Universal Display Corp (OLED) 2006 Q4 法說會逐字稿

Good afternoon. My name is Anthony, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display Corporation year end 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Mr. Paul Johnson, on behalf of Universal Display Corporation. Sir, you may begin your conference.

Thanks, Anthony and thanks for everyone for joining us today. With us today are Steve Abramson, President and Chief Executive Officer, and Sid Rosenblatt, Chief Financial Officer of Universal Display Corporation. Let me start off today by reminding you that this call is the property of Universal Display Corporation. Any redistribution, transmission, 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 web site, this call contains time sensitive information that is only accurate as of the date of the live webcast of this call, March 15, 2007.

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's important to note that these statements are subject to risks and uncertainties that could cause Universal Display 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 out of the way let me turn the call over to Steve Abramson. Please go ahead, Steve.

Thank you, Paul, and welcome, everyone to our fourth quarter and year end 2006 conference call. Sid Rosenblatt will follow my review of the quarter and year with some details on the financial results. Following our formal comments, we will be happy to take questions.

We are pleased with 2006 overall, as we look back on a year of steady growth for Universal Display. We saw revenues increased by 17% year over year. We completed the two-year expansion of our research facility and corporate headquarters in Ewing, New Jersey, we made significant progress on our PHOLED materials and technology, established new business relationships, expanded existing ones and made progress on our programs with the U.S. Department of Defense and the U.S. Department of Energy.

It's a good time to be in OLEDs and a good time for Universal Display. After over a decade of hard work on the technology and business fronts, we believe the next few years will reward UDC as OLEDs are commercialized. Most significant for us in 2006 was seeing our work with some of the largest corporations in the world begin to yield commercial products that use our PHOLED technology. Samsung SDI is leading the way with their $0.5 billion commitment to new active matrix OLED display production capacity. Production has already begun. Clearly, they are committed to OLED technology for today and tomorrow.

One of the initial products utilizing Samsung SDI's active matrix displays, and Universal Display's high efficiency PHOLED technology is an iRiver Clicks two MP-3 player introduced earlier this year. The product has received positive reviews, particularly for the color and clarity of its full color OLED display and the first production run has already sold out in Korea. This comes on the heels of another product launch in 2006, the BenQ Siemens mobile phone, which utilitizes displays from AUO and red PHOLED technology from Universal Display. This was the industry's first A.M. OLED display in the mobile phone and debuted to rave reviews as well. Unfortunately, production by AUO was suspended as previously noted in our third quarter teleconference.

At the CES show in Las Vegas earlier this year, Sony Corporation demonstrated 27-inch, high-definition OLED TV. This was the hit of the show and created quite a buzz. According to a January 11, 2007, New York Times article that discusses Sony's OLED TV, and I quote from the article, the picture quality is extraordinary, bright, sharp with deep colors. If Sony can made OLED sets economically it can mean the end of LCD. End quote. We continue to work with Sony under an evaluation agreement. We are also excited about advances for our technology on the white lighting front. One of our partners, Konica Minolta, announced a record breaking white OLED with a power efficiency of 64 units per watt the or four times the efficiency of an additional incandescent bulb. This white PHOLED result is based on our green and red PHOLED technology and materials combined with Konica's proprietary OLED technologies.

We also reported on our own white PHOLED light source at the I.D.W International Display Works conference in Otsu, Japan in December, 2006. There we announced a warm, white, all PHOLED device using our red, green, and blue PHOLED materials and technology, with a lifetime of 20,000 hours at a thousand nits, external quantum efficiency of 25% using enhanced output coupling techniques and that's 14% EQE without enhanced coupling, and CIE coordinates of 0.47, 0.45.

In the face of rising energy prices, green, that is, environmentally friendly and energy-efficient technologies and solutions have become very important. OLEDs and our PHOLEDs in particular have received emphasis in this area recently. The inherent characteristics of our PHOLED technology, energy-efficient flexible form factor quality of light make it ideal as an energy-efficient technology. We view this as an important opportunity for UDC.

White lightning continues to be an area of great interest for the Department of Energy. Our white technology saw significant increases in quantum efficiency during the year thanks in part to our DOE contract work. The DOE also recognized two of our researchers, Dr. Brian D'Andrade of UDC and Professor Mark Thompson of U.S.C. for advances in this area at the DOE's solid stated lighting workshop last month. This work and our contracts with the DOE are an important factor in driving innovation of our technology. We look forward to additional improvements in 2007.

Just as important are our relationships with various chemical companies that we established during the year. These partnerships and development agreements are significant. They are helping to drive new innovations and performance increases for our PHOLED technology. In December of '06 we announced a significant achievement in the performance of green phosphorus OLEDs. This result from our ongoing technical collaboration with Nippon Steel Chemical Company. By combining our green phosphorescent emitter, GD 48 with NSCC's new green host material, we achieved record operational operation for our green phosphorus OLED device. This green OLED offers greater than 60,000 hours of operational life time of and additional luminance of 1,000 candelas per meter squared.

