Universal Display Corp (OLED) 2005 Q1 法說會逐字稿

Good evening and welcome to the Universal Display's first quarter 2005 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 your host, Joe Crivelli. Sir, you may begin.

Thanks, Nicole. Thanks everyone for joining us today. With us today are Steve Abramson, President and Chief Operating Officer, and Sid Rosenblatt, Chief Financial Officer of Universal Display Corporation.

Let me start by reminding you the call is the property of Universal Display Corporation. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of 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 the call contains time sensitive information that is accurate only as of the date of the live webcast of this call May 9, 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 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 report filed with the SEC.

Universal Display Corporation expressly disclaims any obligation or undertaking to update or revise any forward-looking statements contained herein. Now I'd like to turn the call over to Steve Abramson, President of Universal Display Corporation. Please go ahead, Steve.

Thank you, Joe, and welcome, everyone, to Universal Display Corporation's conference call to discuss our results for the first quarter of 2005. To start off the call this afternoon, I'll be reviewing some recent key highlights and then Sid Rosenblatt will review this quarter's financial results. At the conclusion of our prepared remarks, we'll have a brief question-and-answer session at which time we'd appreciate questions or comments you may have.

When we last spoke less than two months ago, Universal Display completed a year in which we entered into eight new OLED evaluation and development agreements and the outlook for 2005 was optimistic. I'm happy to report our outlook remains the same bolstered by our belief that our OLED technologies are well on their way to industry adoption and commercialization.

This belief was supported by our signing of an OLED patent license agreement with Korean based Samsung SDI in April. I'm sure you've all seen the press release regarding this important milestone for both Universal Display and Samsung SDI. The agreement paved the way for Samsung SDI to integrate our proprietary OLED technologies into their active-matrix OLED display products. Samsung SDI had previously announced the construction of a $700 million Gen-4 OLED fab. The fab will incorporate their low-temperature polysilicon backplane technology with OLED fabrication equipment and will be using mother glass substrates of 730 by 920 millimeters.

As you also may know, Samsung SDI is the largest supplier of passive-matrix OLED displays in the world. Our PHOLEDs have been shown to be up to four times more power efficient than traditional fluorescent OLEDs which is key for lower power consumption, less heat generation, and longer operating life times. Our 4-year relationship has truly begun to bear fruit as Samsung SDI now plans to move forward with volume manufacturing using our proprietary OLED technologies. And we believe this relationship and partnership will continue to be a key factor in reaching our goals for commercialization of our OLED technologies.

Also we announced in April that with our business partners we won the Advanced Display of the year 2005 Grand Prize Award of Finetech Japan. The use of this award almost seems to have gotten lost in the excitement over the license agreement with Samsung SDI. So, I'd like to take a few moments to discuss it.

Finetech is one of the largest display conferences and exhibitions in the world. It is a Japanese equivalent to the SID conference and exhibition in the U.S. Last year our PHOLED won the Material of the Year at SID and this year our PHOLED technology won the grand prize at Finetech. Specifically for the full-color sub-display that's being sold by Pioneer in Japan, which is our first commercial product.

This award helps solidify our position in Japan. We won the award with our Japanese manufacturing partner Tohoku Pioneer, the second largest OLED manufacturer in the world, and the first company to ever manufacturer OLEDs, who made the display, it's parent company Pioneer Corporation, and Nippon Steel Chemical Company, a subsidiary of Nippon Steel Corporation, a major Japanese OLED material manufacturer who made the host material for the product.

Our strategy has not changed nor has our belief in the commercial viability of our OLED technology. With a potential OLED market projected to be 5.2 billion in 2008, Universal Display's extremely well positioned to capitalize on the market opportunity through the superiority of our technology and our ability to execute our strategy effectively. Display Search has recently published that they expect the active-matrix OLED market to begin to take off in 2006 projecting active-matrix OLED revenues of almost $700 million. This is about half the total OLED revenues of 1.4 billion they projected in 2006 as they anticipate the LPPS yield issues to be solved this year.

