Universal Display Corp (OLED) 2006 Q3 法說會逐字稿

Good afternoon. My name is Jeanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display third quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] Thank you.

It is now with great pleasure to turn the floor over to your host, Mr. Paul Johnson, on behalf of Universal Display Corporation. Sir, you may begin your conference.

Thank you, and good afternoon, everybody. 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, 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 call, November 6th, 2006.

All statements made 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, statement's regarding Universal Display Corporations'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 Corporations'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.

Just one note, we would also like to apologize for starting a little bit late this evening. There was a problem with the conference webcast that delayed us a little bit. With that said, now I would like to turn the call over to Steve Abramson, President of Universal Display Corporation. Please go ahead, Steve.

Thank you, Paul. And welcome, everyone, to our third quarter 2006 conference call. Sid Rosenblatt will follow my review of the quarter with some details on the financial results. And of course, following our formal comments, we'll be happy to take questions. As Sid will discuss in more details, revenues totalled approximately $3.1 million this quarter. As has been the case over the course of 2006, revenues continue to transition from development chemical into commercial chemical and license fees. We believe this trend will continue as the AM OLED market grows, and additional products are introduced using our proprietary technologies.

I would like to take moment to talk about our relationship with 2 large Asian-based display manufacturers. First, we are pleased with our initial work with AU Optronics of Taiwan. The active matrix cell phone display AUO began selling earlier this year is beautiful and received rave reviews. Unfortunately, as many of you have heard, AUO has suspended it's OLED efforts for the time being. AUO has also informed us that it does intend to purchase any additional commercial OLED material from us at this time. Recently, Vice President C.T. Lu of AU Optronics clarified AUO's suspension of its OLED effort in an interview with the Korea IT Times. However, Mr. Lu left open the door to AUO returning to the OLED area by saying that "2 or 3 years from now if the infrastructure of the OLED environment becomes more mature, then AUO will consider restarting its OLED effort."

Turning to the second company, our licensee, Samsung SDI of Korea. According to reports, Samsung SDI is moving forward with their plan for AM OLED display production beginning in the first quarter of 2007. You may recall, Samsung SDI's comments last year that they will spend approximately $500 million to expand their AM OLED capacity. The facility's reported initial production capacity is 20 million units per year, which can be increased to 50 million units per year. Samsung SDI has publicly stated that they are actively and aggressively seeking customers for products from the new OLED mass production line.

We're optimistic about this announcement from Samsung SDI, as well as what we saw during our participation in the Flat Panel Display Conference and Exhibition in Yokohama , Japan, a few weeks ago. There was an entire wall of SDI's OLED displays to advertise the advantages of OLEDs over LCDs. According to the Samsung SDI exhibit, these include better outdoor readability, a truer black graphic user interface background which increases contrast, a free 180-degree viewing angle, quick response time perfect for video images, and power efficiency. Samsung SDI had a number of OLED and LCD cell phone size displays showing comparable images, and detailing in milliwatts the amount of power that was being used. The OLED beat the LCD every time, sometimes by a very wide margin.

They also showcased some next generation OLED displays, including a 3-D OLED display that was amazing. Also at FPD in Yokohama, [Shimei] Electronics of Taiwan featured a 25-inch OLED display, the largest ever on a single low temperature Polysilicon backplane. Samsung Electronics of Korea showed some excellent OLED displays, as did TMD Toshiba Matsushita Displays of Japan. In addition at the conference, it was reported that Nokia projected by 2010, cell phone handset main displays are likely to top 1.2 billion units, with 200 million being active matrix OLEDs. As you can see, the state of OLED technology and its prospects for commercial success are impressive.

During the third quarter, we've announced a number of advances in our technology materials and partnerships, and I would like to give you a few examples. We recently announced significant lifetime improvements in our P2OLEDs in connection with a joint development program with Seiko Epson Corporation. The program involves a demonstration of P2OLED materials that combine the high efficiency of Universal Display's OLED technology and the low cost manufacturing potential of solution processing methods, such as ink jet printing. We recently announced 2 different solution process P2OLED red emitters, with lifetimes in excess of 14,000 and 12,000 hours respectively at 500 nits.

We also announced a solution process P2OLED green emitter with over 8,000 hours lifetime at 1,000 nits. Seiko Epson is excited by the program, commenting that "Universal Display's phosphorescent technology is the critical element towards reaching low power consumption OLED performance." Combining PHOLED technology with ink jet printability offers a potential to provide excellent display performance along with cost-effectiveness, both critical for broad market acceptance.

