Universal Display Corp (OLED) 2006 Q2 法說會逐字稿

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display second quarter 2006 conference 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 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 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, August 9th, 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.

Welcome everyone to our second quarter 2006 call. As always, I will be reviewing some highlights from the quarter, after which Sid will review the financial results in detail. We'll then take some questions after that.

Total revenues were about the same during the quarter when compared to the second quarter of 2005. We continue to see a transition in our revenue make up with commercial chemical revenue and licensing fee revenue showing significant increases this quarter versus 2005. These gains were offset by declines in contract, research and development chemical revenue. Sid will discuss these more in detail a little later on the call.

I'd like to discuss our two new recently announced SBIR Phase I Grants with the U.S. Department of Energy. As I discussed in the press release, we're continuing our research work with the Department of Energy for phosphorescent OLED white lighting applications. White lighting OLED research is an important area for us and one we believe will be on the forefront of future PHOLED product applications.

These types of research contracts help us improve on the performance of white OLED lighting structures, because the DOE believes, as we do, that the inherent advantage of PHOLED and Universal Display's research and technology will lead to more efficient lighting applications with almost limitless design potential. It's an exciting area for us, and we're looking forward to future improvements to the research we've already done.

We're also continuing our research with the U.S. Department of Defense on a [rubberized] flexible OLED display of metal foil. Its culminated in a $1.275 million contract we signed in May that will build on the work our team has already done in this area. And we signed a contract to provide the U.S. Department of Navy with a prototype communications device based on our OLED prototype built on metallic foil. This application has generated interest from numerous agencies and U.S. military, and we are excited for its future prospects.

We were happy to highlight on the last call that we'll be continuing our longstanding relationship with Dr. Stephen Forrest and Dr. Mark Thompson, and their respective universities -- University of Michigan, University of Southern California, as well as Princeton University. As you may know, Professors Forrest and Thompson received recognition for their accomplishments at this year's SID conference in San Francisco, winning the prestigious John Rothman prize. The award recognized them for their outstanding scientific achievement in research of flat panel displays, specifically their pioneering research in the area of phosphorescent OLED technology.

They are pioneers of what is today technology that is poised to be commercialized on a larger scale. And our phosphorescent OLED technology development is making very good progress. The new chemistry labs are operational and we've almost completed hiring the additional material scientists, chemist and engineers that should enable us to accelerate our development and commercialization efforts to meet the market needs for phosphorescent OLED materials in place.

The quarter also saw two significant new partnerships for us with Nippon Steel Chemical Company and Mitsubishi Chemical Corporation, both of Japan. We've been working with Nippon Steel Chemical and [shared an award] with them last year at Finetech in Japan. This relationship is focused on developing new markets and customers for VTE red phosphorescent OLED emitter materials by combining our materials with Nippon Steel Chemical's commercially available red host material.

With Mitsubishi Chemical, this collaboration focuses on the development of materials for phosphorescent OLED displays that are processable through solution or web processing materials, such as ink-jet printing. Printable phosphorescent OLED technology is an approach we believe is promising for large area of OLED displays. It combines the high efficiency of phosphorescent technology with the potential cost effectiveness of ink-jet printing.

Along similar lines, you may have seen the recent Form 8-K report we filed regarding an agreement with Seiko Epson. Under that agreement, we licensed one of our ink-jet printing patents in certain -- we made a patent filing with Epson. Epson's license rights included the right to grant sublicenses to third parties subject to specified limitations in the agreement. In consideration with the license, we resolved outstanding issues with Epson concerning the license patent right, and Epson agree to pay us a fixed amount that will be creditable against licensing fees and royalties payable under broader license agreement if we enter into one.

We're limited in the details we can discuss regarding this agreement, but I will say that it's a positive arrangement for us. All in all, the first half of 2006 saw improvements at the top and bottom lines as our technology moves towards full commercialization. We're also continuing to expand our research into future OLED applications, such as flexible displays and white lighting. We firmly believe that the advantages of our PHOLED technology materials will allow them to serve as a foundation for many flat panel display applications. And we are confident that our continuing momentum will lead to expanding and new partnerships the future, as well as new opportunities on the licensing front.

With that, I'll like to turn the call over to Sid Rosenblatt.

Thank you, Steve, and thank you again everyone for joining us today. As Steve mentioned earlier, our total revenues in the second quarter of 2006 were almost the same as the second quarter of 2005, with both quarters totaling approximately $3 million. Commercial chemical revenues were 336,000 for the quarter, and there were none in the same quarter of 2005. License fee revenues were 807,000 for the quarter, up from 42,000 for the same quarter in 2005. The increases in licensing fees and commercial chemical revenues reflect revenues received by us under a material supply agreement we announced in February of 2006.