We are continuing to build our infrastructure here in our Ewing facility, and we expect to be finished with the first phase of the project shortly. The significant investment in the future will enable us to expand our R&D efforts with additional clean-room space, laboratories, and offices. As the OLED industry grows and matures, we will utilize this infrastructure to support our growing business.

Looking to the future, we see our revenue streams expanding along multiple fronts. Technology development and evaluation agreements, and sales of development chemicals as we work with partners to incorporate our materials and technology into their manufacturing lines, commercial license and material supply agreements, leading to IP licensing agreements and sales of our proprietary materials, and government contracts with the Military for Next-generation flexible OLED displays, and with the Department of Energy, for future Solid State Lighting applications.

We expect that these developments will enable us to continue our leading edge invasions into major new markets. As we know the timing of these events is difficult but the Samsung license agreement is strong evidence that we are moving in the right direction.

With that I'd like to turn the call over to Sid Rosenblatt who will discuss the financial results for the quarter in more detail. Sid?

Thanks, Steve, and again, thank you all for joining us today. Based upon requests from the investor community, we have included in our press release all of our financial statements, and we will continue to do so in future earnings releases.

For the quarter the Company posted a net loss of approximately $5 million or $0.18 per diluted share compared to a net loss of $4.1 million or $0.17 per diluted share for the first quarter of 2004. Revenues for the first quarter of 2005 totaled approximately 1.5 million compared to revenues of 2.1 million for the first quarter of 2005. Contract revenue increased during the first quarter of 2005 to approximately 700,000 compared to approximately 412,000 for the first quarter of 2004. The increase is a result of the Company starting to work on a number of new contracts and subcontracts. We expect the growth in contract revenue to continue in 2005.

Technology development revenue declined for the first quarter to $250,000 compared to 700 in the same quarter of 2004. As I discussed before, technology development has been a significant source of funding for us historically, however due to the early stage of commercialization of our technology, it is difficult for us to predict the timing and the amount of these revenues from customers. Developmental chemical revenue, commercial chemical revenue, royalty revenue, and license fees also declined compared to the same quarter 2004. Again the timing of these streams is difficult to predict, though they may accelerate during the second half of 2005.

Operating expenses increased to 6.7 million compared to 6.3 million in the same quarter of 2004. R&D, again, accounted for the bulk of our operating expenses totaling 4.6 for the quarter while G&A expenses accounted for 1.9 million of the total operating expenses. The increase was mainly attributable to additional costs associated with running our facility in Ewing, New Jersey.

As always, we are looking to conserve cash as we approach commercialization of our technology. Looking at our balance sheet we remain strong from a cash perspective with approximately $49 million in cash and over $70 million in total assets. Deferred revenue on our balance sheet increased to 6.5 million for the quarter and was 5.8 million for the same quarter in 2004, a $700,000 increase.

Deferred revenue represents payments from customers for license fees and other future revenues which reduce our cash used in operating activities and will be recorded as revenue in the future. This does not include any payments from Samsung SDI, due to the fact that the Samsung SDI license agreement was entered into in April of 2005. We have consistently controlled and managed our cash burn while moving forward and, in fact, our net cash used in operating activities totaled approximately $1.2 million during the first quarter compared to 1.9 million for the first quarter of 2004.

With that I would like to open up the line for any questions.

Thank you. The floor is now open for questions. [ OPERATOR INSTRUCTIONS ]

Our first question is coming from Jed Dorsheimer with Adams Harkness.

Thanks. Hi, Sid and Steve. How are you?

Fine, Jed, how are you doing?

Fine, thanks. Couple questions. First, when did you enter into the evaluation period with Samsung SDI? And as a follow-up I guess, as we look at the number of evaluation contracts that you have now entered into with other suppliers, trying to get a better idea using Samsung SDI is a proxy as far as timing and when we would expect to see additional licensees signed up? Thanks.

Jed, we signed our initial development agreement with Samsung in 2001. I'm not sure you can use that as a proxy because everybody progresses at different rates and the market was very early back then until we signed up with Sony and Samsung to really get this technology moving. Now it looks like the market is starting to accelerate, the commercial market, so I'm not sure of the length of time between the initial Samsung development agreement and the license agreement is a good proxy for future commercial agreements.