During the quarter, we also licensed to Epson one of our ink jet printing patents. Financial terms were not disclosed. But the fees we receive will be creditable against license fee and royalties payable under a broader license agreement with Seiko Epson, provided it is negotiated and signed within a certain period of time. Last month we also made a joint announcement with Konica Minolta, that we were strengthening our OLED development collaboration with them. This collaboration has resulted in the development of a white OLED with 64 lumens per watt, 4 times the efficiency of standard incandescent bulbs. For this development, our red and green PHOLED technology and materials were used in conjunction with Konica Minolta's proprietary OLED technology. We are now working with Konica Minolta on the next phase, which is to focus on Konica Minolta's commercialization of all phosphorescent OLED backlights and other lighting products.

This quarter has also seen a number of contract wins from U.S. government agencies. We won a $750,000 Phase II SBIR from the Department of Energy to advance our work on white OLEDs. solid state OLED lighting is an important area in which the DOE is focusing to reduce our national energy consumption. We were also awarded a $730,000 Phase II SBIR contract from the U.S. Department of Defense to continue our work on ruggedized flexible OLED displays on metal foil.

Our flexible OLED display work was recently recognized by the U.S. Army as a success story in the SBIR Small Business Innovator Research Program, where they said, "The Army views these portable flexible displays as a critical component required for future commanders to assess the common operational picture anytime, anywhere on the battlefield." We have also recently been honored as one of New Jersey's finest companies by New Jersey Biz Magazine, and were recognized as New Jersey's twenty-first fastest growing company in Deloitte & Touche's Technology Fast 50 Program.

I speak for everyone at UDC in saying we are proud of being recognized for these accomplishments. The first 9 months of 2006 saw significant progress. We are confident that our proprietary OLED technologies hold key advantages for commercial OLED applications, including flat panel displays and lighting. We're optimistic about what 2007 holds for the OLED display industry in general, and UDC in particular. With that, I will turn the call over to Sid to review the quarterly and 9 month financial results in more detail. Sid?

Thank you, Steve. And again, thank you, everyone, for joining us today. Revenues for the quarter totaled approximately $3.1 million compared to approximately $3.4 million for the same quarter of 2005. While revenues compared to 2005 were down, they did improve on a sequential basis, from approximately $3 million in the second quarter of this year. As it is still early in the industry, and the OLED market continues to mature, we do expect to see fluctuations in quarterly revenue comparisons. However, we are pleased with the sequential improvements, and it's important to note that on a 9 month comparison, revenues for 2006 totaled approximately $9.3 million, a solid improvement over revenues of approximately $7.9 million for the same 9 months in 2005.

Commercial chemical revenue for the third quarter of 2006 was $201,000, and we had none in the same quarter of 2005. Royalty and license fees were $534,000, up from $50,000 in the same quarter of 2005. The increases in royalty and license fees and commercial chemical revenues reflect our material supply agreement with AUO. As stated earlier, we do not expect any additional commercial chemical sales to AUO in the foreseeable future. Due to the early stage of the commercialization of our technology, it is difficult for us to predict the timing or the amount of revenues from customers.

Technology development revenue was $540,000, compared to $426,000 for the third quarter of 2005. Developmental chemical revenue was approximately $500,000, a decrease from $1.3 million in the same quarter of 2005. We expect this trend to continue as more display manufacturers transition to commercialized and OLED displays. Contract research revenue was $1.3 million, a decrease from $1.6 million for the third quarter of 2005. The timings of the efforts on these contracts was impacted by the timing of work performed by our subcontractors. In addition, there was a delay in the execution of contracts by governmental agencies. Based on current contracts in-house, contract revenue should total approximately $4 million for the full year of 2006.

The net loss for the 3 months ended September 30th, 2006, totaled approximately $2,943,000, or $0.09 per diluted share, as compared to approximate net loss of $2,979,000, or $0.10 per diluted share in the same period of 2005. The decrease is mainly attributable to a refund of approximately $1 million from Princeton University for cumulative amounts overpaid under our 1999 sponsored research agreement through August of 2006. This is -- this was a result of Dr. Stephen Forrest, our principal investigator at Princeton University, moving to the University of Michigan, where he continues to direct our sponsored research efforts. This refund was offset by increased personnel costs and costs associated with our newly expanded facility, and increased G&A expenses. Total operating expenses were $7.3 million, $7.9 million, and $6.6 million for the first 3 quarters of 2006. Going forward, we believe that our operating costs will remain at or near current levels.

