Universal Display Corp (OLED) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Nikki and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Display fourth quarter and year-end earnings call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Paul Johnson for Universal Display. Sir, you may begin your conference.

Thank you, Nikki. Good afternoon, 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 today by reminding you that 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, March 9, 2006.

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.

With that said, I'd like to turn the call over to Steve Abramson, President of Universal Display Corporation. Please go ahead, Steve.

Thanks Paul. Welcome, everyone, to our call to discuss fourth quarter and year-end results. As we usually do, I'll be reviewing some key highlights from the past quarter and I'll also be looking at some highlights and milestones for Universal Display over 2005. Sid Rosenblatt will be doing the same for the financial results. We will then take any questions.

When we began these quarterly conference calls roughly one year ago, we were optimistic that 2005 would mark the achievement of a number of milestones for Universal Display and the OLED industry, in general. That optimism has proved correct on a number of fronts. 2005 was a year of momentum for us with continued technological advances in our proprietary OLED technologies, multiple significant contract signings, the announcement of our first patent licensee in Asia and improving financial results.

Earlier in the year, we signed a patent licensing agreement with Samsung SDI, a significant milestone not only for UDC but the entire OLED industry. Samsung SDI has announced they are dedicated to the volume production of OLED displays and they intend to use phosphorescent OLED technology, known as PHOLED, in their first commercial OLED products. We see this event as a validation of the inherent advantages of our PHOLED technology over traditional florescent OLEDs. Most significantly PHOLEDs offer up to a 4-to-1 power advantage over florescent OLEDs, more saturated colors and flexibility in terms of manufacturing processing.

These inherent advantages of PHOLED will help to lead OLED manufacturers' full commercialization of OLED displays. We also announced last three weeks ago another commercial relationship with a leading display manufacturer to provide them PHOLED materials for use in active matrix OLED display products. As indicated in our SEC filings that manufacturer is AU Optronics. Again, this is another significant step forward for us and the entire OLED industry.

These events show that display manufacturers believe in our PHOLED technology, its advantage over the other OLED technologies and LCDs and that our PHOLED materials can be used in the volume production of highly efficient [first call] display. It is important to the development of the OLED industry that products using active matrix OLEDs are introduced into the market.

As some of you may have seen, BenQ, a major Taiwanese company, has introduced a cellphone with an active matrix OLED main display. That's on the BenQ-Siemens S88. It was introduced into the market in January and it looks beautiful. One review on Gizmodo said, "You know you're doing something right, when your OLED screen is so sharp that it looks like a sticker." Another important milestone for UDC during 2005 are advances in blue PHOLED materials. We first announced the achievement of a 15,000 hours sky blue PHOLED at our annual meeting of shareholders in June. This was a significant event in that it demonstrated real progress in developing and producing the material systems needed for commercial full color PHOLED displays.

And just over six months after achieving this critical milestone on blue PHOLEDs, we announced further improvements. In January, we issued a press release noting significant advancements in the lifetime and color saturation of our blue PHOLED materials. As sky blue PHOLED achieved higher sales now over 200 nits, our deeper blue PHOLED had a CIE of 0.16, 0.29, had 17,500 hours of 200 nits, which corresponds to over 300 hours at 500 nits. The 500 nits and it's also called the candelas per square squared is the target luminous for commercial applications.

During 2005, we also improved the lifetime of red materials to 100,000 hours at 500 nits and improved green lifetime to greater than 40,000 hours at 1,000 nits. Progress such as this continues to validate our status as the world leader in PHOLED technology.

Turning to other important events during 2005, we would also like to highlight the new government contracts we began work on during the year. In 2005, our new government contracts totaled approximately $4.2 million. These SBIR and the development contracts with the U.S. Army, U.S. Air Force, Department of Defense and Department of Energy are at the leading edge of future OLED applications for everything from white lighting to flexible displays that could be used by soldiers in combat environments.

Again, our achievements of 2005 have already carried over into 2006. In February, we announced delivery of what we believe to be the world's first full-color active-matrix high resolution OLED display prototype of flexible metal foil. We made the announcement at the USDC's fifth annual Flexible Display and Microelectronics conference. In fact, three prototype devices were delivered to the U.S. Department of Defense under research agreements with various government agencies. These government contracts are important as they help support our efforts to build prototypes and demonstrate real advances in flexible OLED display technology and present a number of intriguing future military and commercial applications.

I'll let Sid talk about our financial results in detail in just a few moments, but I'd like to close by noting that 2005 was also a year of marked financial improvement for Universal Display. We grew the topline 45% and were cash flow positive in the second half of the year. We ended the year with a solid balance sheet. In addition, over the last two years we have spent over $13 million to buy build out and expand our laboratory facility and capabilities in order to be prepared for our future growth.

