Universal Display Corp (OLED) 2004 Q4 法說會逐字稿

Good afternoon, and welcome to the Universal Display Corporation year end results conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to Mr. Joe Corvelli. Sir, you may begin.

Thank you. Good evening, everyone. Thanks for joining us today. With us today are Steven Abramson, President and Chief Operating Officer, and Sid Rosenblatt, Executive Vice President and Chief Financial Officer of Universal Display Corporation. Let me start by reminding you, this call is the property of Universal Display Corporation. Any redistribution, retransmission, or rebroadcast of the call in any form without the express written consent of the Universal Display Corporation is strictly prohibited. Further as this call is being webcast live, and will be made available for a period of time on Universal Display's website.

This call contains time sensitive information that is accurate as of the date of this live webcast, March 14, 2005. All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include but are not limited to statements regarding, Universal Display Corporation's beliefs, expectations, hopes, or intentions regarding the future. It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display Corporation's actual results to differ from those projected. These risks and uncertainties are discussed in the Company's periodic reports filed with the SEC. Universal Display Corporation expressly disclaims any obligations or undertakings to update or revise any forward-looking statements contained herein.

Now I'd like to turn the call over to Steven Abramson, President and COO of Universal Display Corporation. Please go ahead, Steve.

Thank you, Joe, and well everyone to Universal Display Corporation's conference call to discuss our 2004 results.

This is our first conference call, and going forward our plan is to provide this forum each quarter to keep investors apprised of our progress, and to provide insight in to our financial results. At the conclusion of our prepared remarks, we will have a brief question-and-answer session. As always, we appreciate any feedback you may have.

As 2004 began, we marked an important milestone for Universal Display OLED technology, when our red PHOLED technology materials were utilized in their first commercial product, a cell phone tel display manufacturer by Pioneer.

PHOLED, stands for Phosphorescent OLEDs, it is one of the our key technology platforms which we will discuss a little more later on. So it's been exciting year as we continue a leader in the OLED technology. During 2004 we made several strides towards commercialization of our OLED technology. Our action plan to making this happen is multifaceted. We're working with approximately 20 OLED manufacturers to evaluate, develop, and qualify our phosphorescent OLED technology, and materials for commercial use, and to receive license fees and royalties from the sale of commercial products using our proprietary OLED technology. We are selling our proprietary OLED materials for both developmental and commercial use, and we have two major future initiatives underway. Flexibility OLED and OLEDs for solid state lighting, and we have won a number of government contracts to assist us in the further development of these technologies. Throughout the year we partnered with a record number of manufacturers for commercialization of phosphorescent OLED.

This year we entered into 8 new evaluation development agreements, including one with [Seiko]. We have 20 evaluation, joint development, development and material supply and licensing agreements. All were with major firms and divisions manufacturing OLEDs using Universal Display phosphorescent technology. The companies span the globe from Taiwan, China, Korea, and Japan to the United States. Most of our partnerships are for the use of phosphorescent OLED technology in vacuum deposition equipment, which is the dominant manufacturing technology today.

New partnership with Epson is focusing on the use of our phosphorescent technology for ink jet printing of OLEDs. Ink jet printing is a potential manufacturing technology for OLEDs and offers possibility in lower cost. Epson is a leader in ink jet printing of OLEDs. Our relationship in Epson is intended to combine the critical power efficiency of our phosphorescent and OLEDs with the potential cost benefits of ink jet printing. We are working to ensure that whatever manufacturing technology is used for OLEDs, whether it's vacuum deposition, ink jet printing, OVPD, or other technologies, our phosphorescent technology will be there.

We've also expanded our research network with institutions in Japan, Korea and Taiwan,to complement our long-standing collaboration with Princeton University and University of Southern California. The strives we've made with our PHOLED technology have allowed to continue to attract such strong industry support. To recap, PHOLED technology is critical because if offers up to 4 times the efficiency of traditional florescent OLED technology. Efficiency is important in portable devices in part because it can expand battery life and support new applications. Efficiency is important in larger area displays such as televisions in part, because higher efficiency correlates to lower display temperature, which means less heat is generated and can enable a brighter, longer-lived screen.

