Universal Display Corp (OLED) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. My name is Holly, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Display Corporation third-quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you. It is now my pleasure to turn the floor over to your host, to Mr. Paul Johnson. Sir, you may begin your conference.

Thank you, Holly, and thank you for joining us this afternoon. 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 expressed written consent of Universal Display Corporation is strictly prohibited. Further, 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, November 7, 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.

Thank you and welcome to Universal Display Corporation's conference call to discuss the results for the third quarter of 2005. I will begin the call today by sharing an overview of our third quarter, and then Sid Rosenblatt will review the financial results in detail.

At the end of our formal remarks, there will be a question-and-answer session. At which time, we will be happy to answer any questions you may have.

I am happy to report that the momentum we saw in the first half of the year continued through the third quarter. It continued to grow revenues overall during the quarter, particularly in the areas of government contract research revenues and developmental chemical revenues. This revenue growth is significant in that it signifies ongoing pre-commercial activity in the development application for our OLED technology.

The progress continues with gains on the top-line delivering improvement on the bottom line. Our net loss once again declined on a quarterly basis. As the leader in OLED technology development, we continue to obtain contract that drive improving financial results for the Company.

Our contract awards from the US Department of Energy progressed during the quarter, as we were awarded $850,000 in new programs. The first was a 9-month, $100,000 small-business innovative research SBIR Phase I contract. This was followed by a 2-year, $750,000 Phase II SBIR towards the end of the quarter. As you may already know, our work with the DoE is focused on applications involving our white OLED technology. Goal of the new Phase II program is to show an innovative approach to increasing the brightness of power efficiency of white OLED lighting using our proprietary phosphorescent OLED, or PHOLED, technology and organic vapor phase deposition, or OVPD technology.

Highlighting our success in this exciting initiative, in early August, we announced a demonstration of a white OLED Lighting Panel with a record power efficiency of 30 lumens per watt using our phosphorescent OLED technology. This represents an important step forward for white OLED applications and for our continued work with the Department of Energy.

Our success was recognized during the quarter when we were named to Deloitte's prestigious Technology Fast 50 Program for New Jersey. This ranking recognizes the 50 fastest-growing technology companies based on revenue growth from 2000 to 2004 with our 1321% growth placing us at number 11 on this list.

And recently, we were also named Number 152 on Deloitte's 2005 technology Fast 500, the nationwide version recognizing growth using the same criteria. This recognition is a testament to the hard work and dedication of everyone at Universal Display over the years.

In July, we extended our relationship with PPG Industries for an additional year through the end of 2008. We have had an excellent working relationship with them for the past 6 years, and it's one of the cornerstones of our success.

As part of our continued growth at the service technology and material needs of the OLED community, we have started the construction of chemistry labs at our headquarters in Ewing, New Jersey. In conjunction with this plan, we have hired a number of the PPG development team researchers to become UDC employees and work here at our facilities when our labs are complete with this expected sometime in the first quarter of 2006.

We will consolidate our current UDC chemistry development team with the new hires from PPG and additional chemists and material scientists. This UDC group will continue to focus on OLED material science research and development. PPG will continue to focus on material manufacturing process scale-up and production of our proprietary OLED material. They sell them to us as our contract manufacturer. We then device qualify the materials and sell them to our customers for evaluation as commercial use.

Also, Dr. Stephen Forrest, a long-time friend and research partner of Princeton University, announced his new position as Vice President of Research at the University of Michigan. As many of you know, Stephen has been instrumental in inventing our technologies at Universal Display, and we believe he will continue to be an important ally and partner of ours in his new capacity at Michigan.

As we look to the end of 2005, we plan to continue seeking advances in our OLED technology in helping to drive the commercialization of active-matrix OLED displays and the adoption of our OLED technologies throughout the industry.

In October, we had our first tradeshow booth outside the US in Yokohama, Japan at FPD, the Flat Panel Display Conference. The conference was well attended, and our booth was constantly busy. In addition, there were a number of companies exhibiting full-color, active-matrix OLED displays.

