Universal Display Corp (OLED) 2005 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the Universal Display second-quarter earnings conference call. At this time all participants have been placed in 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, Mr. Paul Johnson for Universal Display. Sir you may begin.

Thank you. Hello, everyone. Thanks 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 this 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, this call contains time-sensitive information that is accurate only as of the date of the live Webcast of this call, August 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'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 obligation or undertaking to update or revise any forward-looking statements contained herein.

Now I would like to turn over the call to Steve Abramson, President of Universal Display Corporation. Please go ahead, Steve.

Thank you, Paul, and welcome, everyone, to Universal Display Corporation's conference call to discuss results for the second quarter of 2005. I will be starting today's call with a review of some key events from the second quarter. Sid Rosenblatt will then review the quarter's financial results in detail. At the conclusion of our prepared remarks we will have a brief question-and-answer session when we will be happy to take questions from you.

The second quarter was a positive one for us from a number of standpoints. There were a number of key events that signaled our interest -- that signaled interest in our OLED technology continues to increase. On the commercial side, we signed an OLED patent license agreement with Samsung SDI during the quarter. The agreement paves the way for them to integrate our OLED technology into active matrix displays. It is a significant step towards commercialization and that relationship continues to be a very important one for us as we look to expand the applications for our technology.

We were also awarded a two-year $1.7 million Small Business Innovative Research, SBIR, Phase III contract by the U.S. Department of Defense to continue development of our flexible OLED display technology for next-generation military communication devices. This is an area where we continue to receive a great deal of interest from the Department of Defense and this program is supported by our installation of the Tokki full-color deposition system. This Tokki system effectively expands our capacity for prototyping a variety of full-color OLED displays on various substrates, including glass, plastic and metal foil. It is particularly important in pursuit of our flexible display initiative, an area where we have already seen $6 million in total government contract awards, as well as significant commercial interest.

Recently we announced a demonstration of a White OLED lighting panel with a record power efficiency of 30 lumens per watt using our PHOLED phosphorescent OLED technology, significant as it represents a milestone for the future adoption of White OLEDs for lighting applications such as those envisioned under our U.S. Department of Energy research contracts.

A long-awaited exciting event is a significant technology milestone that took place at the end of the second quarter that was announced at our annual meeting of shareholders. We achieved a fundamental technical breakthrough in the development of our Blue PHOLED Phosphorescent OLED technology, specifically a sky blue PHOLED with over 15,000 hours of operating lifetime. This is the first blue PHOLED which has broken through by an order of magnitude the 1000-hour lifetime barrier, a challenge that some people thought might be insurmountable. Again, this is something that some people had thought was simply not possible or otherwise a bit further down the timeline. What this rally means is that we have achieved another crucial milestone in the road to the development of fully-commercialized full-color PHOLED displays. If you are interested in seeing the specifications and color coordinates for this exciting breakthrough, please visit the technology portion of our Website at UniversalDisplay.com.

Finally, we saw contract research revenue grow and a significant increase in developmental chemical sales. We continues to progress on all fronts technology, contractually and financially. As I mentioned, Steve will be on shortly to discuss the financial results in full detail, but I am pleased to report that we increased revenue from quarter to quarter and six months compared to six months, and reduced our loss. And we continued to control cash burn and leverage our infrastructure.

The infrastructure itself also grew during the second quarter with the completion of new clean rooms and office space at our headquarters here in Ewing, New Jersey. This state-of-the-art research facility represents how we have grown, where we are going as a company, and stands poised to serve the inevitable growth in the OLED markets in both the private and public sectors.

The second half of 2005 should bring more technical and commercial progress for Universal Display. As we look to the end of 2005 we intend to keep doing what we have been doing, seeking advancements in our OLED technology, expanding existing partnerships and contracts obtaining new contracts, and driving the commercialization of OLEDs as the industry moves closer towards introducing active matrix OLEDs into the marketplace.

