Universal Display Corporation 2011 Q3 Form 10-Q Summary
Business Context and Reporting Period
Universal Display Corporation develops and commercializes OLED technologies and materials for displays, solid-state lighting, and related applications. Revenue is generated from OLED material sales, technology development and evaluation, contract research, licenses, and royalties. This unaudited filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $21.8 million | $7.1 million | $42.6 million | $19.7 million |
| Commercial revenue | $9.9 million | $2.8 million | $19.9 million | $6.6 million |
| Developmental revenue | $11.9 million | $4.2 million | $22.7 million | $13.1 million |
| Operating income (loss) | $5.9 million | $(3.9) million | $2.1 million | $(10.0) million |
| Net income (loss) | $6.0 million | $(7.2) million | $(2.6) million | $(14.6) million |
| Operating margin | 27.3% | (55.0)% | 5.0% | (50.7)% |
| Net margin | 27.5% | (101.9)% | (6.1)% | (73.9)% |
| EPS | $0.12 diluted | $(0.19) | $(0.06) | $(0.39) |
| Cash flow from operations | Not separately disclosed | Not separately disclosed | $7.8 million provided | $5.0 million used |
At September 30, 2011, cash and cash equivalents were $67.1 million and short-term investments were $270.8 million, for total cash and investments of $338.0 million. Total current assets were $353.7 million, compared with current liabilities of $18.2 million. Working capital was $335.4 million. The filing does not report funded debt; total liabilities were $29.3 million, including $7.8 million of retirement plan benefit liability and $9.2 million of deferred revenue.
Total assets increased to $365.2 million from $92.3 million at December 31, 2010, primarily because of the March 2011 equity offering. Shareholders’ equity increased to $335.9 million from $57.4 million. The accumulated deficit remained significant at $219.6 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 208.7%, driven by higher commercial chemical sales, development chemical sales, and Samsung license revenue.
- Nine-month revenue increased 115.9%. Commercial revenue increased 200.7%, while developmental revenue increased 73.1%.
- Third-quarter operating income improved by $9.8 million, and nine-month operating income improved by $12.1 million.
- Third-quarter net income benefited from a $239,562 gain on the stock warrant liability, compared with a $3.4 million loss in Q3 2010. The nine-month period still included a $4.2 million warrant-liability loss.
- Research and development expense increased to $18.2 million for nine months, selling, general and administrative expense increased to $13.3 million, and patent costs increased to $5.5 million, reflecting expanded operations, foreign subsidiaries, licensing activity, and patent defenses.
- The company completed a March 2011 public offering of 5.75 million shares at $46.00 per share, generating net proceeds of $249.6 million. Common shares outstanding increased to 46.1 million from 38.9 million at year-end 2010.
- All remaining stock warrants were exercised by August 2011, eliminating the $10.7 million warrant liability recorded at December 31, 2010.
- The company purchased Motorola’s OLED patent portfolio for $439,644, ending related royalty obligations to Motorola and recording the acquired technology for amortization over 7.5 years.
- Host materials represented approximately 31% of commercial chemical revenue in Q3 and 41% for the nine-month period, compared with no comparable host-material commercial revenue in 2010. Management noted that this market is more competitive and its long-term prospects are uncertain.
Guidance, Outlook, Risks, and Unusual Items
Management stated that available cash, cash equivalents, and short-term investments are expected to fund obligations for at least the next 12 months. The filing does not provide formal revenue or earnings guidance. Management expects quarterly results to fluctuate based on the timing of license fees, royalties, material sales, research spending, and new business relationships.
- A new Samsung Mobile Display patent license and supplemental materials purchase agreement runs through December 31, 2017. The company recognized $3.25 million of license fees in both the quarter and nine-month period and expects annual installments and minimum material purchases to increase over the agreement term.
- Samsung royalty and license payments are subject to a 16.5% Korean withholding tax. The company incurred $535,642 of related tax expense in Q3 and $1.1 million for nine months.
- Customer concentration is material. For the nine-month period, customers A, B, and C represented 43%, 12%, and 24% of revenue, respectively. Customer relationships with B and C were scheduled to expire in less than 12 months.
- International exposure is significant: foreign revenue represented 89% of nine-month revenue, with South Korea and Japan accounting for $24.3 million and $12.7 million, respectively.
- The company purchases all chemical materials from one supplier.
- Multiple patent oppositions and invalidation proceedings remain pending in Europe, Japan, and Korea. Certain Japanese decisions invalidated claims, and the company has appealed. Management believes the challenged patents are likely to be upheld, but provides no assurance.
- The company is obligated to pay legal costs for proceedings involving exclusively licensed Princeton, USC, and Michigan patents. The filing does not provide a quantified maximum exposure for these proceedings.
- Deferred revenue was $9.2 million at September 30, 2011, including $3.4 million potentially recognizable under licenses not yet executed or deemed effective.
- No material changes to previously disclosed risk factors were reported, and the company reported no off-balance-sheet arrangements.
Most Important Facts to Verify
- Whether Samsung license installments and minimum material purchases translate into sustainable recurring revenue rather than primarily timing-related revenue.
- The duration and profitability of commercial emitter and host-material sales, particularly given customer product changes and stronger host-material competition.
- Renewal or replacement of customer agreements scheduled to expire within twelve months and the effect of customer concentration.
- Outcomes of the pending patent oppositions and invalidation proceedings, including the Japanese claim invalidations and related appeals.
- Future patent-defense, research, foreign subsidiary, and commercialization spending relative to operating cash generation.
- Use and investment risk associated with the $270.8 million short-term investment portfolio and the company’s ability to maintain liquidity without further equity financing.
- The effect of Korean withholding taxes and the absence of the prior-year New Jersey tax-credit and net-operating-loss sale benefit.