For example, in one aisle, Samsung SDI was on one side and Samsung Electronics on the other, and they had their OLED displays across the aisle. You could barely walk through the aisle; the traffic was so heavy. Samsung SDI shared a number of cell phone-sized displays as well as a beautiful 17-inch OLED display. Signs under the cell phone displays noted that manufacturing would begin in 2006.

On the other side of the aisle, Samsung Electronics showed their 40-inch, small-molecule OLED television prototype, which looked absolutely fabulous. It was positioned next to a 32-inch LCD TV, and the OLED looked much better than the LCD.

AU Optronics also showed a number of beautiful cell phone-sized displays, which was about between 2 and 3 inches diagonal. TMD, Toshiba Matsushita Displays, showed a number of 3.5-inch OLED displays for potable video applications.

Pioneer had an entire exhibit dedicated to active-matrix OLED, and the area in front of their exhibit was packed. Also exhibiting active-matrix OLED displays were Chi Mei Optoelectronics in Tainan, Taiwan and Hitachi of Japan. It looks like active-matrix OLED should soon be in the market.

Finally, you may have seen that Aixtron and RiTdisplay issued a press release today announcing that the OVPD Gen2 production tool had been accepted by RiTdisplay. We are very excited about the achievement of this important milestone in the commercialization of our OVPD technology.

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

Thank you, Steve, and thank you everyone for joining us today. As Steve mentioned, we saw improvements in the top and bottom lines of our income statement during the third quarter of 2005 as well as a positive cash flow for the quarter. We ended the quarter with $2 million more in cash and cash equivalents than we have at the beginning of the quarter. Revenues for the third quarter of 2005 totaled approximately $3.4 million compared to revenues of 1.7 million for the third quarter of 2004. Contract revenue increased to 1.5 million from 600,000 for the same quarter last year, resulting from work on seven new and existing programs.

We earned 1.3 million from the sale of developmental chemicals compared to 700,000 for the same quarter last year. The increase was a result of increased activity by our development customers. The timing of these sales is difficult to predict due to the early stage of the OLED industry.

For the quarter, the Company posted a net loss of $3 million or $0.10 per share compared to a net loss of 3.8 million or $0.14 per share for the third quarter of 2004. The decrease in net loss was primarily due to increased revenues offset to some extent by increased total operating expenses. Operating expenses increased to 6.7 million during the quarter with research and development expenses once again comprising the bulk of our expenses. The increase in R&D was due to increased expenses associated with the expansion in operations of our New Jersey facility, increased research expenses under our PPG agreement and increased patent costs. We continue to control and manage expenses while we expand our capabilities.

We were cash flow positive for the third quarter of 2005. Cash provided by operations was 1.1 million for the quarter ended September 30 compared to cash used in operations of 1.7 for the same period in 2004. The decrease in cash usage was primarily attributable to increased revenues and a payment under a new technology development agreement offset to some extent by increased operating expenses.

Cash used in operations was 1.1 million for the first quarter of 2005 and $800,000 for the second quarter of 2005. This is obviously a trend we're striving to continue. However, it is still early in the development and commercialization of our OLED technologies, and the future is difficult to predict.

Let me review the numbers for the 9-month period ended September 30, 2005. Net cash used in operating activities declined substantially for the first 9 months of 2005 compared to the same period of 2004. We used approximately $900,000 in cash during the 9 months ended September 30 compared to cash usage of approximately $5.5 million for the same period in 2004. Revenues for the first 9 months of 2005 were 7.5 million compared to 5.3 million for the same period in 2004. The loss for the first 9 months of 2005 was 11.2 million or $0.39 a share compared to 12.4 million or $0.47 a share for the same period in 2004. Again, the loss was reduced as a result of increased revenues offset to some extent by operating expenses, mainly on research and development.

