Universal Display Corp (OLED) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is [Nicky], and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Universal Display first quarter 2006 financial results conference call.

[ OPERATOR INSTRUCTIONS ]

It is now my pleasure to turn the floor over to your host, Paul Johnson, from Universal Display.

Sir, you may begin your conference.

Thank you, Nicky, and good afternoon, everyone. Thanks for joining us.

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 the 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 of the date of the live webcast of this call, May 10, 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 will turn the call over to Steve Abramson, President of Universal Display Corporation.

Please go ahead, Steve.

Thank you, Paul, and thank you, everyone, for joining us today.

I will begin by sharing an overview of the quarter, and then, Sid will review the financial results. At the end of our formal remarks, we will be happy to answer any questions.

It was a good quarter for Universal Display. Our financial results were strong. We are continuing to gain traction in commercializing our PHOLED technology. We are seeing continued improvement in our research-and-development efforts, and we are obtaining additional agreements with government agencies for our next-generation OLED technology.

As you may have seen, shortly after the end of the first quarter, Universal Display marked the 10-year Listing Anniversary on the Nasdaq. To celebrate the event, we were invited by Nasdaq officials to ring the opening bell on April 11, and had the Company prominently featured at the Nasdaq marketsite in Times Square. It was an honor to be inviting to participate in this event and also, a bit of a thrill to ring the bell. Actually, I pushed the button and opened the Nasdaq Stock Market. It was quite impressive to see the Company's name and logo seven stories tall on the Nasdaq marketsite display in Times Square.

I would like to highlight one financial metric before talking about [inaudible].

Revenues were up during the quarter, and particularly, royalty and licensee revenue and commercial chemical revenue, which showed significant growth. This is directly attributable to the recent signing of a material supply agreement with a major display manufacturer. These types of agreements and their influence on revenue growth and improved financial performance give us optimism about the future holds for our company in the OLED display market.

In addition, we saw increases in development chemical revenue, which is used for evaluating our material by major display manufacturers, and we believe this can protend future chemical -- commercial sales.

We made continued progress on our contracts with the agencies of the Department of Defense. During the quarter, we received a $500,000 extension toward these contracts. Prototypes of advancements made through these relationships are developing the next-generation of OLED displays and products.

A good example of this was the announcement of a full-color active-matrix OLED display prototype of flexible metal foil, at the United States Display Consortium fifth annual Flexible Displays and Microelectronics Conference during the quarter.

Our work with the Department of Defense has led to the development of this novel display prototype that combines the flexibility and ruggedness of foil and substrate, with the inherent advantage of the PHOLED displays. The end result will be a flexible display that could be used under a variety of conditions, yet still provide unfettered access to information.

It is an exciting development, and one we think can lead to new commercial applications. All of this comes with continued improvements in our PHOLED technology that is making every color more commercially viable and leading us closer to the full-color phosphorescent PHOLED display.

At the Finetech Display Conference in Japan last month, we reported 17 candelas per ampere with a CIE of (0.65, 0.34), and with a lifetime of 200,000 hours at 400 nits, a four-fold improvement in red lifetime at these color coordinates. During the fourth -- during the first quarter, we also announced that we had achieved over 100,000 hours of the sky blue PHOLED at 200 nits, and over 17,500 hours of the deeper blue PHOLED at 200 nits, which translates to over 3,000 hours at display illuminates of 500 nits.

We have made tremendous progress in blue since we broke the 1,000-hour barrier less than a year ago, and we're encouraged with the rate of advancement in longer lived and higher-efficiency red, blue, and green PHOLED materials and anticipate we will continue to see progress on this front.

Our new state-of-the-art chemistry labs are operational, and I'm pleased to announce that in April, four of the chemists who work with us through the PPG relationship moved to Ewing and joined our team as UDC employees, and we've also hired an additional three chemists. These additional researchers should accelerate our ability to innovate and expand our proprietary PHOLED materials.