In 2004 we made significant progress in the three primary colors, red, green and blue, that are needed for a full color display. Our red material which has excellent color saturation has over twice the efficiency of any other competing OLED material. This year we doubled the lifetime of our red material at 100,000 hours at display levels brightness 500 [nits].

Our green material has excellent color saturization and over twice the efficiency of any other competing OLED material technology. We have the doubled the lifetime of 25,000 hours at display level luminescence of 1000 nits. We believe that our red and green phosphorescent materials and technology, meet current requirements of OLED display manufacturers for portable display products.

Our blue material still does not have commercial level [efficiency], however we were able to develop a new family of materials that have excellent color saturation and high efficiencies, also at least double the efficiency of any competing florescent material. While our team continues to work hard on the blue lifetime issue, it is important to note that our red and green PHOLED materials can be combined with existing florescent blue materials to make a full color active-matrix OLED display. We believe a number of manufacturers are looking to this solution until a phosphorescent blue material is commercially available.

Significant support from the U.S. Department of Defense and U.S. Department of Energy, enabled Universal Display to expand it's research and development efforts for 2 potentially groundbreaking new technologies. Flexible OLEDs and OLEDs for solid state white lighting. In 2004 we won a total of $5.6 million in new DOE contracts, and more than 1.7 million in DOD contracts, for a total of 7.3 million in new government contracts this year, a record for the Company. The Department of Defense is particularly interested in the flexible phosphorescent OLED technology, in part because it can provide unbreakable conformable portable product designs, with real time communications for a soldier using less power.

Let me take a moment to highlight the DOE projects. Under these projects we will research the use of our transparent and phosphorescent OLED technologies to increase the power efficiency with solid state lighting to develop and demonstrate novel manufacturing technology for white OLED production. In a report prepared for the U.S. Department of Energy, over $25 billion per year could be saved by 2025, if new solid state lighting technology, such as OLED technology can be successfully adopted.

The OLED market did not grow according to industry expectations in 2004. Display search a leading industry analyst, estimates the market grew from about 235 million in '03 to about 330 million in '04. And substantially all the market was in passive matrix small molecule displays being sold by Samsung, [OLEG], DuPont Displays, and Pioneer, as sub-displays on cell phones, and for audio equipment. It appears the active-matrix OLED manufacturers have been working their way through start-up issues. Display search estimates that the OLED market will be over 800 million in 2005. 300 million of the '05 market is projected by display Search to be full-color active matrix displays, our target markets for cell phones, digital cameras, portable TVs. portable DVD players, PDAs, and other small format uses. Display search also projects the OLED market to grow to 2.2 billion by '08. Principally in full color active matrix OLED, and we are positioning our PHOLED technology to capture a significant share of that market.

In March we completed a successful $30 million public offering to bolster our balance sheet. This additional funding will enable us to take steps to support our future growth. We took the opportunity to purchase our headquarters building in New Jersey, which houses or state of the art facilities. We began an expansion program to add new clean room space, laboratories, and offices. These steps provide the necessary infrastructure to enhance our current business and provide the foundation for new initiatives, that will bring Universal Display Corporation into the future.

We've been in the entrepreneurial world for a long time. It always takes longer than you think it should, but when success comes it comes quicker than anticipated. Our results during 2004 were acknowledged by the technical and business communities. In May our phosphorescent technology was named material of the year by the Society for Information Display, and in November we were named the New Jersey public company of the year, by the New Jersey Technology Council.

Our IP licensing model provides the potential for significant leverage and strong margins with minimal sales and marketing expenditure requirements. In addition with our portfolio of over 625 patents issued and pending worldwide, and our world-class research team and business partnerships, UDC is extremely well positioned to profit for the future growth of the OLED market.

With that, I will turn the call over to Sid who will discuss the financial results for the year in more detail. Sid.

Thank you, Steve. Thank you everyone for joining us today. As Steve mentioned, 2004 was a year of continued progress for Universal Display Corporation. We saw continued incremental revenue growth with consistent expense management. At the same time we took steps to significantly bolster our balance sheet.

Revenues for the year were approximately $7 million compared to 6.6 million for 2003. During 2004 we saw the transition in our revenue new stream where technology development revenues were a significant source of funding for us in past years, we began to see the transition of manufacturers focusing on commercializing OLED technology.