In closing, what we have always believed and what is being proven out by actual events is that our PHOLED technology and our other OLED technologies and the advantages they provide in the form of increased efficiency, low heat output, thinness, flexibility and light weight are the OLED technologies of choice for the future. As we move into 2006, we are expecting that our OLED technologies will continue on the path towards widespread commercialization and the next generation of flat panel displays. We look forward to keeping you apprised of our progress.

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

Thank you, Steve, and thank you everyone for joining us today. Looking at our financials for the year, it is apparent we have made quite a bit of progress in moving the business forward from a fundamental standpoint.

Revenues for the year were 10.1 million, up from 7 million in 2004. For those of you who look at percentages, this was a 45% increase over 2004. This revenue increase primarily involved government contract revenue, which was up to 4.7 million, developmental chemical sales revenue, which was up to 3.5 million, and technology development revenue, which was up to 1.7 million. Overall, the increased revenues were due to increased interest in our PHOLED technology for pre-commercial activities.

Our revenue gains were offset somewhat by decreases in commercial chemical sales revenue, license and royalty revenue due to reduced usage of our PHOLED materials and a passive matrix display being phased out by one of our customers.

Our loss was 15.8 million in 2005 compared to 15.9 million for the prior year. This loss appears to be relatively stable year-over-year, as our increased revenues were offset by increased expenses. Our loss per share in 2005 was $0.56 compared to $0.59 in 2004. This difference was largely due to a higher number of outstanding shares of our common stock.

Turning to the balance sheet, there's good news as well. We exited 2005 with $49.7 million of cash, short and long-term investments, up from 47.5 million at the end of 2004. This is partly due to the fact that we were near operating cash flow breakeven during 2005 and partially due to increase in deferred license fees and deferred revenue, which grew to 9.8 million at December 31, 2005, from 5.9 million as of December 31, 2004. As you're aware this represents cash received for which we will record revenue in the future.

We used $345,000 of cash in operating activities during the entire year of 2005 compared to almost 7 million used during 2004. In addition, we received 8.4 million in proceeds through the exercise of outstanding stock options and warrants, which funded our CapEx for 2005. CapEx during the year was 5.6 million on top of 7.4 million of CapEx in 2004. With the expansion of our Ewing facility largely completed, we expect our CapEx to be reduced significantly in the foreseeable future.

In the fourth quarter of 2005, revenues were up to 2.3 million compared to 1.7 million in 2004, the bulk of this increase being due to higher technology development revenue. As a reminder, we have often said that investors can expect our revenues to be volatile until the OLED market matures and stabilizes.

Total operating expenses were 7.8 million for the fourth quarter of 2005, up from 6.1 million in the fourth quarter of 2004, with the largest increase in R&D spending. We generated just over $550,000 in cash from operations in the fourth quarter, the second quarter in a row that we were cash flow positive. On the bottom-line our net loss was $4.6 million for the fourth quarter of 2005, up from 3.5 million in fourth quarter of 2004. This corresponds to a loss of $0.17 per share, up from $0.11 per share in the same quarter of the prior year.

In summary, with a significant cash balance, no debt on the balance sheet at year-end we believe that we're in a strong financial position to capitalize on the growing OLED market. With that we would like to take your questions.

[OPERATOR INSTRUCTIONS] The first question comes from Jed Dorsheimer from Canaccord Adams. Please go ahead.

Thanks. Hey guys. A couple of quick questions for you. First of, I was curious, the agreement that you signed with AU, I was wondering is there an IP deal, or is it just strictly [chemicals]?

This was a -- this relationship is one similar to we signed in the prior year with Pioneer Corporation where it include the right to manufactured using our technology and our materials in their products. So it is two parts. So we do sell the materials, but it also includes the intellectual property and the right to use those materials in the display.

Got you. And Sid, I know you had talked about signing a potential licensee towards the end of the year. Is this the actual contract you were referring to, or could you give us some additional color on timing of some additional licensees? Thanks.

Obviously, we said that we expected to sign a license agreement by the end of the year. We are working on a number of different ones and we would have hoped this was something that we could have announced sooner. We are obviously working on others at this time. But this was one of the ones that we thought that we would be able to announce by the end of the year.

Got you. Thank you. And just moving over there, it seems like it's become somewhat contentious with the patents that you recently received for Ink-Jet Printing, and then some of the comments out of a competitor over in the UK. And I was curious, is the position of UDC to enter into any more substantive -- I guess what I'm trying to get out is from a modeling perspective should we be expecting any higher SG&A for any type of legal issues?