Technology development revenues were 668,000 for the quarter, compared to 332,000 for the second quarter of 2005. The increase was due to two additional technology development agreements that were effective during this quarter as compared to the same quarter in 2005. Development chemical revenue was approximately 297,000 for the quarter, which is a decrease from 1.124 million for the same quarter of 2005. This is a result of the transition from developmental chemical revenue to commercial chemical revenue.

Contract research revenue was 902,000 for the quarter, which was a decrease from 1.514 million for the same quarter in 2005. While government contract revenue was down, we expect it to come in between $4 million and $4.5 million for the full year based upon contracts we have in-house. Again, the decrease is attributable to the timing of revenue recognition under our government contracts, specifically the timing of how we account for fixed price and cost for those contracts coupled with the timing of work by our subcontractors.

The net loss for the three months ended June 30, 2006, totaled approximately 4.3 million or $0.14 per diluted share, compared to a net loss of 3.2 million or $0.11 per diluted share for the same period of 2005. The rise in net loss is attributable to an increase in total operating expenses for the quarter, which were up approximately 1.4 million compared to the second quarter of 2005. This increase is associated with increased personnel costs relating to our hiring of scientists, chemists, technicians and other new personnel, increased costs associated with operating or newly expanded facility and a general rise in operating costs as we grow.

For the six months ended June 30, 2006, revenues totaled 6.3 million compared to $4.5 million for the same period in 2005, so approximately a 40% increase. The net loss for the six months period totaled 7.8 million or $0.26 per share compared to $8.2 million or $0.29 per share for the same period in 2005. The mix of revenue increases and decreases is similar to that for the second quarter with commercial sales revenue increasing by 703,000, licensee fee revenue increasing by 1.6 million and technology development fee revenue increasing by $810,000.

Contract research revenue decreased by 776,000 and development chemical sales revenue decreased by 565,000. The overall revenue increases were offset by increased operating costs during the six months period ending 2006, which included increased personnel and operating costs for expanded facility, increased PPG research and development expenses and stock-based compensation expenses.

Cash used in operating activities was 5.6 million for the six months ended June 30, compared to 2 million for the same period of 2005. This increase is mainly attributable to a decline in deferred revenue and license fees during the period, an increase in the accounts receivables and other assets and a reduction in accounts payable and accrued expenses. Cash short and long-term investments remained solid at 47.8 million at the end of the second quarter of 2006, down from 49.6 at the end of the year. These are impacted by increase in cash used in operating activities, purchase of equipment, offset to some extent by proceeds from option and warrant exercises.

Although the cash decreased slightly, working capital increased to approximately 39.9 million from approximately 38.4 million as of December 31st, 2005. The increase was due primarily to a reduction in current liabilities, which in turn resulted from payments of liabilities due in the final phase of the construction of our state-of-the-art facility in Ewing, New Jersey, during the six months period.

With that, we'd like to open up the lines for questions. So Operator, could you please do that?

[OPERATOR INSTRUCTIONS] Your first question comes from Darice Liu of Maxim Group. Please go ahead.

Good afternoon, guys. Can you talk about the manufacturing activity in the field? There has been a bit of conflicting data out there from AUO and CMO falling down, but then Innovision and LG picking up. What are you seeing in terms of the second half of '06 and what's your visibility like for 2007?

We have read the same published report, Darice, as you have, particularly AUO, TMA and then the other ones increasing their activity. They -- all we can comment on is what's published. AUO denied it. We believe that there are a number of additional manufacturers that have announced entering into the marketplace. And we are speaking to a number of them.

I mean SDI is moving forward. From what we have read, SDI is -- its facility is either ahead of schedule or on target, and LG is also moving forward. So it is -- it's conflicting reports, but again, we can only really comment on what we read in published reports.

And I guess they will be going to Samsung first. Now Samsung SDI is -- are they still on track ramping up in the second half of this year with product coming on the first half of '07?

That's what we believe from the reports that we have read. And we have no reason to believe anything else besides that.

Okay. And then moving along, can you give us an update on your progress with your PHOLED material, the solution processability and then what the Epson license means to you guys?

Sure, Steve will answer that. Thank you.

We are making some very nice progress on the solution process phosphorescent material, working with Mitsubishi Chemical Company, but we haven't announced any results yet there. So once we announce results, then we'd able to talk about it.

Sort of the second half of your question?

On the Epson license. You guys have been in discussions about the work you've done quite a bit. What is the significance of this license to you guys?

It's just -- it's an additional -- it's additional progress towards the strong relationship that we have with Epson. We have been working with them for a number of years on development side. And we continue to make incremental progress. It's very good that we are able to enhance that progress by filing a license agreement with respect to ink-jet printing patents.