We have expanded our efforts in order to insure our capabilities to address market opportunities going forward. The net loss for the 9 month period totaled $10.8 million or $0.35 per share, compared to $11.2 million, or $0.39 per share for the same period in 2005. The overall revenue increases were offset by increased operating costs during the 9 month period of 2006. Again, the Princeton University refund reduced our operating costs for the 9 month period. Net cash used in operating activities was approximately $5.7 million during the first 9 months of 2006, compared to just under $900,000 for the same period of 2005. This increased usage is mainly attributable to a reduction in deferred revenue, an increase in accounts receivable, and a reduction in accounts payable and accrued expenses. However, we were near cash flow breakeven during the quarter, with cash used in operating activities totaling approximately $70,000, which includes the Princeton refund.

Our working capital increased to approximately $39 million during the quarter, compared to $36 million for the same quarter in 2005. Cash, short, and long term investments remained solid at $47.7 million at the end of the third quarter, down from $49.7 million at the end of December 2005. These were impacted by increased cash used in operating activities, purchase of equipment, and is offset to some extent from option and warrant exercises during the 9 month period. With that, we would like to open the lines up for questions at this time. Operator, would you please take over?

[OPERATOR INSTRUCTIONS] Darice Liu, Maxim Group.

You talked a little bit about what's going on with AUO and Samsung. Can you talk about other types of manufacturing activity in the field with OLED, whether it is passive or active?

Darice, this is Steve. We primarily focus on active matrix. And we see a number of manufacturers working to commercialize their active matrix, small molecule, vacuum deposit OLED displays.

Can you give a rough number in terms of who is in R&D right now in Asia?

Oh, gosh. I can't give you a number off the top of my head. There's a number of them working in R&D, Darice, probably over 10 to 20 at various stages.

The number is at least 10, that we can count.

Are the majority of them in early stage, though? Or are we going to see maybe more announcements like Samsung SDI?

Well, Samsung SDI is really going after this market in a big way. But there are other manufacturers that run the gamut, and of course, a number of them do not disclose their plans until they're ready to launch.

Fair enough. And I guess, speaking of Samsung SDI, when should we start seeing revenue flow from them in your business model?

Well, as they have stated, they're starting to ramp up production in this quarter, and start shipping product in the first quarter of 2007. As we ship them commercial materials, that will show up first. And when they sell product, we will get royalty reports at the end of each quarter after they are sold. So there will be a delay on when we record the royalties for the first couple of quarters until we get a handle on what their ramp is, then we can make some projections.

AUO had a license to buy, I believe, in 1 color. Do you know how many colors you have with Samsung SDI?

They've not yet released that type of information, Darice. And you know we can't talk about our manufacturers until they release that type of information.

Fair enough. And then going back to the OpEx, Sid, should we expect basically if we bring back the $1 million refund, that should be the benchmark going forward? And do you see increases to your R&D?

That should be -- you are correct. That should be the benchmark going forward. We have built the facility out. We have staffed up most of the folks here. If we see much growth, it will be very small.

Okay. Thank you, guys.

Jim Ricchiuti Needham Capital.

I was just wondering if you could just talk a little bit about, perhaps, how you might see the ramp up on the commercial chemical side with SDI. I mean is there any color you can provide over and above what you have said, as to how we should think about that?

It's difficult for us, as Steve said, to talk about this, until SDI starts to talk about it. As they -- as we have stated, though, they expect the capacity to be 20 million moving to 50 million units. And as they gear the factory up, we would expect to start shipping them additional quantities of materials to meet their needs. And it's in the process of starting right now. But until we get, as I said, at least a quarter or 2 under our belts, it's really difficult for us to predict how quickly the ramp will be, and what the order of magnitude of the volume of materials we will be able to ship them.

Okay. I was just wondering, Sid, if they might be building initially some buffer inventory -- some inventory, and then would work that off, and then see how it progresses from there.

It's difficult for us to say right now. I do know that as they are starting to ramp up, we start seeing more and more activity. If I was them, I would ensure that I had enough materials on hand to make sure that there's no interruption in the flow. So in the beginning, if I was in their shoes, I would be as conservative as possible to ensure I don't have any breaks. But until we report the next quarter, it's difficult for us to say.

Okay. I understand. On the contract research revenues side, is there anything you can tell us about how that area might shape up in calendar '07?

For calendar '07, it looks like what we have in-house today. As we've said before, we expect that to be fairly flat or grow a little bit, or in the 4 million range. I would anticipate for 2007 that number is probably the right number. It could be higher. There have been some additional awards. We've got some Phase Is that we have completed, of which we may get Phase IIs, and then there are some add ons to that. But right now I think we can look at '07 as being very similar to '06.

Okay. And Sid in '06, we saw a step down in the development chemicals part of the business. But it sounds like you're also working with a fair number of people. Is there anything you can say in terms of how we should think about that level of activity in '07?