The device also exhibits a high luminance efficiency of 65 candelas per ampere and external quantum efficiency of 18% at 1,000 candelas per meter squared. Color coordinates for this device and standard bottom emission structure are 0.35, 0.61. This result represents more than a two-fold increase in operational stability, which is a key for commercial success. UDC's GD-48 is currently available from Universal Display and NSCC's new green host material will soon be available from NSCC for evaluation and use in commercial production. We continue to collaborate with NSCC on the development of improved phosphorescent material systems for all three PHOLED colors.

We also began in the fourth quarter a collaboration with Idemitsu Kosan, another well respected chemical company in Japan. This collaboration is focused on the development of commercially viable blue phosphorescent OLED materials for use in displays fabricated through dry processing methods such as vacuum thermal evaporation, which is the industry standard. Idemitsu is well known in the industry for its work with blue fluorescent materials and we believe that we will be able to accelerate progress in the area of blue phosphorescent OLED through this collaboration. During the year we also established an alliance with Mitsubishi Chemical Company to accelerate the development of inkjet printable PHOLED materials based upon our proprietary technology. Mitsubishi Chemical is a world class chemical company.

Their commitment to printable phosphorescent OLEDs which is we called P-squared OLEDs indicate that inkjet-printable PHOLED technology has real commercial potential. As we announced in our third quarter teleconference, we are making significant progress in this area through our joint development collaboration with Seiko Epson Corporation to enable the manufacture of inkjet printable OLEDs. Having achieved lifetimes of 14,000 hours of 500 nits per red, and 8,000 hours at 1,000 nits per green. Working side by side with industry leaders like these, we believe that we can accelerate commercial opportunities not only for UDC but for the entire OLED industry overall.

Returning to our PHOLED materials and technology, in 2006 we made significant development progress. We unveiled a new deep red emitter with excellent luminous efficiency of 15 candelas per amp that corresponds to a 19% external quantum efficiency in over 200,000 hours of operating life time at 500 candelas per meter squared. We also demonstrated advances in red device architectures that leads to significantly extended life times, well over 300,000 hours in certain designs. As I mentioned when discussing our relationship with NSCC, we doubled the life time of our green PHOLED material system and we have continued to improve the color saturation, efficiency and life time of our blue PHOLED materials although they are not yet ready for commercial products. We believe these results demonstrate the great promise of phosphorescent OLEDs for both displays and lighting. With the progress we are making is bringing us ever-closer to achieving all Phosphorescent commercial OLED products.

Finally, our work with the Department of Defense and Department of Energy continues to provide us with significant revenues and also helps to drive new innovation and commercial opportunities for PHOLED technology. We had a number of SPIR and development contracts with both agencies in 2006, focusing on flexible PHOLED displays for the Department of Defense and white OLEDs with the DOE. Earlier this year we delivered the first high resolution A.M. OLED flexible display prototypes to three agencies of the U.S. Department of Defense and we are continuing to push this technology forward. Commercialization of A. M. OLED displays that utilize our PHOLED technology began in 2006, and is continuing in 2007.

According to industry analysts, there should be additional manufacturers entering the A.M. OLED display arena in 2007. We are confident that with our strong financial position, excellent strategic partnerships, substantial patent portfolio, state-of-the-art R&D facility, and very talented team, we are well-positioned for growth in 2007 and beyond.

With that, I will turn the call over to Sid to review the fourth quarter and year end financial results in more detail. Sid?

Thank you, Steve. And again, thank you everyone for joining us today. For the year 2006, revenue totaled approximately $11.9 million, compared to approximately $10.1 million for 2005. The 17% increase in revenue year over year was driven by growth in commercial chemical and licensee revenue; partially offset by anticipated declines in development chemical revenue. As you know, given the current stage of the industry and the level of maturation in the OLED market, revenue remains difficult to predict on a quarter to quarter basis. However, we are pleased with the improvements compared to 2005.

Revenue components for the full year 2006, when compared to the full year 2005, were as follows: commercial chemical sales revenue of $1.9 million compared to only $31,000 in 2005. This increase is mainly AUO and Samsung SDI. License fee revenue was $2.4 million compared to $234,000, a large portion of our license fee revenue for 2006 is attributable to the commercial products produced by AUO during the year.

We have been pleased with what we have heard about Samsung SDIs A.M. OLED production plans and were optimistic about their planned production levels for 2007. It has been reported that initial production will be 1.5 million screens per month and this may ramp up depending on market reaction. As you know, under our agreement made with Samsung SDI, in April, 2005, we received up front payments of licensees and royalties classified as deferred revenue and deferred license fees. The deferred license fees are being recognized as license fee revenue over the life of our agreement with Samsung SDI. The deferred royalties in connection with the SDI agreement will be recognized as products when sold and royalties when earned. Under Samsung SDI's current plan A.M. OLED production levels we expect to see royalty revenue from them increase in the second half of 2007.

