PANL – 2Q10 Earnings Preview: Is the Street too Conservative?

Universal Display will report its 2Q10 results after the market close today. The Street expects EPS of -$0.13 on revenues of $4.1 million compared to EPS of -$0.18 in the year ago quarter on revenue of $3 million. Management will be holding a conference call to review the company’s performance at 5 PM ET (888-215-6982; 1148660).

2Q10 expectations conservative? While we have been critical of the valuation accorded to PANL shares and concerned as to what an increasingly competitive OLED market (Dow Chemical DOW, Aixtron AG AIXG and others) may mean, we suspect expectations for PANL’s 2Q10 will prove conservative. This belief is fueled by comparing Street expectations for 2Q10 compared to PANL’s results in 1Q10. More specifically, PANL reported 1Q10 revenue of $4.25 million, which is above 2Q10 expectations. We find this to be disconnected compared to sequential smartphone shipment growth in 2Q10. Per IDC, 63 million smartphones were shipped in 2Q10, up 15% sequentially. While there have been reported shortages for OLED displays, which have prompted some such as HTC to switch display technologies for some models, it would appear Street expectations are lagging, which could have been one of the drivers in PANL’s stock price performance in recent weeks.

The Street’s outlook for PANL. No doubt investors are waiting for PANL to sign longer term licensing agreements with both Samsung and LG to better understand the underlying economics. Currently, the Street expects revenue of $4.6 million for the September quarter and $18.3 million for all of 2010. In terms of EPS, current consensus expectations call for -$0.12 in the September quarter and -$0.45 in 2010. What to listen for on the earnings call – commercial vs. development revenue, deferred revenue and inventories. PANL reports revenue in two segments – commercial and development; development revenues have generated 55%-60% of revenues in recent quarters and we will be watching the mix in the June quarter per our smartphone related comments above to gauge commercial traction. As we have articulated with other IP related companies we follow, such as InterDigital IDCC, one of the key line items to watch is deferred revenue. In its 10Q filings, PANL discloses both deferred license fees and deferred revenues, which totaled $10.5 million exiting 1Q10, up slightly from $10.2 million at the end of 2009 when factoring in long-term deferred licensing fees. In our view, trends in these line items are good indicators of revenue in near term quarters. Unlike, InterDigital, PANL does sell chemicals and other materials to its customers. Given shortages and expected OLED industry growth, we will be listening to management’s discussion of the company’s inventory position on its balance sheet and its ability to ramp to meet demand. The company’s most recent 10Q did not disclose its inventory position at the end of 1Q10.

Valuation – all the good news baked in? At the end of 1Q10, PANL had $63 million in cash and equivalents on its balance sheet. Excluding that cash, we calculate PANL shares are trading at 18.3x on an enterprise value to 2010 revenue expectations, which is a significant premium to the IP licensing peer group. Even on a 2011 revenue basis, at 20x and no expectation for positive EPS, the shares are trading at rich multiple compared to IP licensing peers. While the outlook for the OLED industry is favorable, we would argue that PANL shares are “priced to perfection” and the shares are vulnerable in the wake of either good news that does not live up to expectations or bad news.