The step down really had to do, AUO was buying, and another customer was buying a lot in the prior year. We may not have customers buying the quantity that AUO was buying, but we do have significant amount of customers. And it appears that as they are moving their efforts forward, it's not necessary to buy the orders of magnitude that AUO was buying on the development side. There's a lot more overall development in the industry, I think, that's being shared throughout the industry, and you don't have to quite buy as much.

Okay. Terrific. Thank you.

Jed Dorsheimer, Canaccord Adams.

Just a couple questions. 1, was wondering, the agreement with Samsung SDI, is that also using Novaled’s doped materials?

Our agreement with Samsung just relates to our proprietary technology, Jed.

All right. And I guess, same question on the efficacy that you saw on the 64 lumens per watt. Is that using any type of doped material in that process?

Well, that was with ourselves and Konica Minolta. So I can't comment on that, other than what Konica Minolta said about their proprietary technologies. During the quarter, however, we did announce a saturated red phosphorescent OLED with a luminous efficiency of, I believe, about 15 candelas per amp, at an operating voltage of less than 4 volts, and that was using Novaled's technology, as well as our technology.

All right. And then, as you start to talk more about the opportunity on the lighting side, I mean clearly, the inorganic LEDs have had an advantage by having greater amount of product in the market, and being adopted by some of the other applications, where the OLEDs haven't necessarily had that yet. What is the, as you talk about that 64 lumens per watt, what would be the cost per lumen there, so we can get some type of benchmark to compare it to the inorganics?

Well, we don't have the cost numbers yet, Jed. In order to commercialize white OLEDs on a general lighting basis, however, we are going to have to reduce the costs down significantly.

So I guess, on the inorganic LED side, the cost per is still about $0.05 per lumen, which compares to fractions of $0.01 versus fluorescent or a compact fluorescent, right now. So they still have to come down in order of magnitude. Would you be an order of magnitude higher than sort of a $0.05 per lumen type number, or are you in that range? And I'm just trying to get an idea, because it seem like, while everybody talks about your opportunities on the display side, it seem likes the lighting side is just as large, from a market perspective. And if you could start tapping into that, it could be a great opportunity.

Well, we think the lighting market opportunity is very, very exciting. One of the reasons why people are looking at OLEDs is because it's a potentially low cost broad area emitter, because you can use some of these low cost processing methods that we've been talking about to apply to white lighting. I'm only hesitant because we are -- the OLED development started after the inorganic LED development. So we don't yet -- we're not yet at the point where we can put forth reliable cost numbers. But the projections I've seen show that OLEDs can compete very favorably with other lighting technologies once they start getting into production.

And then last question. Would that be using an organic -- would that be using an organic phased deposition, or some type of deposition? Or when you talk about the road maps, is it using some type of ink jet printable?

It could actually use a wide variety of manufacturing methodologies.

Jed, let me add 1 thing. As you're aware, one of the complications in the display industry is using shadow mask and having a pixelated display, whereas with lighting applications, it's essentially very large pixel. So it's a much less complicated manufacturing process. So we believe we can really get the costs out on the manufacturing side for lighting.

Great. And then one question on the display side. AU, have you have seen a significant drop off in the chemicals that they've been purchasing from you?

We have said that we don't expect them to purchase any additional materials at this time.

Oh, I must have missed that. Thank you.

Andrew Abrams, Avian Securities.

I was wondering if you could give us a little bit of color on the Seiko Epson. It sounds like that you guys are either working on, or talking to them about a wider license, based on your comments so far. And I was wondering if you could give us a little bit of color there as to the depth of that kind of agreement, and what you think your time frame might be?

Well, we've been working with Epson on phosphorous ink jet printers OLED for quite some time, and they're interested in commercializing that. And so the licenses we would be talking about would be around our proprietary technologies, including phosphorescence. Of course, Andy, I can't give you any time frame on how long that will take. Some companies sign license agreements well before they go into production. Others wait till the end.

Okay. Also on the SDI progress that's being made. And this is more just your G2 that you can help us with. Is this going to be -- is most of their production going to be mixed fluorescent and phosphorescent, meaning using blue fluorescent with some of the other molecule -- your small molecules?

Well, although we can't talk about what it is going to be initially, we do not think it will include blue phosphorescence.

Okay. So most probably, it will wind up being mixed as most of the other stuff is. And last, can you give us some feel for what you're hearing in terms of LTPS backplanes design for OLEDs, and what progress is being made there? And just kind of your general feel on how things are going there?

Well, again, that's been one of the -- one of the difficult issues. Samsung SDI designed this plant from the ground up to incorporate their LTPS solutions. And we're hearing about some additional progress in other companies, as well. So I think those issues are starting to come around slower than we would have liked, but we're seeing progress.

