I interpreted the April call differently but can see the basis for your cautious comments.
However, I think the articles that came out on May 19th/20th (one of which Ynot quoted) are definitive (for example, SI #4728). Those are quotes from a LGD press conference promoting OLED's and are about as concrete as anything we ever get from LGD or Samsung. I expect LGD to make a major push on OLED's at IFA in early September and set prices to drop pretty substantially between now and the end of the year. Their publicly announced unit targets dont make any sense with their current 4K pricing.
Any thoughts on the conversation around blue on SI? Are platinum tentadentrate complexes the answer?
I take that sentence to mean that they will decide on the M3 fab by the end of the year and that increasing the 4K yields is the key variable.
I thought that the timing of the ramp for the M2 fab was conclusively given at the LG press conference on May 19th. The articles that day have direct quotes from LG execs about a capacity ramp starting in Q3.
My point is simply that UDC gave Samsung a huge discount at the time of the signing in the fall of 2011. Samsung had already built their A2 fab so they should have had plenty of leverage in those negotiations and yet management was only able to extract a royalty rate of less than .5%. So I dont think it is pessimistic to feel that management needs to give some details about the LGD agreement before I'll automatically believe that it is a homerun....and to circle back to the original post, a royalty rate lower than expectations is a real risk for investors.
I dont think anybody will hold off on bringing OLED production to market. Uncertainty over what competitors are paying is simply another reason to hold off on signing a long-term agreement. Nobody is going to get fired for signing agreement similar to what competitors are paying, but you dont want to be the guy that signs the agreement that means your company is overpaying.
Simplicity should be the goal. If you are going to copy a royalty model in technology, the company to copy is Qualcomm who stated for years what their "standard" rate was going to be....not Interdigital. Complicated agreements where nobody is paying the same rate and it takes years to sign or renew agreements is a hallmark of the latter company.
ynot wrote...." I agree the range of returns is quite large but I would just make a couple points. To the extent the SDC agreement generated lower revenue than expected it is because SDC hasn't increased fab capacity from 2011 until this quarter with the A3 line while the expectation was for faster growth."
Materials are completely separate from royalties under either the license fee or royalty scenarios. Samsung would have bought precisely the same amount of materials from UDC with or without the minimum material purchase agreement. The only protection that provided was if Samsung had managed to perfect a printing method that substantially lowered the amount of materials used.
The license fees that UDC commanded give a royalty rate that ended up being less than .5% of SDC's revenues. It would have been even worse if Displaysearch's projections from the fall of 2011 had actually taken place. UDC indicated during their July 2011 conference call that DS expected that the OLED market was projected to be worth $15 billion in 2014 (a .3% royalty rate).
Adding a touch sensor does add to the cost of the OLED module. That is no different than Qualcomm earning royalties off the addition of a camera module to a handset. It also really isnt any different than UDC earning higher royalties when a LTPS substrate is used instead of IGZO. In all cases, the ASP increases based on work done by companies other than UDC. That is the nature of royalties based on the ASP of a product.
With respect to the secrecy around the LGD agreement, a standard agreement would make it easier to sign agreements. The only thing worse than paying royalties is paying more royalties than your competitors. Secrecy just prolongs the process of getting companies signed. It isnt as if the agreements are going to stay secret forever. Any potential new licensee simply needs to wait a couple of years to figure out how the outlines of the LGD agreement.
My definition of risk is based on the range of returns that OLED may generate. I think that range has always been very large and the size of that range (which includes the possibility of a negative return) is at least partially due to the lack of information. You concentrated on the TAM which is one key part of the equation. However, the other part is UDC's ability to extract revenues from that market, both in the medium term and the long term.
Over the next six years, much is going to depend on the terms of the LGD agreement. Yes, UDC has monopoly pricing power, but they had the same power when Samsung Display signed their agreement. That agreement with Samsung has generated far lower revenues than anybody projected back in the fall of 2011. My expectation is that LGD agreement has far better terms but that is based on nothing but logic and faith. Management has yet to give the details to make that projection based on facts.
Over the longer term, including your 10 year scenario, UDC's ability to extract royalties based on all OLED's is likely going to depend on the development of a phosphorescent blue emitter. We have had some promising developments come from research papers over the last 12 months, but again nothing from management. Are they close to a commercial blue? I am optimistic based on those papers but again, management has given zero details.
Years ago, UDC used to give out a range for the typical royalty rate they expected to generate. Qualcomm did the same. It is past time that UDC again gave out some idea about the size of future royalties that can be expected.
Management hides behind their customers.
Yes, they are limited in what they can say but the idea that they can say nothing is contradicted by every other company I have ever followed. They could talk about "typical" royalty ranges going forward and that LGD is in that typical range. They could have characterized the $42 million by saying whether it was evenly split between prepaid royalties and license fees or whether one category dominated. They could talk about which emitter colors are covered.
Instead they have chosen to say nothing and left their investors in the dark.
IMO, a lack of information combined with the valuation is what makes the position high risk.
It has been four months and we still dont know the details of the LGD agreement beyond the fact that they made a payment of $42 million that is made up of prepaid royalties and license fees. That isnt enough to tell us whether the agreement really is the home run that I hope it to be.
From a longer term perspective, UDC will eventually need to develop blue, encapsulation, or OVPD to extend their IP beyond 2021. Again, UDC has adopted a policy of giving almost zero details about the progress in any of these areas. I believe that they are making progress in all three areas but gauging that progress is impossible.
So while I continue to own an overweight position in UDC, I recognize that some of my position is based on faith rather than an explicit knowledge of the underlying fundamentals. That makes it high risk in my book.
Yahoo seems to have eaten my first response.
FWIW, I understand the reasons that UDC has gone silent on blue. However, I think those reasons go out the window once they allow Julie Brown to comment on the importance of the blue development from Forrest's team. At that point, you have already told investors that this matters and I think they should say how much it has impacted the development of blue.
Unfortunately, no presentation from anybody at UMich at SID. OTOH, the ASU team is presenting on the progress with their platinum emitter for blue. There paper was pretty optimistic that they could make fairly easy progress to build up the lifetime beyond the 2000 hours first listed. Hopefully, we get an update on lifetime from them.
and Qualcomm actually ran up significantly prior to the agreement as well. I think overall return for the year was close to 20x.
I'll never see anything like that again.
Thanks, I missed that.
I just went back and took a look at your notes from last year and there was quite a bit of info. Cool, looking forward to that. Hopefully, we can get some more insight into the LGD contract.
The Cowen conference is part of SID and I dont think it is usually streamed. The only presentation between now and 2nd quarter earnings looks like it is going to be the annual meeting.
That page indicates their R&D areas. Their commercial sales have been centered around red host sales (as ynot indicates above).
That KT article is the only source that I can remember that contradicts LG Display's own comment from their January earnings call.
Supply on 4K televisions seems to be improving now, but I dont have a handle on the length of time from LG Display producing a module and a television appearing in stores.
Exactly. If you believe that OLED"s will continue to displace LCD's then a royalty agreement is exactly what you should hope for. It will be more volatile but the upside will be preserved.
The Apple Watch is the ultimate example of this. The functionality is identical between the $10,000 and $350 versions.
Awesome! It is great to have somebody who can read Korean on the board to give us some of the finer details on some of the articles. Google Translate only goes so far.
Please chime in whenever you think some of the translations are off base...