Okay. When these other, was it eight, evaluation contracts that you're now in, when -- what time periods were they entered into? Had those just recently been entered into?

The eight were actually all entered into last year. We had 20 total at the end of last year, so 12 would have been entered into before last year.

The green period is probably from 2001 through 2004.

Great. And given the fact that Samsung SDI is somewhat validating, you know, or not somewhat but validating your technology at this point, how many additional licensees would you expect to have signed? One, two, or all eight during this fiscal year?

It's a difficult question to answer. We would like to sign them all up, obviously. But again, it really depends on different stages of development and we will do our best to convert as many of these as we can into license agreements. As we said before, the timing of how long it takes to complete these is difficult for us to predict. We are at varying stages with a number of different companies, but at this point, it's too hard for us to say when and how many we'll be able to sign up this year.

I understand. Maybe last point on this, would you expect to have at least one additional licensee signed up this year?

Yes. We would expect to have at least one additional and as many as we we possibly can.

Great. And then looking at the Samsung SDI plans a little bit closer, I was wondering if you could make any comments with respect to, you know, the 700 million investment in the Gen-4 fab. Are you able to comment on what levels of capacity that would bring to market?

Jed, we really can't comment past what Samsung SDI has already released to the market.

Got you.

Except it would be a lot.

Yeah. Probably in the tune of about 100 million panels, it would look like.

It's -- I think actually, Display Search does some estimates of what a Gen-4 fab would do. But we really can't talk about it.

I understand. Thank you. Sid, just looking at the financials a little bit closer, the cash burn was much lower than at least what we were expecting. I was wondering is that level expected to continue throughout 2005?

We Would like it to continue. Our plan is to use as little cash as possible and I would expect it to be along is this path. We are always trying to conserve cash obviously and we try to manage our business where we use customers' money.

Great. Actually just moving back to the Samsung for one more question. Then I'll pass it on. I don't have the press release in front of me, and I was curious, has Samsung SDI noted when production will be complete and when we should start to see production from this contract and, in turn, revenues hitting your P&L?

What Samsung SDI announced was that they said as soon as production equipment is moved on-line, sometime at the end of 2005, production will begin. So that comes off of the Samsung release.

Wonderful. Thank you. And I'll pass it on. Congratulations by-the-way.

Thank you.

Thanks, Jed.

Thank you. Our next question is coming from Jim Richetti (ph) with Needham & Company.

Thanks. I just wanted to follow up on a comment you made. I think you were talking about a possible acceleration in revenue in the second half of '05 and I wasn't sure which particular of your revenue line items you were referring to. I'm wondering if you could just elaborate a little more on that. Thanks.

Sure. The government, the contracting revenue which is predominantly government contracts or subcontracts from government agencies we believe will accelerate during the year. We've announced we have in house 4.4 million in government contracts and an additional 4.8 million in Department of the Energy Lighting contracts that we will take as revenue over the next couple of years, so we're gearing these up and that number should accelerate.

We would hope that some of the other ones would accelerate also, but again, it's just difficult for us to predict. Whether it's developmental chemicals or commercial chemicals, license fees. We would hope that these are going to start to move up, but again, it's hard for us, without some history, to predict exactly what they will be at this time. But we're doing our best to accelerate all the revenues.

Okay. You cited some of the market forecasts including Display Search, talking about the active-matrix market taking off in '06. Is that consistent with what you guys are seeing? I mean, I know you can't talk specifically necessarily about license agreements, but is this consistent with what you're hearing from some of the folks you're talking to?

We have seen an increased activity across -the-board in companies that we work with on an evaluation basis and a joint development basis that it appears that a lot of the issues related to the LTPS back planes, and some of the manufacturing issues of marrying OLEDs with the backplane technology are being solved and we would expect, as Barry's number predict, that '06 should accelerate growth in active-matrix OLEDs. And we believe that based upon his forecast they are probably similar to what we see in terms of the number of companies that we would believe to be entering the OLED manufacturing space.