Great. Thank you.

[Sendan Konokar], Cowen & Co.

Sorry if I missed this earlier, but what was the revenue contribution in this quarter from AUO?

The commercial chemical sales were all from AUO.

Okay. And -- okay. Thank you. That takes care of it.

[OPERATOR INSTRUCTIONS] Darice Liu of Maxim Group.

The AUO in units has put a damper on [inaudible] industry for the past quarter or so. But it seems the Samsung SDI is a much larger opportunity. Can you give us an idea of how much larger Samsung SDI is compared to the AUO opportunity?

Well, Samsung SDI's factory is clearly a much larger fab, 20 million units to approximately 50 million units annually, is clearly way above anything that AUO was going to do. So the opportunity is much, much larger. But AUO has never really announced what the capacity of their fab was, but it was no place near this. So it's -- I don't know what else to say, since AUO never really announced what it was. And as I said, it will take a quarter or 2 for us to start shipping commercial materials to SDI for us to say it's 10 times as much, it's 50 times as much, or it's the same, or it's the same. I can't answer that question right now.

Fair enough. But with the -- currently you mentioned that it's currently 20 million units capacity at Samsung SDI?

That's what they have announced, a 20 million and up to 50 million.

And does the current tool capacity they have able to do 50 million, so they can ramp up quickly? Or do they need to add on?

The quote that we saw did not talk about capacity constraints. It just said -- I think it said 20 million initially, and in the beginning of '08, it could be up to 50 million.

Thank you, guys.

Jed Dorsheimer, Canaccord Adams.

Jumped on the call a little late, so I'll apologize in advance if you already touched on this in the very beginning of the call. But any update on a usable blue and/or an update on what coordinates you've been able to get to?

No, Jed, you didn't miss it. We didn't make any announcements on blue at this point time, on this conference call. We talked about some whites, we talked about some reds, and talked some greens. But we didn't talk about any blues.

All right. Could you?

Not at this point in time. We are not yet prepared to make any announcements.

All right.

Except that I will tell you that we are make some very good progress. The chemical team -- the chemistry team is really starting to come together. We've just about outfitted all of the hoods with people. They're making a lot of good progress, and 1 of their prime foci is blue.

All right. Thank you.

Hugh Mai, First Albany Capital.

I guess when we're thinking about SDI, should we assume that this is 100% probability that it is going to go forward? Or are there any technical challenges that might force SDI to just walk away as AUO electronics has just done?

Well, SDI has spent about $500 million to build the factory. It has 1,000 employees. They are qualifying all the equipment today. This is a very different effort than AUO. AUO was using backplanes that their LCD group was manufacturing for LCDs, and trying to shoe horn them into a product. They had a small GEN2 line that was essentially put together just to see if they could penetrate the market. The SDI commitment, and when you hear the president of SDI talk, they are -- this is their bet in the display business. The only thing else they make are plasmas. They never manufactured LCDs at SDI. And this is their bet. And to some extent, they have put a very big effort into this. And it's close to a bet-the-company effort. So I don't believe that -- in my opinion, I don't believe they're going to walk away from it. I think they put this money in because they think -- they know that they can make it work, and this is a big effort on their part.

So I guess as a follow-up, so can we assume that there should be no technical challenges that would -- i.e., like they resolved all the technical challenges?

I am certain there are technical challenges. I am certain any time you build a new factory with new technology from the ground up, and you're trying to get yields at very high levels, and ship products into a new marketplace, I am certain that they have technical challenges that we haven't even thought about. And they are working night and day, I believe, to get these done. I know when I was there, some of the guys told me that they were starting 7:00 in the morning and going home at 11:00 at night, and they were doing that 6 days a week. The good part is, the guys said, we do get paid overtime.

Thank you very much.

Andrew Abrams, Avian Securities.

The chemical sales, when they start to SDI, those aren't -- I know the royalties will be booked a quarter late. The chemical sales are as-shipped?

That is correct.

Thank you.

At this time, there appear to be no further questions, and I would like to turn the floor back to management for their closing comments. Please go ahead.

We would like to thank you all very much for participating. We believe that, as we said, SDI is moving forward. It will be very important for the OLED industry for them to get product into the marketplace. What we can tell you is that we have seen a number of the displays, and they are terrific looking. And if any of you have seen them, all of us are going to want one as soon as you can get your hands on it. So with that, thank you all for participating.

Thank you very much.

Thank you. This concludes today's Universal Display third quarter 2006 earnings conference call. You may now disconnect your lines at this time, and have a wonderful evening.