At the same time, recurring commercial revenue sources, such as contract revenue, license fees, and royalty revenues began to increase. For the year contract revenues were 2.6 million, almost doubling from $1.4 million last year. License fees and royalty income more than doubled to 400,000, from 159,000 in 2003. License fees and royalty income for 2004 was comprised of $344,000 from reporting license fees from the sale of our proprietary materials to Pioneer Corporation.

In addition we realized royalty revenues from the sale of OV PD research and development tools by AIXTRON AG. OVPD, Organic Vapor Phase Deposition, is our proprietary next generation manufacturing process, which we have exclusive licensed to AIXTRON AG. In addition AIXTRON has delivered its first production tool to [Write Display] in Taiwan, which is currently undergoing testing.

Commercial chemical sales increased to $147,000 from 68,000 in 2003. The increase, while not significant from a dollars value standpoint, it does indicate that our technologies are beginning to get traction from a commercial standpoint. Revenue from the sale of developmental chemicals was 2.5 million for the year, an increase of approximately $200,000 from 2.3 million in 2003. This is a result of the continued interest in our proprietary FOLED materials.

Operating expenses for the year remained stable at -- 24.2 million, virtually the same level as 2003. R&D accounted for the majority of operating expenses, totaling $16.7 million for the year compared to 17.9 million for 2003. Although R&D expenses declined in dollar value, our efforts in research and develop increased. Our in-house efforts increased to 8.2 million compared to 7.2 million in 2003.

In addition, the major reduction was in the accounting for the equity issues to PPG Industries. These efforts were increased, however the expenses recording decreased to $4 million in 2004, from $6.5 million in 2003, and this is based upon the stock value at the end of each quarter when we record the expenses.

Going forward our plans to continue to carefully manage our expense levels, to conserve cash as we move towards commercializing our technology. For the year we posted a net loss of $15.9 million, or $0.59 per diluted share compared to 2003's net loss of 18.4 million. or $0.82 per diluted share. The bottom line improvements were partially attributable to an increase in interest income during the year, as our cash balances were higher throughout the year on the heels of our March 2004 secondary public offering.

In addition, we realized a tax benefit of just over $600,000 due to the sale of our New Jersey net operating losses, which would have expired unused.

Turning the balance sheet, we have strengthened our cash position over the past two years. We ended 2004 with a cash balance in excess of $51.7 million, of which 4.5 million is restricted as an offset to our loan for the purchase of our building. Our working capital increased to $40,600,000. We continue to have a low cash burn rate. Our cash used in operating activities was approximately 6.9 million compared to 5.8 million during 2003. Our cash burn has averaged less than $6 million per year for each of the last 3 years, and we intend to continue conserving our cash.

We invested significantly in our physical infrastructure in 2004 with net Property, plant, and equipment increasing to $9.5 million from $3.5 million in 2003. As Steve noted, we acquired our headquarters building and expanded our technology development infrastructure, which accounted for the majority of the increased capital expenditures. We invested 7.4 million in CapEx during the year, compared to 950,000 in 2003.

With that, we'd like to open up the line for questions. The operator will now come on and start taking questions.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS] Our first question is coming from Jed Dorsheimer of Adams, Harkness & Hill.

Hi, guys. I guess I have a couple quick questions. First off, you know, we haven't seen any new licensees signed up, and there's been some recent speculation that your focus may have changed from the strategy of signing up some licensees to more of a commercial supplier type of -- chemical supplier. I was wondering if you could make comments on that, or give a little bit further color?

Well, we have not changed our strategy, so I don't know where that has come from. We are a technology licensing company. Our revenue streams that we intend to come from licensing our proprietary technology, where we enter a license agreement and get a license fee and a running royalty. That is what we have been, and that is what we will continue to be. We do sell our proprietary materials, and that is part of our licensing strategy, but we have not changed anything to become a material supplier, and abandoning our licensing strategy.

Great. Then any expectations with respect to when we should see an any additional licensees signed up? Do you believe it will be next quarter? Within the next six months? Within the next year?

It's difficult to answer that question. We obviously are talking to a number of different companies. We would expect to sign up at least a couple this year, but the timing of which is very difficult, just because of, we know where we are with different negotiations with folks, but we are not at liberty to discuss that. As soon as we enter a license agreement, we will publicly announce it.

