Universal Display Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Universal Display develops and commercializes organic light-emitting diode (OLED) technologies and materials for displays, solid-state lighting, and other applications. Revenue is generated from OLED material sales, intellectual-property licensing, and technology development and support. This unaudited filing covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $15.0 million | $12.6 million | Up 18.7% |
| Material sales | $12.8 million | $10.5 million | Up 21.1% |
| Royalty and license fees | $1.3 million | $0.4 million | Up $0.9 million |
| Technology development and support revenue | $0.9 million | $1.7 million | Down $0.7 million |
| Operating loss | $(7.2) million | $(1.6) million | Loss increased |
| Net loss | $(4.8) million | $(1.2) million | Loss increased |
| Net loss per diluted share | $(0.10) | $(0.03) | Unfavorable |
| Cash used in operating activities | $(10.9) million | $(2.0) million | Higher use of cash |
Cost of material sales was $3.1 million versus $1.1 million, producing an approximate material-sales gross margin of 75.7% versus 89.7%. Operating margin was approximately negative 47.8%, compared with negative 12.3%, and net margin was approximately negative 31.8%, compared with negative 9.7%.
Research and development expense increased to $8.9 million from $6.7 million. Selling, general and administrative expense increased to $5.2 million from $4.3 million. Patent costs and amortization of acquired technology increased to $4.6 million from $1.9 million, primarily because of $2.7 million of amortization related to technology acquired from Fujifilm in July 2012.
At March 31, 2013, cash and cash equivalents were $45.5 million, short-term investments were $175.3 million, and long-term investments were $4.9 million. Total cash and short-term investments were $220.8 million, compared with $243.9 million at December 31, 2012. Working capital was $232.9 million. The balance sheet does not disclose borrowings or other debt; total liabilities were $28.2 million, including $10.1 million of retirement plan benefit liability. The accumulated deficit was $209.0 million.
Material changes versus the prior comparable period
- Revenue increased $2.4 million, led by a $3.0 million increase in commercial material sales and an $877,000 increase in royalty and license fees.
- Commercial green emitter sales increased approximately $3.1 million, while commercial red emitter sales declined approximately $1.5 million due to lower pricing and lower volume.
- Host material sales increased approximately $1.7 million, although management stated that the host-material business is more competitive and its long-term prospects are uncertain.
- Technology development and support revenue declined by approximately $0.7 million because fewer contracts were outstanding.
- Operating expenses increased $8.0 million, exceeding the $2.4 million revenue increase and substantially widening the operating loss.
- Operating cash use increased primarily because of payment and collection timing, the higher pretax loss, and lower deferred-revenue receipts.
- The company repurchased 195,599 shares for $5.5 million under a program authorizing up to $50 million of repurchases. Approximately $39.3 million remained available under the program at March 31, 2013.
Guidance, outlook, risks, contingencies, and unusual items
Management expected to have sufficient cash, cash equivalents, and short-term investments to meet obligations for at least the next 12 months. No formal revenue or earnings guidance was provided. Management cautioned that quarterly results may fluctuate based on material-sales volume and timing, license-fee and royalty timing, research and development and patent expenditures, and new business relationships.
The company recorded a $2.2 million income-tax benefit based on an estimated annual effective tax rate of 31.6%, assuming the first-quarter loss will be offset by income later in 2013. A full valuation allowance remained against substantially all net deferred tax assets, and any future release could materially affect results.
Revenue concentration was significant: customer A represented 42% of revenue, customer B 21%, and customer C 19%. Foreign revenue represented 95% of total revenue, including $9.3 million from South Korea and $4.6 million from Japan. All chemical materials were purchased from one supplier.
The company had a three-year joint development commitment to pay Plextronics $1.0 million annually beginning July 2012, remaining obligations under research and license agreements, and change-in-control benefits for six executive officers. It reported no off-balance-sheet arrangements.
Several patent oppositions and invalidation proceedings remained pending in Europe and Japan. Management generally expected its patent claims to be upheld but provided no assurance; the proceedings could require significant legal expenditures. During the quarter, Japanese authorities upheld all claims in two patents, and a Korean patent was determined valid. The filing stated that there were no material changes to previously reported risk factors.
Most important facts for investors to verify
- Whether increased OLED material adoption, particularly by Samsung Display, continues and offsets pricing pressure and customer product changes.
- The timing and amount of license-fee installments under the Samsung Display agreement, which can cause substantial quarterly revenue volatility.
- The sustainability of the company’s high material-sales concentration and reliance on major Asian customers.
- Whether operating cash losses and patent, research, and commercialization spending remain supportable from the investment portfolio.
- The effect of Fujifilm-acquired technology amortization and ongoing patent-maintenance costs on future operating margins.
- The realization of the projected 2013 taxable income supporting the $2.2 million tax benefit and the potential release of the deferred-tax valuation allowance.
- The outcomes and costs of pending patent challenges, particularly proceedings involving key phosphorescent OLED technologies.