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

Thank you, Steve, and again, thank you, everyone, for joining us today. For the quarter the Company posted a net loss of $3.2 million or $0.11 per diluted share, compared to a net loss of 4.5 million or $0.17 per diluted share for the second quarter of 2004. Revenues for the second quarter of 2005 total approximately $3 million compared to revenues of approximately $1.5 million for the second quarter of 2004. The reduction in the loss for the second quarter was a direct result of the $1.5 million increase in revenues, offset to some extent by a $250,000 increase in operating expenses compared to the second quarter of 2004. Research and development expenses are and will continue to be the bulk of our expenses.

Revenues for the first half of 2005 were 4.5 million compared to 3.6 for the same period in 2004. The loss for the first half of 2005 was 8.2 million compared to 8.6 million for the same period in 2004. Again, the loss was reduced as a result of increased revenues, offset to some extent by an increase in operating expenses, mainly on the research and development expenses.

Government contract revenue increased during the second quarter of 2005 to approximately $1.5 million, compared to approximately $885,000 for the second quarter of 2004. Government contract revenue for the first six months of 2005 was 2.2 million compared to 1.3 million for the first half of 2004. This increase in revenue was anticipated as we began to work on a number of new contracts and subcontracts in the first quarter of 2005, and we expect to see the contract revenue to be in the 4.5 million to $4.8 million range for the rest of the year. This is based upon existing contracts.

Developmental chemical revenue increased to 1.1 million compared to 259,000 for the second quarter of 2004 and was 1.5 million for the first half of 2005 compared to 1.1 million for 2004. Developmental chemical revenues represent the sale of our OLED materials that are used by our partners to evaluate our materials for future inclusion in their OLED products. The acceleration of developmental chemical sales is an encouraging sign for the future, but the dollar amount and the timing of these sales is difficult to predict.

During the second quarter of 2005 we shipped developmental chemicals to 10 different customers compared to four in the same period of 2004. Technology development revenue increased in the second quarter to 332,000 compared to 250,000 the same quarter of 2004. Revenue in this category is based upon existing technology development programs with commercial partners.

There were no commercial chemical revenues in the second quarter of 2005 due to the phasing out of the product in which it is being used and no corresponding license fees were recorded. Royalty and license fees for the second quarter of 2005 were fees recorded as a result of the signing of a patent license agreement with Samsung SDI. In connection with this agreement, UDC received an upfront payment of license fees and of royalties, both of which were deferred. The deferred license fees are being recognized as license revenue over the life of the agreement. The deferred royalties will be recognized as products are sold and royalties are earned. Please remember that as in the case every quarter so far, the early stage of commercialization of our technology, it is difficult for us to predict what the timing or the amount of revenues from customers on a quarter-by-quarter basis.

Cash used in operating activities was approximately $2 million for the six months ended June 30, compared to 3.9 million for the same period in 2004. The cash used in the second quarter of 2005 in operating activities was 811,000 compared to 1.9 million for the second quarter of 2004. The reduction in cash used for operations is a result of the increased revenues and the increased deferred royalty and license fees that we received.

Our balance sheet remains strong with over $70 million in total assets, a cash position including cash equivalents and restricted cash of approximately $45.8 million compared to 49.4 million at December 31, 2004, and more than $7.6 million in deferred revenue on our balance sheet.

We would like to thank you for attending this conference call, and with that, we'd like to open up the lines for any questions. Operator, you may do that now.

(Operator Instructions). Jed Dorsheimer, Adams Harkness Hill.

Congratulations on hitting some milestones this quarter, guys. First off, Steve, I was wondering if you could maybe talk a little bit about how difficult it is to ship the molecular structure of the materials in order to reach usable chromaticity coordinates. In other words what I'm trying to get at is the difficult part already achieved in reaching the milestones, or do you think it will take the same amount of time in order to reach usable XY coordinates?

If you're talking about blue, the most difficult thing was breaking the 1000-hour barrier hitting the lifetime. We have already shown that we can hit deep blue chromaticity targets with different molecules, and now the object is to put together the deep blue chromaticity with the high efficiency with the long lifetime.