Great. Then could you give us a little bit of color. It seems as if the OLED market in general was pushed out a little bit. I was wondering is that was primarily a result of the blue lifetimes or is it a result of other factors in the manufacturing process, and then maybe an update with respect to to what you've been seeing recently?

Jed, the OLED market we think was pushed out a little. It didn't match the '04 projections that people had. It seems that the principal cause of that are the manufacturing start-up issues. Right now there is a full-color set of materials in small molecules that manufacturers can use, and they're going through the manufacturing start-up issues. Now to try to get product into the marketplace.

Great. Just a little -- no pun intended, but a little color with respect to the lifetimes. We're seeing a wide variety of lifetimes. It might be helpful if the industry, you know, sort of standardized on a certain brightness level, with comparison between polymers, florescent, and phosphorescent. What typically is the required brightness that your manufacturers will spec out?

I'll agree with you that it would be helpful if there was standardization on the specific metric, but everyone seems to be using somewhat different metrics in order to discuss their lifetime. We're seeing manufacturers looking I think at between 400 and 1,000 nits in display lifetimes, depending on color.

And we have published our latest lifetime data, based upon what we believe our display level brightness is, which is 1,000 Nits for green and 5,000 for red, and in blue we haven't published anything on.

What are the manufacturers requiring for a brightness of blue?

We usually see in between 300 and 600 Nits.

300 and 600.

Yeah.

Lastly, Kodak, I think one of their original patents when they discovered small molecule OLEDs back in the 80's, it would seem, just by doing the math, that that patent might be coming up on expiration. When does that patent expire? What would that do? Would that create an opportunity for manufacturers to combine florescent and phosphorescent devices?

Well, they already have -- there already have the opportunity to do that. It's simply a question of negotiating two license fees when you have to combine the two. Some of Kodak's earlier patents have already expired. They do have a florescent [doping] patent that expires in the U.S. in 2007.

Great. I'll pass it on. Thank you.

Thank you, Jed.

Thank you. Our next question is coming from Jim Ricchiuti of Needham and Company.

Yes. Good afternoon. You talk about the potential for two licensing agreements in '05? Would that you think have a more meaningful impact on revenue in '06?

What we hear from the industry, it's clear that the OLED acceleration will start in '05, and really start to take off in '06. I think it will have an impact on our revenues in '05, but the bulk of it will be as some of the larger manufacturers get online with higher volumes of OLED displays, which has been projected to be in '06.

Can you give us a sense as to the types of applications that you're expecting to take off in late '05 and early '06?

A lot of those applications, obviously, are proprietary to our customers, but we're seeing small format applications. Any application that would use videos, a small cell phone that would use video, 2.2 inch or larger portable TV, portable DVD players. The small format displays, are what people seem to be focusing on, and OLEDs have such an advantage over LCDs from a viewing perspective when you're looking at video. I think that can be a very important product application.

Okay. Can you talk a little bit about the -- what you're seeing in the government market in terms of -- I guess what I'm trying to get to also, is how much visibility do you have in terms of that portion of the business? If you look out at '05 and look at what you have in the way of say, contract and research revenue, can you give us a sense as to what you see in your revenue stream?

Sure. As Steve said, we were granted the largest number of government programs this year for approximately 7.9 million new ones. We have about $9.8 million of government programs that we have won, or have been awarded to us, most of which will be done over the next 2 years. So that work will be performed over the next couple of years fairly evenly.

Great. And, Sid, can you talk a little bit about what you see in terms of the operating expense side? Your R&D was down in absolute dollars. How would you see that in '05?

I think what we'll see, is some growth. We've expanded our facility. As we said, we purchased our facility. We're building a new cleanrooms. I would expect on the R&D side to see growth on our facilities, if we break it out in footnote number 2, we break out our R&D expenses between our facilities, patent expenses, prints and contracts, PPG Industries, and scientific advisory board.

Our internal expenses I would expect to see grow somewhere between 10 and 15 percent on the R&D side as we start to fill up the facilities with additional equipment as we build our flexible technology. This pilot line, and continue to further develop our technology. I don't see on the G&A side very much growth.