Contact resource revenue for the first 9 months of 2005 was 3.8 million compared to 1.9 million for the first half of 2004. We expect contract research revenues to be in the range of 4.5 to 4.8 for the year based upon existing contracts. Developmental chemical revenue increased to 2.9 million for the first 9 months of 2005 compared to 1.8 for the same period in 2004. The acceleration of development chemical sales is an encouraging sign for the future, but the dollar amount and timing of these sales still remains difficult to predict.

Total deferred license fees and deferred revenues increased by approximately $3.5 million for the 9 months ended September 30, 2005 compared to a $150,000 increase for the same period in 2004. We entered into two new revenue-producing development agreements during the 9 months ended September 30, 2005.

With that, let us open up the lines for questions. Holly, would you please do that?

(OPERATOR INSTRUCTIONS). Rob Stone, SG Cowen.

Congratulations on a busy quarter. I wonder if you could just provide a little bit more color on the development chemical sales. Can you give us a sense of how many customers that spreads across?

In this quarter, it spreads across nine separate customers. And if you compare that to 2004, that was seven separate customers.

Is it up sequentially as well, or has it been nine customers in the second quarter as well?

No, it is not up sequentially. Sometimes, we have very small amounts of customers who will use it. Particularly in the last quarter, we had a number of customers who actually purchased small quantities we believe in preparation for the SID Show. But these customers have been fairly consistent.

I didn't quite catch what you said, Sid, on the uptick in the deferred license fees and deferred revenues. Is that related entirely to two contracts? Or are there more than two contracts in deferred license fee revenues at this point?

There were two new contracts that we have signed in this period. And there were also payments that receive as payments that we list as deferred revenue. Some are technology development fees. And also included in that number for the year is the Samsung payment and the upfront payment in the first half of the year. So it is a combination of a number of different numbers; some are technology development fees and others are upfront payments.

The sequential increase you said -- or the year-on-year increase was 3. something?

3.5 million compared -- or 3.7 million, I believe, compared to 150,000 in the period. Yes, 3.5 million increase for the first 9 months of this year compared to $150,000 increase in the same period of '04.

Jed Dorsheimer, Adams Harkness & Hill.

I guess the first question, maybe Steve, talking about -- it sounds like from the Ctech (ph) over in Japan, the news was -- or FPD over in Japan, the news was pretty positive. And seems like you're a bit more upbeat with respect to the commitments and timing of the OLED market. I am curious what your thoughts are on the backplane technology and if those have been solved with respect to amorphous silicon or low-temp polysilicon or if that is going to further delay the market?

Sure, Jed. I think that one of the reasons the manufacturer seemed to be more optimistic is because they are improving the yields on their backplane technologies. I think the initial backplane technology that is going to be out will be LTPS, or low-temp poly. I think people are looking at amorphous, but it is not at the point where people are trying to scale it up for production yet.

As far as timing on the Samsung SDI, have any of your expectations changed with I think previously they had publicly said in the beginning of 2006 for commercial production. I was curious if any of those timing assumptions have changed.

We just follow what they announce, Jed. At FPD, they simply said, expected to be mass-produced in 2006.

Then can I -- Sid, previously, I am out here at AeA, so it's a little tough hearing the call and was just curious, did you said you had two additional licensees that signed for the quarter during the quarter?

No, we signed two additional revenue-producing agreements during the quarter.

And previously said, Sid --

Cash-producing agreements.

Previously Sid, I think you and maybe it was Steve at SID, but I think the conversation was that you felt comfortable by the end of the year, you would have an additional active-matrix OLED licensee. And as we enter the fourth quarter, I am curious if -- do you still feel confident in that? Do you think that has sort of moved into Q1 of '06 or further? What are your thoughts on an additional licensee?

We're still working as diligently and as hard as we can to do what we believed, which was by the end of this year. And we're doing everything we can do to complete whatever it is, whether it is this transaction -- one license agreement or whatever it is we can get done. If it slips, it slips. But we still are working as hard as possible to get it done this year.