And then looking at the Samsung SDI agreement in a little bit more detail, did you include any provisions for blue PHOLEDs, or are they willing to go to market with two licensing agreements?

You will actually have to ask them that question. Anything that relates to the product of our customers you need to talk to them about.

Can I ask you a different way? Can you comment on whether or not you have licensed blue PHOLEDs to Samsung SDI?

The structure of our license agreement is based upon a specific -- based upon different colors, and we do not necessarily have to provide all three colors. They use our phosphorescent materials when they are available. So you can have a hybrid product.

I guess what I'm getting at is -- and maybe you could just comment on what your own assumptions are here -- is the holdup in seeing small-molecule OLEDs reach commercial production into the marketplace, is it more of a technology issue or is it more of a business model issue, where the -- by having to pay two licensing agreements, this is the real holdup in signing additional customers, and what your thoughts are with that, maybe a little bit more insight on that.

I think delays are due in large part to technical issues regarding the LTPS backplane and being able to yield the LTPS backplane. According to the recent reports from Display Search, those issues are being rapidly solved. And we are seeing that type of information in our own meetings as well. I think in many industries you need to take licenses for more than one technology provider, and I don't think that is a significant holdup in the industry.

And then looking at -- I was wondering if you could remind us of when the Phase I of the SDI is scheduled to go into production. I know they have publicly announced the investments in the fab. Did they also announce when that is scheduled to commence?

We have read the same published reports that you have, and they're talking about volume productions in '06.

Lastly, as you look at the conversations that you're having with some of the other potential licensees, I was wondering -- these potential customers; do they already have existing gen-4 fabs that they would be retrofitting to OLEDs, or would this require new investments on behalf of these potential customers? And then any sense of timing as to when or how long after signing the royalties may hit your P&L?

Some of the people that we're talking to have existing fabs anywhere from gen-2 to gen-5; others of them would look to set up new fabs, because there's some people that want to be new entrants into the market; other people are long-term display players. And in terms of how long it may be before they go from a license agreement into production, it really depends on the way the negotiations work. It could be anywhere from a distance away to the next day, depending on how the negotiations work and how the partnership evolves.

Jim Ricchiuti, Needham & Co.

Just a question on the government and contract revenue. You indicated 4.5 to 4.8 million for the rest of the year; is that correct? How would that be split, if you can give us some sense, between Q3, Q4? Is it going to be pretty even?

That would be for the entire year.

Okay. That is what I wanted to clarify. And just on the customers, you talked about the -- on the development chemical side an increase in the number of customers that you've been shipping to. Can you give us a sense as to where these customers are in terms of geographically, and potentially what kind of applications they are working on? I realize you can't name the customers, but is there any color you can give on those?

They are either customers that we have announced agreements with, whether it is a joint development agreement or we're working with them. And we have a number of -- we said we have more than 20 agreements in place today. They essentially are Japan, Korea and Taiwan. And what we have seen is the initial entrants into this marketplace are cellphone-sized displays, small-area displays. Some are doing research on larger-area displays. It is all over the place. It is everybody you would think, though.

Is any -- have you seen in the last couple of, say, the last three to six months, more activity out of companies in either Korea or Taiwan, outside of the SDI announcement?

I don't think we can specifically state we're seeing more. We are saying, obviously, based upon the results, more interest across the board in OLEDs and introducing OLED products with our phosphorescent technologies. So I don't seen it in one place versus the other, to be perfectly honest.

On the R&D spending going forward, should we assume that that is going to be ramping up in the second half of the year? How should we think about your R&D spend?

I don't believe it should be ramping up. There is always some increases in that we always are looking to bring some folks on, but I don't see any significant increases. You can sort of look at past history and it should project where it is going.

Just as you look at the government business, do you -- can you give us any indication if it is an active pipeline potentially for new contracts or new development contracts on that side of the business?

