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This is written with serious investors in mind, though sometimes they're just drafts in progress. I'm a former reporter, private investigator and institutional equity analyst who digs deep to find niche undervalued and undiscovered securities. I manage money for individuals, institutions and family offices via my business Long Cast Advisers. This blog is part decision-diary, part investment observations and part general musings about Philadelphia sports. It should not be viewed as a solicitation for business or a recommendation to buy or sell securities.

Tuesday, June 24, 2014

OLED: my gut says overlooked value but i'm bumping up against my patent competency

Here is a company that has compounded shareholder equity by 95% & 45% annually over the last 3 & 5 years with little debt, little dilution and incremental EBITDA margins in the 50% range. In short, it has grown its assets materially faster than its liabilities, but the stock has generally traded sideways for the last two years and down from the initial euphoria of "the next big thing". This "next big thing" is a way to generate light and displays - including but not exclusively televisions - more efficiently and with less power while still improving visibility.
The company is universal display and the ticker is OLED, which stands for organic light emitting diode

The company does not manufacture but merely develops and licenses new technology related to this "next big thing." "We generate revenues primarily by licensing our OLED technologies and selling our proprietary OLED materials to display and lighting product manufacturers."
So this is an opportunity to own intellectual capital of the "next big thing" with little required incremental capital. An R&D play of sorts. In theory at least; shareholders have not been rewarded of late as high hopes seem to have long ago given way to a more cautious and even a negative outlook; shares short represent 30% of the float. 
The caution and fear is the residue of a few things, primarily ...

- revenue concentration. Samsung Display represents 60% of revenues under a technology license that expires in 2017
- manufacturing problems. said client is having difficulty manufacturing large panels using the technology and is therefore
- market lag. LG, which is using a different technology for its OLED televisions, has been quicker to get to market than Universal Display technology users.
- fear of obsoleseence. it would be a severe headwind to the company and its value if they are not on the cutting edge of "the next big thing" with a marketable and producable technology.

... On the face of it, I suggest that too much emphasis is placed on the success or failures of the television panel business - the failure of which has been well reported - but overlooks opportunities for solid state general lighting. case in point, the general lighting market for example is estimated by McKinsey at ~$70B poised to grow to $100B in 2020. backlighting is a fraction of this.


as I've dug a little into this, I'm faced with a problem of capital allocation. In this case, the capital is my time and the problem, for me, is a lack of resources:

- I don't know enough about the patent market to understand who owns what patents and what they're worth

- The opportunity cost of learning the patent is high. I think I can generate better bang for my buck sticking to my knitting at the moment

- I'm not a physicist. I'm sure I can find articles that would explain some of the technology and the probable outcomes, but it would take a long time to really understand this.

... in short, I'm bumping up against the edge of my competency, and I don't like to invest there.

So while my gut tells me the market is overly bearish on single items like the Samsung manufacturing issues and overlooking potential long term value in lighting, I need to take a pass.

Where the rubber meets the road in this business is where fundamental due diligence and analysis can test the gut's hypothesis. without this capability, I have to leave this discussion on hold for another day.


What is in current assets? what is up with the Plextronics convertible note? how do they value their patents? 

Licenses: We have licensed our OLED technologies and patents to several manufacturers for use in commercial products. In July 2012, Samsung Mobile Display Co. Ltd. (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC is obligated to honor all pre-existing agreements made between us and SMD. In 2011, we entered into a new license agreement with SDC for its manufacture of active matrix OLED (AMOLED) display products, which agreement superseded our prior license agreement with SDC. We also have license agreements with Lumiotec, Inc. (Lumiotec), Pioneer Corporation (Pioneer) and Kaneka Corporation (Kaneka) for the manufacture of OLED lighting products, as well as a collaborative arrangement with Moser Baer Technologies, Inc. (Moser Baer) to support its development and manufacture of OLED lighting products. Additionally, we have license agreements with Showa Denko K.K. (Showa Denko) for its manufacture of OLED lighting products by solution processing methods (2009), Konica Minolta Holdings, Inc. (Konica Minolta) for its manufacture of OLED lighting products (2008) and DuPont Displays for its manufacture of solution-processed OLED display products using proprietary OLED materials obtained through us (2002).

LG seems to use another technology: May 13, 2013 (Herndon, VA) – Global OLED Technology LLC (“GOT”) and LG Display Co.Ltd. (“LGD”) have signed a patent licensing agreement that gives LGD access to GOT’s patent portfolio, including intellectual property related to Active Matrix Organic Light Emitting Diode (“AMOLED”) display technology.

