As illustrated earlier the tech market is highly unpredictable and though a volley of smartphones and tablets has been released this festive season however the market does not seem to be very enthusiastic apart from a few flagship brands which sports trend and fashion statement. However looking at the overall market things do not look like booming the way it had done when the first line of smartphones or tablets were launched. Needless to mention that the tablet market is bleeding losses heavily irrespective of the brand. Thus even the allied component segment related to these gadgets has been suffering. In our last article titled: ‘Qualcomm: The Chip-Maker Falls Short’ we showed how the chipmaker is getting hit due to the current lull in the smartphone and tablet sales and as obvious now Universal Display (OLED, Financial) presents somewhat similar picture as the chipmaker. Let us go throw the numbers that the display giant is displaying from its quarter 3 financial reports.
Number Mix
Universal Display has reported Q3 2014 EPS at 9 cents, exceeding street expectations by just 2 cents. Revenue reported was $32.9 million which was below the consensus level of $37.8 million. So what took it for a nosedive? The sales numbers dropped drastically primarily due to a fall in shipment numbers to one of its major client Samsung (SSNLF, Financial). According to market reports UDC management has confirmed that the negative change is due to a change in recipe for the Alpha series, rather than in the Galaxy S5. Thus, sales to Samsung would get minimized going forward, though management is optimistic about the possibility of creating new clientele with the introduction of new, more efficient materials. Furthermore, the full-year guidance from the display giant’s management deck has been lowered by about 10% ranging between $183 million to $185 million.
Further due to the smartphone market witnessing a slowdown in overall sales due to its stagnancy in style and needs to move on to the next level by introducing something new like bendable or foldable smartphones in order to revive the smartphone market from it trail into obsolescence. Mere soft feature addition will not be able to do much good for the smartphones.
Apple (AAPL, Financial) is doing well and would be able to enjoy the crown for a couple of quarters more before seeing the same effect, due to its product cycle and delayed offering of phones in a larger size.
Apple's indirect use of UDC technology in its upcoming watch product does seem to be an effort towards revival, but revenues from it is likely to be dull since the acceptability level of its watch phone is still under speculation. But something positive about Apple is that it is putting in efforts to redo its technology in cognizance with the current market sentiments about smartphones and this would eventually lead the smartphone giant to make a technical in order to avoid obsolescence, since LCDs can't be made flexible or transparent.
Display Giant Restructuring
This is the very reason why the display giant has reportedly set aside $5.4 million for development process up from $3.3 million reported last quarter and $1.2 million of Q4 last year. This clearly shows that the company is gearing up to go all out on the purchase front as it sets its eye on LG (LPL, Financial) to procure televisions, smartphones, and the watch faces that will be used in the Apple Watch.
In the press release UDC management confirmed that LG has risen to about one third of material sales. Last Monday in a press release LG has confirmed its plans of producing bendable displays next year, and foldable ones in 2017. Growth in emitter, rather than host, sales for all these products plus lighting segment has been in the spotlight for the display giant when it comes to expansion and investment expenditure. This indicates Universal Displays’ management’s intensions to improve its gross margins considerably by reducing its participation in host sales functions.
LG will continue to rush to make the most of its lead in large screens using its WRGB architecture. This will result in a revised agreement with UDC, as LG almost doubles its production capacity by year end, and more than quadruples it in 2015.
On the other hand Samsung stated that it will minimize its focus on television production and rather concentrate its towards cementing it foothold on the smaller display segment which signifies its focus to remain trained on the smartphone and tablet segment in order to maintain its market lead more so against the stiff competition cropping from China and Japan.
Final Take
Currently it does not look very bright for Universal Display from its recent number mix however going by its management guidance for the recent future in terms of reduction in participation in host sales and its effort to make foray in bendable and foldable and larger display segment the future looks somewhat streamlined and stronger in terms of gain. However it is too early to judge how much of the management guidance will actually get implemented. As of now we would suggest to hold your position in the company for some time and watch for the company to work on the current guidance issued by its management. Also a few positions can be added to your portfolio with the current dip in it share prices but we do not suggest a highly impressive result in the near to mid-term though the company looks to be on track for long term average yield. For now wait and watch how the new management guidance gets implemented.