And then lastly just to end on a technical note, was curious what your thoughts are with respect to the red, green, blue, white filter technology? It seems like Kodak is going down that path. And I am curious, do you think that that's the path of phosphorescent technology as well? Or what are your thoughts on that?

Well, I think people are using white with color filters -- the good news is that you don't have the shadow mask issue, so you can scale it out very broadly. The bad news is you have color filters, and so you lose some of the efficiency. In all of that, we think phosphorescent is key for that. And different manufacturers are going on different paths.

(OPERATOR INSTRUCTIONS). Andrew Abrams, Avian Securities.

I was wondering if you could talk just a little bit about the relationship with PPG and how that is going to build out over the next couple of quarters? First, in terms of facilities, bringing a couple of their guys over and adding a couple to your staff outside of theirs, can you give us a little color in terms of the number of people that we are talking about?

And second, if you could just clarify something on the relationship. They are the primary provider of materials you qualify and resale. Do you have to qualify all that they actually sell? Or are there small accounts or very small customers that could pass without going through you or would only go through you and they would not receive any compensation for it?

I'll start with the first question. The way we've been working is that we have a research team at PPG, and we have a research team at UDC. And we are hiring about four or five of the PPG PhDs to come work at UDC. The UDC guys right now are in a satellite office about 20 minutes away from here, so we're consolidating the chemistry group. And they will hire some additional people.

And so we're going to focus, as the industry grows, we're going to focus on the research and development of the materials. And PPG will focus on the manufacturing scale up in the process development. All materials at this point run through UDC; they have to. So PPG is our contract manufacturer.

We device qualify -- materials in this business need to be device qualified because there aren't any analytical tests for fully device-compliant materials at this point. So we device qualify all the materials, and we transfer them to our partners as well as the technological expertise necessary to use them in displays.

Rob Stone, SG Cowen & Co.

Just a housekeeping question for Sid. With respect to operating expenses, you have been holding those pretty steady even as revenue increases. Can you just comment directionally what you expect in the fourth quarter? Are there year-end items that might cause expenses to bump up? Or you think those will stay about the level they have been?

I think our expenses will stay about the level they have been. There should not be any year-end bump-ups. We accrue everything during the year. And whether it is stock bonuses or stock options that we will grant that we do each year, we have accrued these during the year. So I don't expect any pickups in the numbers being fairly steady, and I don't see any increases in employees during this period. The PPG employees will not come on until next year. The only thing is, we will have CapEx expenditures of approximately $2 million as we complete the laboratories in our facility.

On those couple of notes so that implies some sequential uptick in the first quarter of next year just on the headcount change. Would you also normally have annual increases, things that would take the budget up to the next level in the first quarter of a given year?

Yes, we do. We give annual increases, and we have given them in the range of that the industry is 3 to 4% on an annual basis. But we also give bonuses, which in past years, we have given it in stock options and in stock. But I expect it to be fairly steady.

And now that you're completing the new labs at your site, do you have any comments yet on CapEx for 2006?

I don't have a firm number at this point. Some of the construction may carry over into the first quarter. Included in the $2 million number is outfitting the laboratories in terms of hoods and casework and a lot of the other equipment in it. There will be some equipment. And I would suspect off of the top of my head, we will always be spending 1 to $1.5 million on capital expenditures. Because stuff wears out, and we have here -- it's a significant facility that we have here.

So 1 to 1.5 million sort of maintenance per annum?

Yes.

Thank you. I'd like to turn the call back over to management for any final comments.

If any of you have any specific questions, you know that you can call me at anytime. Contact me via email at rosenblatt@UniversalDisplay, or you all have my cell phone number. And some of you, I will probably see at AeA because I will be out there tomorrow and Wednesday. So thank you again for your attention.

Thank you. This does conclude today's Universal Display conference call. You may now disconnect.