Jed, we don't view -- this is Steve. We don't view there to be any contention. What we were able to do is figure out a way to Ink-Jet print small molecules which we think is pretty important. CDT has been working on Ink-Jet Printing of polymer materials for a long time and the object is to move the technology forward as rapidly as possible.

Got you. And then either Sid or Steve, maybe just some additional color on the saturated blue. You had mentioned - at the 300 hours at 500 nits, could you give us some metrics to compare that to? In other words, going back six months what was it at? And then, maybe you could toss a forecast of what you think you could get to if you're willing to do that? I'm not sure.

Well, Jed, if I said 300 hours I made a mistake it's 3,000 hours at 500 nits. And that was a correspondent to the 17,500 hours at 200 nits. The 500 nits is important because that's what the customers are looking for we believe for commercial liability.

We've made rapid progress as you know in the blue. We went from under 1,000 hours to 100,000 hours in the sky blue last year. And our blue at this [CIE] was well under 1,000 hours and now it's up to 300,000 -- 3,000 hours - I'll do this right - 3,000 hours at commercial luminous. But it's still in development projects so it's very difficult to be able to predict precisely when we're going to be able to get it to commercial lifetimes at commercial levels.

Got you. And one last question, just maybe commentary on the marketplace in general. As you talk to your customers and they give you your -- their time lines for bringing products to market, do you feel comfortable that by the end of this year there will be several products in the marketplace with the OLED materials? Or do you actually think that that's going to be more of it in '07 event at this point?

It looks to us that a number of manufacturers are planning for OLED products this year.

Thank you. I'll pass it on.

The next question comes from Jim Ricchiuti from Needham and Company. Please go ahead.

Thank you. Good afternoon. Just following on that last question, if we see the commercial launch of several products in the second half of this year, Steve, how soon would we begin to see that begin to impact your P&L?

You'd see that in two places. One would be the materials being sold. So in a traditional license agreement; you would see us providing them with commercial materials and then on a quarter or two quarter lag would be any royalties that would be based upon sales of product. In some of our relationships where we sell the material wrapped around a license, you would see both of them start to grow at the same time.

Okay, great. And should -- a question on operating expenses. Is there any sense as to how that might be tracking in the current quarter? Should we assume that operating expense would be up from Q4 levels with the heavier component for R&D?

I don't think it will be up from Q4. Q4 always has year-end adjustments and catch-ups and stuff like that. I don't think it will be any higher than Q4. I think if you looked at Q3 and Q4 together and did an average of those it's probably a better estimate of what Q1 will look like.

Okay, great. Thanks very much.

Thank you, Jim.

[OPERATOR INSTRUCTIONS] The next question comes from Darice Liu from Maxim Group. Please go ahead.

Good afternoon, guys. As you look at 2006, what are your thoughts on your investment cycle? Has anyone picked up their pace on investments or slowed down their pace?

We hear the same thing that you guys hear. And you hear it from a lot of different sources. I think there are a number of manufacturers that we believe will have product in the marketplace this year and are moving forward with it. But it's really difficult for us to talk about somethings that we know that are under confidentiality.

Okay. Maybe I can ask it in a different way. Do you see more positive momentum recently or more negative momentum?

Darice, I'm seeing a lot of positive momentum. You see, I think you're seeing a number of companies are looking at the OLED industry and are saying the material is set and the technology is right and the development efforts have been proceeding at a very, very nice pace. So I'm seeing a lot of positive momentum. There are some negative elements as there always are when you're at an inflection point of an industry. But overall, I would say it's positive.

Okay. I just returned back from Taiwan, and there is a lot of buzz there regarding moving the OLED from the sub-display to the main display. A two-part question. One, the phone for BenQ, is that going to be -- the OLED will it be both the sub as well as the main display? And when you do you think we're going to hit more main displays for OLED?

The BenQ phone is the main display. It is the candybar-type phone. So there is no sub-display on it. So it is the main display. It's an active matrix OLED display.

And in terms of just the market, they had some stumbles in regards to moving to the main display. Do you expect that pace to pick up this year or when do you estimate that to happen?

We believe that the main display will be the display that the Active Matrix OLEDs are put in and we expect that to pick up this year.

Okay. Thank you, guys.

Thank you.

Sir, there appear to be no further questions at this time.

Thank you very much for calling in. If any of you have any other specific questions, my phone number is available to all of you. So please give me a call directly at any time. Thank you very much.

Thank you.

This concludes today's Universal Display conference call. You may now disconnect.