We also recently announced agreements to continue our very rewarding 12-year sponsored research relationship with Stephen Forrest and Dr. Mark Johnson. These agreement provide for up to $4.6 million in funding over the next three years to continue sponsoring the research in OLED and other areas in the emerging field of organic electronics. We continue to have the exclusive rights to all of the intellectual property invented under these agreements.

You may recall, Dr. Forrest left Princeton University to pursue a new position as Vice-President of Research and Development at the University of Michigan. Both Steve and Mark who is still at the University of Southern California, have been instrumental in helping to develop the technology at Universal Display.

Our recently announced agreement with Dr. Forrest, Dr. Thompson, and the respective universities ensures that these innovative research-and-development efforts will continue. We are also continuing our longstanding relationship with Princeton University, where we first began to sponsor the research of Dr. Forrest and Thompson, which has been a fantastic partner and neighbor during Universal Display's growth and advancement of our proprietary OLED technology.

The official unveiling of our expanded state-of-the-art research-and-development and headquarters facility in Ewing, New Jersey, will take place on May 22, during our Discovery Day. Congressmen, dignitaries, media, investors, and others will be on-hand as Universal Display is highlighted as a part of the resurgence of [Einstein] Gallery in New Jersey, and it's stage grows the tone to technological innovator. Attendees will be invited to see the expanded facility and receive first-hand tours from management.

Also, we will once again be holding our annual shareholder's meeting at the Holiday Inn located in City Line Avenue, in Philadelphia, on June 29. The details are in the annual report and proxy, which was mailed late last month. We encourage all of you to attend.

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

Sid?

Thanks, Steve, and again, thank you, everyone for joining us today.

The first quarter of 2006 saw continued improvement on the top and bottom lines. Revenues for the first quarter of 2006 totaled approximately 3.3 million, compared to revenues of approximately 1.5 million for the first quarter of 2005. This was more than a 120% increase over the first quarter of 2005.

The increase was primarily from developmental chemical revenue, which was up to $676,000; commercial chemical revenue, which was up to $398,000; royalty and license fees, which were up $931,000; and technology development revenue, which was up to $730,000.

The increase in revenue reflects our recent material supply agreement at UL, which drives royalty and license fees in commercial chemical revenue. Despite the continued improvement in revenues, the early stage of commercialization of our technology makes it difficult for us to predict the timing and the amount of revenues from customers.

Government contract revenue was down to $536,000 for the quarter, however, for the year, we expect to be near the 4.6 million-mark of 2005, and this is based upon the contracts we have in-hand.

Our net loss totaled approximately 3.5 million, or $0.12 per diluted share, compared to a net loss of $5 million, or $0.18 per diluted share, for the first quarter of 2005. The total operating expenses for the quarter increased by approximately $600,000, which was mainly due to increased growth associated with our PPG development agreement and increased personnel costs.

Cashews in operating activities was 3.3 million during the first quarter, compared to 1.2 million for the same quarter of 2006. It is important to note that this increase is mainly attributable to a $1.4 million reduction in payables and accrued expenses primarily for the payment of the facility expansion in Ewing, New Jersey. These payments affected cash used in operations during the quarter as it was in payables at the end of the fourth quarter, but paid in the first quarter of 2006. The rise was also due to a decrease in deferred revenues, as a portion of this was realized during the quarter and a rise in receivables that came with our revenue growth for the quarter.

When viewing cashews and operating activities, on a trailing 12-months basis, it totals approximately 2.5 million, compared to cashews and operating activities of approximately 6.2 million on a trailing 12-month basis at the end of the first quarter of 2005. Obviously, we are pleased with the overall trend.

Cash short and long-term investments remains solid at 49.3 million at the end of the first quarter, down slightly from 49.6 million at the end of 2005. These were impacted by an increase in our working capitol needs associated with the rise in revenue, as well as expenses in capital expenditures relating to the Ewing expansion. These were substantially offset by proceeds from stock option and warrant exercises during the quarter.

Capital expenditures were $400,000, compared to 1.5 million in the same quarter of 2005. During 2006, we anticipate that our CAPEX will be approximately $2 million.