Okay. And then last question. Sid, you mentioned that you see a few other guys other there in the field talking about capacity expansion and ramping up. What does this mean in terms of new opportunities in the licensing field for Universal?

We would obviously like to be part of any new tech -- any new companies or technologies that's entered in. We are working closely with a number of the folks that have announced product. We have a number of agreements in addition to the ones that we have announced. We have over 26 relationships with companies.

So we believe that anybody who is going to enter the OLED marketplace -- in the active-matrix OLED is going to want to use phosphorescent materials because of all of the benefits of it. And we are doing all we can do to ensure that anybody who introduces new OLED products uses our technology.

Can you give us a little bit more color in terms of the timing?

It's difficult as you are well aware to predict when product will be announced or when we would be able to announce relationships with them. We know that there is a couple of them that are talking about the end of this year or the first half of next year. And we are working closely with them.

Fair enough. Thank you, guys.

Thanks, Darice.

Thank you, Darice.

Your next question comes from Jim Ricchiuti of Needham & Company. Please go ahead.

Hi, thank you. Sid, just a question on the expenses, which moved up in both R&D and G&A. Are you looking at R&D, and you mentioned that you're still hiring, still adding some key people. Do we see the R&D expense moving up much from here?

No, in the second quarter we actually transitioned a number of the folks from PPG Industries where there were still expenses on the R&D side. And as of April 1st, a number of those PPG guys came on full-time here; the remainder of the folks there are sort of winding down. We have hired a number of folks. I do not see the second half growing significantly from the second quarter numbers. There was included in there some 123(R) expenses over the guys that we brought in from PPG. But I do not anticipate expenses growing significantly from where they are in the second quarter.

And on the G&A line, that was again obviously 123(R) or is that --?

Yes 123(R) and obviously we went last year from 20,000 square feet to 40,000 square feet in the facility. And those costs associated with building chemistry labs and running the chemistry labs are finally kicking in. So we see what they are in the second quarter. There are some 123(R) expenses in there also but I don't see -- everything goes up, I mean the inventories goes up, all the store stuff goes up. But I think what you see in the second quarter could be fairly close to the expense rate for the third and fourth quarter.

Looking at the revenues, how much visibility do you have with the customer with which you have a materials supply agreement in terms of the commercial chemical sales and the license revenues? I was thinking about how we can look at that, those two lines, the balance of your --?

The visibility on those two lines is something that as we move forward as manufacturers start to produce, such as -- SDI would be a good example of it, we know that SDI wants their factories -- start to ramp up and we start to understand we were getting, we will discuss with them what it is when they'll need it, when that fab is up and running we will really be able to have good data in order for us to predict what the future may look like. The customer that we have today, essentially -- the material supply agreement that we announced in February, that customer has sent us purchase orders each month and we ship the products and we really don't have much visibility beyond that.

And just with respect to the government portion of the business, the revenues that you're seeing, you have talked I think in a previous call that a decent level of revenue in 2006 from the U.S. government, both from the Department of Energy and the military. How did you see that now, you still feel pretty confident about that in the second half?

Yes, I think the number for the year will be between 4 and $4.5 million. That's really based upon the contracts that we have in-house. The timing of those things gets lumpy sometimes. But some are fixed price, some are gross plus and the fixed price you essentially record the revenue over certain milestones depending on when they are and of course both the same way. And we have subcontracts with some of the universities that we work with and it is the timing of that. But based upon everything we know today, we think the number for the year will be between 4 million and 4.5 million.

Great. Thanks a lot.

Thanks Jim.

Your next question is coming from Hugh Mai at First Albany Capital. Please go ahead.

Yes thank you. I have a question regarding the development chemical. Is that going to be more or less at that [particular] level on a going-forward basis? Unless you get new customers.

Hugh it is difficult. That number sort of jumps up and down a little bit based upon one the customer that transitions from a development stage into a commercial customer. The second is we see that going up and down when a company is doing research and development, where they will order a lot of development materials in one quarter and then order nothing in the next quarter.

It is really difficult for us or if there is a significant show coming up such as SID or Finetech or something like that, we get a lot of activity on the development side to get demos and things like that. But it is something that is very difficult and has been if you look at it, it is very lumpy and difficult for us to predict.

I mean do you have a ballpark figure for the whole year?

I do not to be perfectly honest with you. I mean it really is up to customers. We are shipping developmental chemicals and t goes up and down and it is really difficult for us to predict it.

I guess to put it differently, if a customer is interested in using this universal display technology, what is the quickest timeframe that there would be in the evaluation technology development stage? The technology evaluation stage.

