAAP profit of $49.7 million, improving from its profit of $41.5 million in the same quarter last year.
Universal Display (OLED) Q2 FY2023 Highlights:
- Revenue: $146.6 million vs analyst estimates of $128.7 million (13.8% beat)
- EPS: $1.04 vs analyst estimates of $0.76 (36.4% beat)
- The company reconfirmed revenue guidance for the full year of $580 million at the midpoint
- Free Cash Flow was -$8.4 million, down from $38.5 million in the previous quarter
- Inventory Days Outstanding: 498, up from 448 in the previous quarter
- Gross Margin (GAAP): 78.1%, in line with the same quarter last year
Serving major consumer electronics manufacturers, Universal Display (NASDAQ:OLED) is a provider of organic light emitting diode (OLED) technologies used in display and lighting applications.
Universal Display Corporation was founded in 1994 by Sherwin Seligsohn after he visited the electrical engineering school at Princeton University and observed research on self-emissive organic materials. In 1996, Universal Display went public with a research contract with Princeton, 3 part-time employees, and one patent pending.
Organic light emitting diodes or OLEDs are thin, lightweight devices that emit light that can be manufactured on both flexible and rigid substrates, which make them suitable for color displays and other lighting products. OLED displays have been capturing market share from inorganic light emitting diodes or LEDs due to superior power efficiency, contrast ratio, video response time, and manufacturing cost. As such, OLED technology is commonly employed in mobile phones, TVs, wearables, AR/VR devices, and automotive markets among others.
Universal Display generates revenue by entering into long-term agreements with our customers through (1) commercial supply agreements for the purchase of specific OLED materials and/or (2) patent license agreements related to the manufacture of display and lighting devices. Commercial supply agreements often involve multi-year purchase commitments for mass production facilities, which gives customers volume discounts and preferential pricing.
Competitors offering OLED or competing lighting technologies include Sumitomo Chemical (TSE:4005), Idemitsu Kosan (TSE:5019), and Cynora.Sales Growth
Universal Display's revenue growth over the last three years has been strong, averaging 22.3% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $136.6 million in the same quarter last year to $146.6 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

While Universal Display beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 7.33% year on year. Universal Display's growth, however, flipped from negative to positive this quarter. This encouraging sign will likely be welcomed by shareholders.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Universal Display's DIO came in at 498, which is 150 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Universal Display's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 78.1% in Q2, down 0.2 percentage points year on year.

Gross margins have been relatively stable over the last year, averaging 76.7%. Universal Display's gross margins are some of the best in the semiconductor peer group, driven by strong pricing power from its differentiated, value-add products.
Profitability
Universal Display reported an operating margin of 53.1% in Q2, up 7.9 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.

Universal Display's operating margins have been trending up over the last year, averaging 48%. On top of that, the company's margins are some of the highest in the semiconductor industry, driven by its highly efficient operating model and economies of scale.
Earnings, Cash & Competitive Moat
Analysts covering Universal Display expect earnings per share to grow 26.3% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Universal Display's free cash flow came in at -$8.4 million in Q2, down 137% year on year.

As you can see above, Universal Display produced free cash flow of just $49.6 million in the last year, resulting in a measly 9.06% free cash flow margin. Universal Display will need to improve its free cash flow conversion if it wants to stay competitive.
Universal Display's average return on invested capital (ROIC) of 56.7% over the last five years implies that it has a strong competitive position and was able to invest in profitable growth over time.
Key Takeaways from Universal Display's Q2 Results
With a market capitalization of $6.64 billion, Universal Display is among smaller companies, but its $559.1 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by how significantly Universal Display blew past analysts' revenue expectations this quarter. We were also glad that its operating margin improved. On the other hand, its inventory levels materially increased. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 8.2% after reporting and currently trades at $150.5 per share.
Is Now The Time?
When considering an investment in Universal Display, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. There are several reasons why we think Universal Display is a great business. First, its revenue growth has been strong. And while its cash burn raises the question of whether it can sustainably maintain its growth, the good news is its impressive gross margins are indicative of robust pricing power, and its impressive operating margins are indicative of a highly efficient business model.
Universal Display's price-to-earnings ratio based on the next 12 months is 32.1x. Looking at the semiconductors landscape today, Universal Display's qualities really stand out, and we really like it at this price.
Wall Street analysts covering the company had a one year price target of $161.2 per share right before these results, implying that they saw upside in buying Universal Display even in the short term.
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