Universal Display (OLED) is trading sharply lower today (-16%) after reporting disappointing Q4 results/guidance last night. In case you're not familiar, the company specializes in what's known as organic light emitting diode (OLED) technology for the display and lighting industries. It licenses its technology to makers of TVs and consumer electronic devices. OLED technology produces a much higher quality picture than LCDs. It also allows for vibrant colors, thinner screens and less power consumption.
There has been a proliferation of OLED products, including laptops, OLED wearables such as the Apple Watch Series 2, new smartphones including new Galaxy, Samsung Galaxy A, C, J and S models, new virtual reality and augmented reality OLED headsets, and new OLED TVs. Also, the recently-released iPhone X is Apple's first OLED phone and there has been speculation that all Apple phones will move to OLED in 2018 or 2019. The stock had been ramping higher since OLED reported very strong Q3 results in early November.
Turning to the Q4 results, non-GAAP EPS came in at $0.93, which excludes the benefit from the recent tax reform legislation. Revenue rose 55.3% year/year to $115.9 mln. Both results were well ahead of market expectations. So why is the stock down so much? It's mostly due to the guidance. OLED expects 2018 revenue of just $350-380 mln, which is a good bit below market expectations.
The company noted that 2017 was a record year for revenue thanks to a multitude of new agreements and new OLED consumer electronic products. The company also approximately doubled its production capabilities at PPG Industries. Overall, 2017 was filled with tremendous growth. The increasing pipeline of customer activity is indicative of the industry's momentum from expanding OLED development commercial activity to new OLED capacity plans.
With that said, after an extraordinary year-and-a-half of new capacity installs, the company now expects that industry capacity growth will take a bit of a breather in 2018 as panel makers build the framework for the next wave of high volume OLED production, which is expected to ramp in 2019. Based on current production timelines, OLED estimates the installed capacity base, as measured in square meters, will increase by approximately 50% over the next two years.
Despite the breather expected in 2018, OLED sounds pretty bullish on the outlook for the industry in general. For example, Apple has said that the iPhone X OLED screen is where it's going in over the next decade. There is also Samsung, which is expected to launch a Galaxy Tab S4 next week that will reportedly have a 10.5 inch super AMOLED display.
In the OLED TV market, LG displayed and shipped an impressive 1.7 mln OLED TVs in 2017, up from approximately 900,000 in 2016. For 2018, LG expects shipments to grow by approximately 50% to about 2.5-2.8 mln OLED TVs. On the lighting front, which is an emerging market, OLED is still in the early commercialization stage. The benefits of OLED lighting include high power efficiency, novel and innovative form factors, beautiful natural colors and cool operating temperatures. In December, LG Display announced that it commenced mass production at the world's first gen5 OLED lighting fab and launched its own OLED lighting brand Blue Flex.
In sum, the Q4 results were quite good, but the guidance for 2018 appears to have spooked investors a bit. This stock has been a big mover, so any caution about 2018 would cause a pullback in the stock. The good news is that it sounds like 2018 is being described as just taking a breather from all the recent capacity ramp-ups, and that 2019 should see a resumption of growth. Let's hope that is the case but there is compelling evidence that OLED technology is the future. 2018 is being seen as just a small bump in the longer term road.