With that summary, let us open up the line for questions at this point.

Operator, would you please take questions.

[ OPERATOR INSTRUCTIONS]

The first question comes from Darice Liu from Maxim Group.

Good afternoon, guys.

The manufacturing process, historically, phosphorescent OLEDs have processed via vacuum. You are working on alternate solution as well, I was wondering what (a) the status was of the engine-printing for small molecule OLEDs are, and (b) the promise of increasing the max size of the vacuum product is?

Darice, we are making some good progress on solution processing of phosphorescent OLEDs although we haven't announced any specific metric numbers yet.

On the vacuum deposit side, it looks like the manufacturers are working off of gem 3.5 size glass for vacuum deposition.

Any word in terms of increasing the mass size for that or going to gem 4, gem 5, with that? Is that conceivable, or are they focusing [inaudible]?

No, I think it's certainly conceivable. When we started doing this a few years ago, it looks like the maximum mass size was gem two. We have now been able to move up to around gem 3.5, and there are people working on expanding the mass size.

We don't believe the inkjet process is the solution today for large-area displays because it needs a lot of work, and the manufacturers are moving -- what we hear is -- looking at larger and larger substrate sizes using shadow masks. But we don't have anything in particular that we can talk about.

Okay. Fair enough.

From the commercial front, you've signed a few key contracts already, when should we start expecting these customers to actually ramp-up? We have heard a lot of the announcements, but not a lot of actually doing stuff. Can you give us an update there?

In the first quarter, you see the results of our agreement with AUL in terms of commercial chemicals and license fees, and most of that is from AUL. So, we are starting to see them ramp-up. We have also read that Samsung's facility should be ready by the end of this year, and they would start ramping-up and selling products -- and shipping products in the first quarter of next year, which is the latest announcement that we've seen.

And we are working with a number of other manufacturers who, we believe, may be able to enter the marketplace during the second half of this year, but we don't have anything to announce at this time.

Okay.

From a housekeeping standpoint, what was your option expense charge this quarter, and what should we model going forward?

Our option expense charge for this quarter was, I think, about $120,000 -- it's not a significant number.

I don't know exactly what it would be. It really depends upon the vesting schedule. I don't expect it to be a significant number for the year in terms of options that we have already granted.

We have -- we're looking at other ways, incentive-wise for our employees, at the end of the year because of the 123 rules, obviously, so--. We do give employees bonuses. In the past, we have given options and/or restricted stock, and we will look at other ways of doing it. We wanted to ensure that we motivate our employees, and keep them as the owners in the Company without unduly burdening our income statement, which is a tough -- obviously, I big fine line to draw, but we are going to do the best we can.

Okay.

Thank you, guys.

Thanks, Darice.

The next question is from Jon Dorsheimer from Canaccord Adams.

Please go ahead.

Jon Dorsheimer, please go ahead.

Hi. Can you hear me?

Yes.

Hi, Jed. How are you?

I'm doing fine [inaudible]--.

Just a couple questions -- I was wondering if you could provide any further details on the saturated blue, as far as lifetimes, and maybe it would be helpful to -- if we look at the development of the sky blue -- how do you compare the progress you are making in the -- more saturated -- from a timing perspective?

I think we've make significant progress on, Jon, on the timing perspective, by deepening the blue that we have been able to achieve from the sky blue to the deeper blue.

It is really difficult to predict when we are going to be able to have a commercially viable blue. We are talking to the manufacturers now about their entry-level requirements are for the commercial phosphorescent blue, and we are expanding our chemistry facilities to try to meet those requirements as quickly as possible.

Just to add one thing, Jon, last June, when we announced the breakthrough with blue, it was really the fundamental break that we had been looking with for for a number of years, and at this point, we are working off of that, but that was a significant milestone in our chemical development history.

We are working diligently to get close and when we can commercially manufacture them as quickly as possible, but that was significant milestone.

Great. That is helpful.

