Universal Display (NASDAQ:OLED) Surprises With Q4 Sales But Full Year Guidance Underwhelms

Full Report / February 23, 2023
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OLED provider Universal Display (NASDAQ:OLED) reported Q4 FY2022 results that beat analyst expectations, with revenue up 15.6% year on year to $169 million. On the other hand, guidance for the full year missed analyst expectations with revenues guided to $575 million at the midpoint, or 8.54% below analyst estimates. Universal Display made a GAAP profit of $65.1 million, improving on its profit of $45.9 million, in the same quarter last year.

Universal Display (OLED) Q4 FY2022 Highlights:

  • Revenue: $169 million vs analyst estimates of $149 million (13.5% beat)
  • EPS: $1.36 vs analyst estimates of $0.94 (45.4% beat)
  • Management's revenue guidance for upcoming financial year 2023 is $575 million at the midpoint, missing analyst estimates by 8.54% and predicting -6.75% growth (vs 11.2% in FY2022)
  • Free cash flow was negative $8.74 million, down from positive free cash flow of $28.3 million in previous quarter
  • Inventory Days Outstanding: 554, up from 413 previous quarter
  • Gross Margin (GAAP): 82.2%, up from 76.4% 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 20.8% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $146.2 million to $169 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).

Universal Display Total Revenue

This was an OK quarter for Universal Display with revenues growing 15.6%, ahead of analyst estimates by 13.5%. This marks 10 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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.

Universal Display Inventory Days Outstanding

This quarter, Universal Display’s inventory days came in at 554, 211 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Universal Display's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 82.2% in Q4, up 5.8 percentage points year on year.

Universal Display Gross Margin (GAAP)

Gross margins have been relatively stable over the last year, averaging 78.1%. Universal Display's gross margins remain one of the highest in the semiconductor industry, driven by strong pricing power from its differentiated chips.


Universal Display reported an operating margin of 48% in Q4, up 0.9 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Universal Display Adjusted Operating Margin

Operating margins have been trending down over the last year, averaging 46.8%. However, Universal Display's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to be fairly flat over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Universal Display's free cash flow came in at -$8.74 million in Q4, down 120% year on year.

Universal Display Free Cash Flow

Universal Display has generated $84.3 million in free cash flow over the last twelve months. This is a solid result, which translates to 13.7% of revenue. That's above average for semiconductor companies, and should put Universal Display in a relatively strong position to invest in future growth.

Universal Display’s average return on invested capital (ROIC) over the last 5 years of 64.2% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Universal Display's Q4 Results

With a market capitalization of $6.05 billion Universal Display is among smaller companies, but its more than $577.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were impressed by how strongly Universal Display outperformed analysts’ revenue expectations this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that Universal Display's revenue guidance for the full year missed analyst's expectations and the revenue guidance for the full year was downgraded. Overall, this quarter's results were not the best we've seen from Universal Display. The company is up 3.73% on the results and currently trades at $134.24 per share.

Is Now The Time?

Universal Display may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Universal Display is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last three years. On top of that, its impressive gross margins are indicative of robust pricing power, and its impressive operating margins are indicative of an highly efficient business model.

Universal Display's price to earnings ratio based on the next twelve months is 31.4x. There are definitely things to like about Universal Display and looking at the semiconductors landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $145.8 per share right before these results, implying that they saw upside in buying Universal Display even in the short term.

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