Thanks very much.

Thanks, Jim.

Thank you. Our next question is coming from Birkram Rahkenheshman (ph) with Core Fund Management.

Hi, just following up on one of the previous questions you commented that you expect to have at least one additional licensing agreement this year. What is sort of your target size of these licensing agreements?

The size of these agreements, essentially it is to license our technology, our core patent portfolio of our phosphorescent materials, and the licenses are, and the agreements include, a number of materials are used which are based upon the royalty rates. So the size of the agreements we don't talk about, and we don't disclose the rates, the royalty rates. So it's difficult to answer your question.

But is there something as far as putting a model together what we should think about giving some range, because right now I don't really understand what the range in the size of the contracts or the licensing agreement would be.

Just to give you a quick answer, and I'd be happy to spend some time on the telephone with you subsequent to this. You look at the market size which is the ASP of the display module and the industry historically has paid anywhere from 2 to 4% in royalty rates for that.

You have to take whatever share of that market you believe we would get, multiply it times that. In addition we would be selling our commercial chemicals to the customers also, so that would be an additional revenue stream for us. I'd be happy to spend a lot of time on the telephone with you anytime you would like.

Okay. Great. Thanks.

Thank you.

[ OPERATOR INSTRUCTIONS ] Our next question is coming from Shannon Cross with Cross Research.

Hi, guys.

Hi, Shannon.

Can you talk a little bit about the competitive landscape for OLED technology in general what you're seeing out of your two competitors and if there's anybody out there on the horizon?

We believe from a competitive standpoint the important thing is that OLEDs get into the marketplace and the customers and consumers start to see how much better a display the OLED display is. From a technological standpoint our phosphorescent material, when you compare it to conventional fluorescent technology, has a four-to-one power advantage and we believe that, that is a significant advantage in terms of these displays which the initial applications will be for portable devices. So that power advantage is significant when you compare it to fluorescent small-molecules and fluorescent polymer technology. The lifetime of our materials are commercially available, reds and greens have grown significantly.

Okay. And has there been any more development with regard to solution processing? Are you being able to, you know, use ink jets?

We are continuing to work in that area but we have not made any announcements of late.

On solution processing we've been working for a couple of years on our joint development agreement with DuPont and are continuing to accelerate that development with Seiko Epson.

So you're still working with Seiko Epson on that one?

Absolutely.

Great. Thank you.

Thank you. Our next question is coming from Murray Van de Velde (ph) with UBS.

Hi Sid and Steve.

Hi, how are you, Murray?

I'm fine, thanks. I know you can't talk about your individual licensing agreements or royalties, but can you probably state what chemical sales, you know -- is there some by way we can get a handle of what that might turn out to be because you can dictate that price and that probably would be pretty uniform to everybody, wouldn't it?

We can dictate that price, but the timing and the quantity of materials really depend upon the ramp up in the facility and as they bring these facilities on line, we have not -- you know, at that point we'll have a better feel once we get one or two quarters behind us, but at this time it's hard for us to predict what that will be in terms of the dollar amount and the quantities, so it's still difficult at this time for us to make any predictions. We do believe that these numbers will grow in the second half of this year, but for us to tell you what we think that number is, it's difficult.

I didn't mean from that point. I meant from the point of if we were going to talk 2 inch by 2 inch screen, you know, is that 25 cents of material on that? A dollar's worth of material that we'd have to make the projections of when and how many screens might get into the marketplace.

It's still a difficult question only because in the beginning the utilization of the materials would probably be significantly higher as the manufacturing process gets better. We have looked at the -- you know, from a rule of thumb-type of situation we look at these and say for the dope in materials that we would sell it's about 1% of the ASP per color, but beyond that it's really difficult for us to tell you what it is per square inch at this time because there really isn't a lot of history in terms of the manufacturer approximate as soon as we have some basis for doing that, we will.

Okay. Thank you. The last question I have that might help a little bit, what is a fourth generation fab? What technology will Samsung be using in that?

