Will This Quarter Be a Royal(ty) Pain for Universal Display?

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OLED innovator Universal Display (NAS: PANL) lights up Wall Street on Wednesday night with a fourth-quarter report. Are smartphones still driving rapid growth or did the new Samsung contract hamstring Universal's financial health?

The word on the Street
Your common household analyst expects earnings of $0.06 per share on about $17.8 million in revenue. A year ago, the company reported a small net loss on sales of $10.8 million.

Management just started providing some financial guidance. That Samsung contract and a generally more mature market for OLED devices give CFO Sidney Rosenblatt the confidence to predict fourth-quarter sales between $15.4 million and $19.4 million. In 2012, revenue should clock in about 67% above 2011 levels. Assuming that Universal delivers fourth-quarter results around the midpoint of guidance, this full year's sales will nearly double year over year.

 The analyst community doesn't have a great track record when it comes to Universal's earnings. The consensus for the last four quarters added up to a $0.18 net loss, but the company can look back at 12 months of breakeven results.

Tempest in a teacup?
This stock has jumped and fallen vigorously since last summer, when management sealed a long-term technology contract with Samsung. The Korean giant is not only the foremost maker of OLED screens today, but also the biggest seller of consumer devices featuring those screens. Most Samsung smartphones come with the company's own OLED screens, for example.

So it's a big deal when your largest customer by far signs a new deal. But some investors worry that the new terms might not be as profitable as the old ones. This deal is structured as a straight-up technology license with payments due to Universal every six months, with no royalties paid per end-user unit or square inch of panels sold.

It's easy to jump to the conclusion that Universal will miss out on the OLED market's actual growth because of that blatant lack of royalties. But then you forget that Samsung also pays for OLED materials, made exclusively for Universal Display by chemicals giant PPG Industries (NYS: PPG) .

This model drove the company to a $0.12 profit per share last quarter, when Wall Street was looking for a loss. It seems obvious to me that the management team crafted a decent deal here, though the profit power of those materials may not be too obvious to your average critic. "We are expecting phosphorescent emitter materials sales to roughly scale with the growth of Samsung's OLED business," Rosenblatt said in the latest earnings call. "This should enable us to participate directly in OLED market growth over the next several years."

The license payments come and go -- there was a $3.2 million payment in the third quarter, so there will be none in the fourth. But the materials sales carry on regardless and will make up the bulk of this period's sales.

I'll be looking at the materials revenue as an indicator of the broader OLED market. Andy Rubin, Android chief at Google (NAS: GOOG) , just reported that there are 300 million activated Android devices in the wild today, with 850,000 more joining the fray every day. And Samsung's OLED-sporting Galaxy line owns the lion's share of that admittedly fragmented Android flow.

This market is way bigger than smartphones
I'm so excited about the OLED revolution that I bought shares of Universal Display a few weeks ago. I'm up 38% so far, though this return pales in comparison with the 300 points of market-crushing performance this stock has brought to my CAPS portfolio.

In the long run, Universal Display goes far beyond smartphones and tablets as OLED television sets and lighting panels become available on a commercial scale. But in the short term, it's all about mobile computing. That's not a bad place to be, though: NVIDIA (NAS: NVDA) is transforming itself from a traditional computing company into a pure smartphone play.

The company is already reaping the rewards of a trillion-dollar revolution. In a freshly updated special report on that market, The Fool's top analysts show you how NVIDIA, Universal Display, and other stocks can ride this game-changing trend to new heights. But don't delay -- the report won't be free forever, so get yours today.

At the time this article was published Fool contributor Anders Bylund owns shares of Universal Display and Google but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Universal Display, NVIDIA, and Google. Motley Fool newsletter services have recommended writing puts in NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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