Universal Display Corporation Harvard Case Solution & Analysis

Historical Downside Potential

In the recent past, the share price of Universal Display fell by a large percentage. The reason behind the price target cut was that traders predicted lower-than-expected sales to Samsung Electronics, which was its key client.

Along with that, the low royalty rates offered by Samsung and accepted by Universal Display caused misconception in the market. The market failed to perceive the fact that these royalty rates do not reflect the future royalty rates. However, when the product becomes widely accepted by the market, then Universal Display can charge a higher royalty rate. The lower than expected sales to Samsung and the decreased market share of Samsung in the OLED market is not a negative factor for Universal Display because other companies in the market also have to buy the product from Universal Display Corporation because of the patent protection.

Valued Technology

The higher than even investment in R&D is leading the world into a new era of technological development. People are getting used to the new technology and demand clearer screen that has the power saving ability as well. The marketing and production technique has shifted from push to pull. In these circumstances, the proactive company takes the lead and the reactive company lies behind.

By developing OLED, Universal Display Corporation has taken a proactive step to fulfill the demand of the customers. The fact that the new technology may have problems and it may not serve the purpose; prevents the customers from its early adoption. Nevertheless, it will be accepted by them after some time. This is the time for Universal Display to reap the profits from this worthy technology.

This technology can be used in other appliances as well and there is a huge market for this technology. The size of this market is very large and this technology will soon get accepted by the target market.

Patent Position

Universal Display Corporation has a strong position in patents. The company has successfully secured its rights and has saved the possible imitation of the technology through its patents. The agreement between Samsung and Universal Display confirms this strong position of the patents of Universal Display.

According to the licensing agreement, Samsung cannot challenge Universal Display’s patents. Since OLED is patented by Universal Display, Samsung or any other company cannot buy it from elsewhere until at least 2017. This patent will provide the sustainable competitive advantage to Universal Display so that it could extract the R&D expenses successfully.

Target Market

Universal Display deals in a Business to Business (B2B) market. Thus, the companies tend to sign long term contracts to avoid the price fluctuations. This locks in security for the developer company that its products will be sold as long as the market for these products exists. Samsung is a big customer that attracts other companies to follow the same path for gaining a higher profit margin by adopting the latest technology material.

Financial Performance

The significant increase in licensing revenue and a near doubling of material sales in the quarter reflect the growth of OLED technology. Looking at the first half of the year, Universal Display generated high operating cash flow, while improving operating income in 2011. This financial performance was an indicator of the current and future success of the company. Universal Display leveraged its proprietary technology and materials to generate attractive returns for its shareholders. The company’s leadership in this technology translated in the best quarterly financial results in the company’s history.

The company can charge as high as 2.00% royalty charges for its product from the new customers that will follow the trend after the early adoption by Samsung. The company’s accumulated losses are now getting subsided by the upcoming profits and high margins. Moreover, as there is no debt on the balance sheet hence; it eliminates the risks for the company. The company has successfully aligned the managements’ interest with the shareholders’ interests through different options so that they can work for the maximization of shareholders’ wealth in a better way.

Increased Sales

As discussed, this new technology uses almost double material thus it will increase the overall sales of the company. This positive insight about the company’s performance eradicates one of the most controversial talks about the company related to lower royalty charges from Samsung. The bears are focusing more on the lower royalty rate whereas the bulls are looking at this positive side of the company’s strength.......................................

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