Samsung is using low-temperature polysilicon for the backplane and they have not yet announced what technology they are using for the OLED portion. It will be small-molecule. I think they announced they were putting in some evaporation.

Okay.

Thank you. Our next question is coming from Jed Dorsheimer with Adams Harkness.

Thanks.

Hey, Jed.

I think Samsung over in Korea, actually at a conference I was attending, announced that it would be laser-induced thermal imaging that they would be using.

Thank you.

Jed, are you in Asia?

Yes. I'm in Japan right now. Curious, just looking at the numbers for this quarter and while they are relatively meaningless, were there, you know, revenues were a little bit lighter than what we had been expecting. Were there any chemical sales or commercial chemicals that you may have been expecting to see this quarter that were pushed into Q2? Any color there?

Well, you know,, Jed, it's very difficult, as you know, to predict on a quarter-to-quarter basis. We all try to do that. Some quarters are going to be good, and some quarters are going to be not as good, so you do see some lumpiness in there. But we do seem to see a good strong ramp along our customer base.

Great. And cash burned for Q2, should we expect the same level, Sid?

Cash from operations, at this point it's hard for me to predict. I would like it to be in that range. I don't think it will be far off from that.

Got you. Just a follow-up to a previous competitive question. Is Sony actually paying royalties to Kodak at this point in time?

We couldn't answer that. You'd have to talk to one of those two.

Sure. And one of your competitors earlier today implied that they would have a significant breakthrough to announce for the SID with respect to lifetime. I was wonder finding you could comment at all on blue lifetimes? And then also as a follow-up, as we look at the large format panels, what your expectations are with specifications for lifetimes, are your customers -- or would Samsung be asking for, you know, 150 nits, 400 nits, 500 nits? 1,000 nits? Thanks.

On the lifetime of large area panels using depending on which color you're at which nit, they're generally looking for about 50,000 how hours. Whether it's 400 nits or 200 nits on blue and 500 nits on green or red, they are looking for about 5,000 hours on -- 50,000 hours on lifetime for the large area displays, and we're doing very well on the green and red. The blue creates an issue, which should be no surprise to anybody, but we are continuing to make progress on all aspects of blue. We think when you get to the large area displays, you're going to need the power efficiency provided by phosphorescence and that's why all these major manufacturers are working with us and we're working very hard to deliver the goods to them.

Great. Just in looking at because there is such a wide variance between what some -- what one of our competitors reports for lifetimes and what others in the industry report. I was curious when you do look at the, what the requirements are for blue, what is the typical requirement for a portable application and for a large format panel from brightness?

Generally you're seeing between 2 and 400 nits is what we're seeing for blue.

Great. And that needs to get to 50,000 hours.

Your initial portable format is probably 5 to 10,000 hours and in small-molecule, there is a small-molecule company that does have a blue fluorescent molecule that meets that need so the red, green and blue in the fluorescent-phosphorescent hybrid is there, the material science is there for small format devices, and we're working very hard to get there for large format devices as well.

Wonderful. Thank you. And lastly, with the upcoming SID conference in Boston, should we be expecting any announcements out of U.D.C. going into that or would it be a greater likelihood that we would see, you know, use the demonstrators in small-molecule as more of a proxy as far as how the business is going?

We announce significant events when they occur. We try not to plan them around events. What's important to us at SID, to be perfectly honest, is to see a number of different products and manufacturers demonstrating OLEDs. And it's a great opportunity for us to meet with all of our customers and do it all in a very efficient way. But we normally don't try to have a big press event at these conferences. We announce these as they occur.

Wonderful. Thanks, guys.

Thank you.

Thank you. There appears to be no further questions at this time. I would now like to turn the floor over to management.

Thank you. Well, thanks, everyone, for joining us. The momentum we have seen during the first quarter and early part of the second quarter of '05 has been promising. Certainly more recent developments confirm we are partnering with leaders in the industry and receiving the types of contracts that illustrate our OLED technology is the future of the market. We look forward to updating you all on the second quarter conference call. Thank you very much.

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

Thank you, Nicole.