PPG appears to be a contract manufacturer: PPG Industries currently manufactures our proprietary emitter materials for us, which we then qualify and resell to OLED product manufacturers. We record revenues based on our sales of these materials to OLED product manufacturers. This allows us to maintain close technical and business relationships with the OLED product manufacturers purchasing our proprietary materials, which in turn further supports our technology licensing business. >> results in low capital overhead 

PPG has been a great stock; what's driving it? 

PPG 2013 annual report: "Opened a world-class organic light-emitting diode (OLED) materials production facility at PPG’s Barberton, Ohio, plant, expanding production capabilities for Universal Display’s Universal PHOLED® materials."

Press release regarding the opening of the facility 

Crains Ohio on the $9M plant expansion and incremental 10 employees (Nov '13)

customer concentration: We receive a majority of our revenues from customers that are domiciled outside of the United States, and our business is heavily dependent on our relationships with these customers. In particular, one of our key customers located in the Asia-Pacific region, SDC, accounted for more than 60% of our consolidated revenues for 2013. Substantially all revenue derived from our customers is denominated in U.S. dollars.[SDC = In July 2012, Samsung Mobile Display Co. Ltd. (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC is obligated to honor all pre-existing agreements made between us and SMD. ]

SDC represetns 60% of revenues but ... 
We have been working with SDC and providing our next generation PHOLED materials to SDC for evaluation since 2001. In 2011, we entered into a patent license agreement with SDC for its manufacture and sale of AMOLED display products which has a term that extends through December 31, 2017. We also supply our proprietary PHOLED materials to SDC for its use in manufacturing licensed products. Under a separate supplemental agreement, SDC has agreed to purchase a minimum amount of phosphorescent emitter material from us for the manufacture of licensed products. This minimum purchase commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement, which is concurrent with the term of the license agreement.

PHOLED = phosphorescent OLED
FOLED = flexible OLED

types of manufacturing: UniversalP2OLED® Printable Phosphorescent OLEDs
The standard approach for manufacturing a small molecule OLED, including a PHOLED, is based on a vacuum thermal evaporation, or VTE, process. With a VTE process, the thin layers of organic material in an OLED are deposited in a high-vacuum environment. An alternate approach for manufacturing a small molecule OLED involves solution processing of the various organic materials in an OLED using techniques such as spin coating or inkjet printing onto the substrate. Solution-processing methods, and inkjet printing in particular, have the potential to be lower cost approaches to OLED manufacturing and scalable to large area displays. For several years, we worked on P2OLEDs under joint development agreements with Seiko Epson Corporation. We are continuing to develop novel P2OLED materials and device architectures for evaluation by OLED manufacturers, and to collaborate with other material manufacturers who are working on host, and other OLED materials, to match our P2OLED emitters.
OVJP® Organic Vapor Jet Printing
OLEDs can be manufactured using other processes as well, including OVJP. As a direct printing technique, OVJP technology has the potential to offer high deposition rates for any size or shaped OLED. In addition, OVJP technology reduces OLED material waste associated with use of a shadow mask (i.e., the waste of material that deposits on the shadow mask itself when fabricating an OLED). By comparison to inkjet printing, an OVJP process does not use solvents and therefore the OLED materials utilized are not limited by their viscosity or solvent solubility. OVJP also avoids generation of solvent wastes and eliminates the additional step of removing residual solvent from the OLED device. We have installed a prototype OVJP tool at our Ewing, New Jersey facility, and we continue to collaborate on OVJP technology development with Professor Forrest of Michigan.
OVPD® Organic Vapor Phase Deposition
Another approach for manufacturing a small molecule OLED is based on OVPD. The OVPD process utilizes a carrier gas, such as nitrogen, in a hot walled reactor in a low pressure environment to deposit the layers of organic material in an OLED. The OVPD process may offer advantages over the VTE process or solution processing methods through more efficient materials utilization and enhanced deposition control. We have licensed Aixtron AG, a leading manufacturer of metal-organic chemical vapor deposition equipment, to develop and qualify equipment for the fabrication of OLED displays utilizing the OVPD process.
TOLED Transparent OLEDs
We have developed a technology for the fabrication of OLEDs that have transparent cathodes. Conventional OLEDs use a reflective metal cathode and a transparent anode. In contrast, TOLEDs use a transparent cathode and either a transparent, reflective or opaque metal anode. TOLEDs utilizing transparent cathodes and reflective metal anodes are known as “top-emission” OLEDs. In a “top-emission” AMOLED, light is emitted without having to travel through much of the device electronics where a significant portion of the usable light is lost. This results in OLED displays having image qualities and lifetimes superior to those of conventional AMOLEDs. TOLEDs utilizing transparent cathodes and transparent anodes may also be useful in novel flat panel display applications requiring semi-transparency or transparency, such as graphical displays in automotive windshields.

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