And then, maybe just along those lines, is -- as you are talking to some of these manufacturers about signing agreements in the second half, is blue part of the mix? In other words, is there sort of a call option on the blue that you are writing into these agreements, or any discussions of that?

Each agreement -- we are dealing with the largest companies in the world, and each agreement is tailored to each of those companies.

They're are very interested in the phosphorescent color that we have right now -- the reds and greens that are commercially available -- and obviously, they are interested in the blue -- when it will come on-line -- and they are pushing us to accelerate that process, as is everybody, as quickly as possible.

They do see that a hybrid approach, which is part fluorescent, and part phosphorescent, is halting -- that Cannon probably will be done initially until the phosphorescent blue is commercially available.

Okay.

Thank you.

[ OPERATOR INSTRUCTIONS ]

Your next question comes from Jim Ricchiuti from Needham and Company.

Please go ahead.

Hi. Good afternoon.

Hi, Jim.

I don't know if you can answer this or not, but I will take a shot at it anyway.

It looks like AU was about 16% of your revenues in the quarter. Can you give us a sense as to how we should think about this customer in terms of its needs for commercial chemicals going forward?

You're right. It is a difficult question

Until we have, at least, another quarter behind us -- you can see the magnitude of the impact in the first quarter, we believe they will keep up at this rate -- but it is difficult for us -- until we know that the product that its in is selling well, we hear all positive feedback, and we hear positive feedback from them, I think with one more quarter under our belt, where we have at least two, and we know what they're doing and what the ramp is, we'll be able to predict, at least, with some ability to have a basis for that prediction. Right now, just like you said, it is difficult for us to answer that question.

Sid, right now, it is in the one handset?

As far as we know, it is in the one handset.

Okay.

With respect to commercial chemicals, was there a big uptick in the beginning of the quarter -- late in the quarter -- mid-way -- I'm trying--?

It was fairly flat. Once we know what their line was, when it was running -- one shift, and then, two shifts -- it has been fairly steady since they started ordering.

Okay.

On the government contract business -- that tends to be lumpy business. I guess there is some seasonality to it, perhaps. How does the pipeline look over the balance of the year in that area?

I think the pipeline for -- the contracts that we have in place, we think the number for the year is going to be probably around $4.5 million based upon everything we know today. I think it should be fairly steady for the next three quarters.

The first quarter is less than the rest of it, and it is just a way the billing on the fixed-price contracts versus the percentage-of-completion contracts work out. We would expect it to be up in the next quarter, the stay at about the same pace for the rest of the year.

Anything you can tell us, as you look at the balance of this year, based on some some of the discussions you have had, what we might be seeing in the way of products with the OLED displays?

To be perfectly honest, we deal with the manufacturers who then, who put it into the supply chain into different products, and we find out about the products almost when everybody else does. We have heard talk that there were other products coming out with this technology in it, but I don't have anything, and the manufacturers of the product, really keep that as their own announcement. So, it is really difficult for us to figure out exactly what it is going to go into unless they announcement it.

Turning to the expenses -- G&A was down for the quarter. Should we read anything into that, or should we assume somewhere going back toward the fourth quarter level?

I think it is someplace in between. The fourth quarter ended up with some accruals based upon accounting for our payments to the Scientific Advisory Board and our Board of Directors, which ended up getting put into that quarter because we wanted to grant any options and compensation in 2005, as it related to 2005.

I think it is probably -- for the rest of the year, it's probably someplace in between the two.

Okay. Great.

No significant increases that we see, particularly, on that side.

And how about R&D -- anything you can tell us there about what your level of R&D spending might look like as you go through the year?

We brought on some folks from PPG, obviously, and as Steve said, we've hired three additional ones. We have a few more folks that we are going to hire to fill out our chemistry team here in our facility. I don't see a significant increase in R&D on a quarter-by-quarter basis.

Okay.

Thank you.

Thank you.

There appear to be no further questions at this time.

Well, we'd like to thank everyone for all of your support.

Thank you, all.