We are in a number of different phases, Phase I SDI (ph), Phase II, we've received some Phase IIIs. And there is a lot of government interest in this technology, whether it is for flexible technology for lighting applications. And we are seeing more and more activity. Whether this will grow significantly; it obviously has grown significantly in the past year, and we would hope that it will continue to, because these are paths that we think are very important in our development scheme, which is phosphorescent OLEDs in active matrix displays, flexible technology and lighting applications.

I was also particularly interested in the lighting application side, only because there's been a lot of press of late in that area. And I was wondering if you are seeing any increased activity in that area, but it sounds like it has been fairly steady.

Yes, it's been fairly steady, and this year has been a very good year in terms of what we have received from the letting applications. So it is steady and it is growing. There's more and more interest.

Rob Stone, SG Cowen.

Steve, I wonder if you could put a little more detail on the treatment of the Samsung deferred amount. What is the term of the contract and the amount of deferred license revenues that is on the balance sheet now?

The term this license agreement was announced to be June 30th, 2010 is this license agreement covers. (indiscernible) period for five years and some months.

So it's five years. And the amount that was deferred?

We have not disclosed it, but you can actually look at our balance sheet and see where the increases in deferred revenues are. And a significant portion of that is Samsung, but we do not disclose those specific amounts.

That was actually my follow-up question was whether the quarter-to-quarter increase was entirely related to Samsung, or whether there was some other activity in there?

There was other activity in there.

In terms of your development chemical sales which jumped up quite a bit both year-on-year and sequentially, I think if I interpreted your prepared remarks correctly, those orders can be kind of lumpy. Do you have any sense of customer requirements for, say, the balance of the year?

As we said, they are lumpy and it is difficult for us to predict only because we get some estimates, but realistically the estimates are not binding. And it is very difficult for us to try to project or give any color on that number just because it is a number that we do not have a lot of control over and a lot of history on. Obviously we would like it to continue because it shows more and more interest in our proprietary technologies and our materials, and we would hope it would continue. But I can't give you much more than that.

I think you said that the number of customers to whom you shipped this quarter was 10 versus four last year. Did I get those numbers right?

That is correct.

Was there an increase in the number of customers versus the first quarter as well?

Yes.

Finally, I'm going to ask you about a number that you probably can control (multiple speakers) having purchased a new tool and new lab space and office space, can you comment on what you think your CapEx spending is going to be for the balance of the year, or what it will be for the full year?

The CapEx spending for the full year is probably going to be close to $4 million. We've done -- we've purchased the equipment and we are doing the expansion in our facility, completed, as Steve said, some clean rooms -- the clean rooms and some office space, and we still have some additional expansion to complete in here. So you see in the cash flow statement 2.7 million of CapEx this year; I suspect the number for the year will be about $4 million.

So you're past halfway?

Yes.

(Operator Instructions). Andrew Abrams, Avian Securities.

I wonder if you guys could give us a status report on the OVD product and on any changes that you're doing with PPG, just so we understand where you guys are in terms of making any of those changes. And on the OVD side, maybe giving us a handle on any additional shipments that have been made but haven't been booked or that kind of stuff.

Thanks, Andy. The technology that we have licensed to Aixtron AG, the Organic Vapor Phase Deposition technology, as we hear it is in the final stages of acceptance at (indiscernible) display this tool was shipped there quite a while -- I guess it was almost nine or 12 months ago, in the final stages of acceptance. We do not know of any additional commercial tools that have been announced by Aixtron. And I think there's at least one that they've talked about on a research level that they have an order for. As we get that information and as we get paid the royalties, we disclose it. We are not -- we don't really talk much about that until we receive confirmation that a tool has been sold. It really is Aixtron's business, not ours.

From the PPG side, as you've noted, in the 10-Q there is full description of us modifying our PPG agreement where there is a description in the 10-Q talking about extending it for one more year. And all of the detail -- there's a lot of information in the Q talking about some of the terms in they are. The PPG relationship that we have is one that has been very good and continues to be very good.

At this time, ladies and gentlemen, I would like to turn the floor back to management for any further comments.

I would like to thank everybody for attending the conference call. Thank you. Enjoy the rest of your summer.

This does conclude today's teleconference.