Sure. It varies between customers. Some customers, we have been shipping developmental chemicals for three or four years and other ones have been six months. A lot of them work with their own materials or other materials that they can get because they are just trying to understand how OLEDs work, but when they start being serious about manufacturing and want to use efficient materials, then they use our materials. But again, it is really difficult for us to predict that. And if you look at the history of developmental chemicals, they go up and down on a quarterly basis.

So if there is an OEM that is totally not having any sort of technical development agreement with Universal Display, the quickest that would take for them to become a licensee would be around six months?

I do not know. No, it really is -- I mean we could have someone walk in tomorrow and say we're going to introduce product and we want to put your technology in it and there is really no -- a lot of the data about our material is public knowledge. We present at conferences. The industry knows how phosphorescent material works. And they really understand that it is required in order to move into active-matrix OLEDs. But there is no specific timeframe. We've worked with a lot of companies because they do a lot of R&D, but we could enter a licensing agreement with someone in a much shorter period of time. There is no minimum time necessary. Others have been working with us for a while.

Okay. And I guess just a general question, have you noticed any increase in progress, at least at the technology front or at the deposition front during the past quarter?

A lot of our manufacturers are working very hard and we're seeing them making some really nice improvements in their manufacturing processes. So we are excited about those prospects.

So how would you comment on -- there have been some rumors [always chatter] about some of the difficulties that some of the OEMs are having in adopting the data back time technology over to OLED.

Well, it not easy and we've been talking about that -- for the last year that was plenty but what we're seeing is a lot of these people who are getting involved in it are making a lot of progress. Some are more progress than others. And that's why we work with a number of different manufactures

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Andrew Abrams of ABN Securities. Please go ahead.

Hi guys, I have couple of questions. Can you go though quickly the status with PPG? Now that you've moved most of the guys over had as the relationships still work and does a relationship with Nippon or one of the other guys that you've signed up recently changed the way that relationship works. Can you give us a little detail there?

Sure. PPG is still our exclusive supplier of our material. So this of is as a [foundless] phosphorescent material supplier and PPG is our foundry manufacture exclusively for us. So they manufacture our materials for us; we in turn sell them to the industry. Our collaboration with Nippon Steel and Mitsubishi - they're developing their own materials around our phosphorescent submitters. So that's expanding our network of phosphorescent material suppliers, but our relationship with PPG industry continues to remain strong. We are bringing in most of the development work in-house - we're phasing out the development work at PPG, and they are focusing more on the scale [out] manufacturing and on the production of the materials.

Got it. Can you give us any information that you might have on the sell through of the BenQ phone and when or if it's going to be released in the United States. Any information that you might have and can you kind of walk us through the way the royalties would flow through to you guys on the timing of royalties as that product sells through?

We have very little visibility on BenQs telephones, because we don't have a relationship with BenQ. And as you are aware, there are lot manufacture [biased] by someone else who then provide them the BenQ. The relationship that we announced in February is a short-term material supply agreement where we include -- we sell materials and parts of the price includes a license fee.

So we record revenues, when we ship the material, we record a commercial sell of the revenue and we also record license fees. When we ship the materials -- when we enter into these material supply agreements. If we enter into a royalty bearing agreement with the company, such as we announced with Samsung, SBI, then you will see commercial chemicals and then you will see a lag in the period that we would record the royalty income from that as we get royalty reports.

So this arrangement is when we record essentially a license fee and a commercial chemical sale when we ship the product because they get the right to incorporate that product or that material into OLED display with the purchase of the materials.

Is that a license fee pro-rata against the amount of materials they take, meaning the value of the materials?

Yes.

Okay. And last give us any information on the Forrest and Thompson projects, you've reestablished or you renewed your relationship? Can you give us some idea of what these guys are working on right now?

What these guys - their object is to invent the next generation of organic electronics. So they're working on things that will be commercializable in a few years out. So the things, we give them the freedom to think about what the future is going to look like and then we bring it in house to develop it.

Okay. And last, any new developments on blue lifetimes and any indication of when you feel that the commercial grades of all three colors could be used as a straight mixture instead of using fluorescent blue as a substitute?

Well, we continue to make significant progress in blue, there is nothing new to announce today, our sky blue -- the most recent answer was a 100,000 hours at 200 nits. And the light blue is 17,500 hours at 200 nits. Now we've expanded the materials development team. We're working very hard to have a complete suite of materials, but as you know, we can't predict the timing.

Okay. Thank you.

Sure.

There appear to be no further questions at this time. I will turn the floor over to Sid Rosenblatt.

We'd like to thank you all very much for participating in this call. And again, as you all know, if you have any additional questions, you can contact us directly. So thank you again for your time.

Thank you very much.

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