Okay. Thanks a lot.

Thank you, Jim.

Thank you. Our next question is coming from Chris Kinkade of SG Cowen.

Yeah, you mentioned that you signed 8 new development licensees in 2004, but it looks like technology development revenues declined year-over-year. Can you help us understand why the revenues were down?

We work with a number of different -- we now work with 20 different companies. It depends on what it is they would like us to do. Some of our evaluation agreements are strictly evaluating our materials, where the manufacturers say we really don't need any help. We have our own program. We don't want to share any information. There are others tha that we work with and have worked with, where they really would like to do a lot of joint development work. When there is work involved with us, we charge for that.

So although the numbers have increased, our technology development and revenues go down, a lot of folks we're talking to today have had their own in-house programs, and really have learned a lot more about what they think the benefit of phosphorescent material is, and we are providing them evaluation and materials, under an agreement that says, this is under the valuation basis for R&D purposes only, and if you intend to make a commercial product with us, you need to enter into a license agreement with Universal Display.

Great. You commented on OpEx. I was wondering on CapEx for 2005, it sounds like the bulk of your CapEx requirements were made in 2004, but can you comment there?

I think last year was obviously the acquisition of the building and some of the acquisition of the equipment. We probably have about $2 million worth of construction that we're going to do in our facility to completely outfit the remaining of it, and some equipment of that which may be up to an additional $1 million, but that's about it.

Okay. . Thanks a lot.

Thank you.

Thank you, once again as a reminder, if you do have a question, please press star 1 on your touch-tone phone. Our next question is coming from Shannon Cross of Cross Research.

Hi, guys. Can you talk a little bit about what your partners are saying, in terms of yields obviously on the display sid, and then if there's any difference between LTPS and [anamore polysilicon], in terms of the yields people are seeing?

Unfortunately, Shannon we talk a whole lot about the yields they're seeing, because it's proprietary to them.

How about in general?

It's low. It's not yet high enough to be seeing volume commercial production, but they're seeing significant improvements.

What issues are they noting, and what are the gating factors towards kicking the production up?

I'm sorry, Shannon. Could you repeat that one more time.

What issues are they noting, within the yield issues? Anything specific that we can watch for in terms of, you know, development within the fabs to then note that hopefully yield should improve?

I don't think there's anything significant. It's just generally the manufacturing scale up when people started doing this, they thought it was going to be easier than it was. You go through each different masking step, and it has to match the next masking step. As you have those additional steps, when you have a defect, you multiply defects, and it can result in a lower yield. They're seeing significant improvement, and we're seeing a lot more optimism from the manufacturers.

In the past we heard a lot more about the low temperature polysilicon back plane yields and the stability of the TFTs, and we are not hearing that any longer.

Okay. And then from the standpoint of the various manufacturing methodologies, I would assume at this point that you are using the vacuum chambers and spin coating. How is your -- I always get the acronym wrong, so I'm not going to try. Your manufacturing process going?

OVPD, organic vapor phase deposition?

Yes. That one I mangle every time I say it.

You're not alone in that at all. We'll try to simplify our names as we move forward. There are 3 or 4 research tools, OVPD research tools that AIXTRON sold to different researchers, and there's a production tool that they delivered to Write Display. That's still undergoing acceptance testing.

That can hold to again, up to 3.5 glass size.

Do they plan on signing additional contracts, I would assume?

As far as we know, they're actively marketing the technology, and they have a number of leads, but there is nothing that has been signed, and there's no specific delivery. I think to be perfectly honest, I think folks are waiting for the right display tool going online.

Okay. . Great. Thanks.

Thank you, Shannon.

Thank you. At this time I'd now like to turn the floor back over to management for any closing comments.

Thank you, everyone, for joining us today. We're certainly very excited about our prospects at this juncture. UDC stands at the brink of an emerging [OLEG] market, are in a leadership position in technology development, excellent business partners, one of the most robust patent portfolios in any industry, and a licensing based business model that's scalable and flexible.

We have recently revised our website, so if there's additional information, you would like about OLEG or UDC that would be an excellent site to visit. We look forward to speaking with you again, and keeping you apprised of our progress.

Thank you, everyone, for your support.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.