Technology development revenue was $2.2 million compared to $1.7 million in 2005. Developmental chemical sales were $1.7 million compared to $3.5 million. Our major development chemical customers in 2005 included AUO and Samsung SDI, both of whom have shifted to commercial chemical category in 2006. Contract research revenue was $3.8 million compared to $4.7 million. The total amount in contract revenue was affected by the timing of our ability to recognize revenues under our various government contracts. However, we had essentially the same number of government contracts and level of contract efforts in 2006 as in 2005.

The overall revenue increases were substantially offset by increased operating costs during 2006. Operating costs were reduced by a refund from Princeton University for unspent R&D funds. A decrease in amounts payable to PPG Industries, our chemical manufacturer, based on our hiring of part of the PPG development team as UDC employees, and a decrease in the expenses related to the timing of recognition of stock-based compensation issued to our scientific advisory board. These reductions were partially offset by an increase in personnel and operating costs associated with the expansion of our research facility and corporate headquarters during the year. For the year, we reported a net loss to common shareholders of $15.2 million, or a loss of $0.49 per diluted share, versus a net loss of $15.8 million, or $0.56 per diluted share in 2005.

Net cash used in operating activity was approximately $4.7 million during 2006 compared to $345,000 in 2005. This increased usage was mainly attributable to the recognition in 2006 of revenue previously deferred for which the company received the cash in prior years, and to the timing of receipts and payments. We were cash flow positive during the fourth quarter, with cash from operating activities totaling just a little under $1 million. Revenue for the fourth quarter totaled approximately $2.5 million, compared to revenue of $2.3 million for the fourth quarter of 2005. Commercial chemical revenue for the fourth quarter of 2006 was $940,000, and we had none of these revenues in the same quarter of 2005. The increases in commercial chemical revenue during the quarter were primarily based on a relationship with Samsung SDI.

Royalty and license fee revenue was $127,900, up from $68,000 for the same quarter of 2005. Technology development revenue was approximately $228,000 for the fourth quarter, compared to $718,000 for the same period of 2005. The decrease is mainly a result of nonrefundable payments from one of our technology development partners that are now being credited against up front license fees if we enter into a commercial license agreement with them and therefore they are included in deferred revenue rather than current technology development revenue. Development chemical revenue was approximately $192,000 for the quarter, a decrease from $626,000 in the same quarter of 2005. As mentioned earlier, this was a result of AUO and Samsung SDI transitioning to the manufacture of commercial OLED.

Contract research revenue was approximately $1.1 million for the fourth quarter, an increase from $884,000 for the fourth quarter of 2005. As we noted in the past, our recognition of revenue under these contracts does not always track the timing of efforts under these contracts. The net loss attributable to common shareholders for the three months ended December 31, 2006, totaled approximately $4.4 million, or $0.14 per diluted share, as compared to an approximate net loss of $4.6 million or $0.17 per diluted share for the same period of 2005.

We expect to see the trend of increased revenues, particularly on the commercial chemical sales and license fee and royalty side continue in 2007. Our strong -- our cash short and long-term investment remains solid at nearly $50 million at year end, roughly equal to the levels of December 31, 2005. We believe that Universal Display is in a strong position to capitalize on the OLED opportunity you see before us.

With that, we would like to open up the lines for questions at this time. Operator, would you please start the questions?

Certainly. [OPERATOR INSTRUCTIONS]. Thank you. Your first question is coming from Darice Liu with the Maxim Group.

Good afternoon, guys. Just two questions, first one being regarding SDI. Now that they are starting to ramp production, there seems to be a change in the industry's investment tone for active matrix OLED, lots of buzz about new investments following SDI. Can you tell us what you are hearing and what it may mean for license agreements for you?

We have heard the same. Samsung SDI as you're aware just presented at a display research conference and talked about significant investments in the future in A.M. OLEDs and we are hearing a number of companies that Steve mentioned entering the A.M. OLED marketplace in 2007. We are hearing the same things you are.

Can you talk about who those players are?

There are some published reports that indicate companies like LG, Topoli, CMEL, are some of the published reports I've seen.

And do those three players have license agreements yet with an IPL?

I don't believe so.

Okay.

Not that we have read anything about.

Fair enough. Then on the P&L front I understand that it's difficult to gauge revenues and that you probably can't comment on pending product design wins for SDI, but with production ramping and you having a rolling forecast, can you estimate how much commercial chemical revenues can grow in '07 versus '06?

It's, at this point if you look at what we did in the fourth quarter we would expect that number to continue to grow, but we really, at this time, because we've only had one quarter behind us, and we don't have a lot of information in terms of when they are actually shipping product, I think if you give me at least one more quarter and I have some history, and I know where they are going, I could do it. It's still very early for us to try to predict the year, but we would expect it to continue at that rate and grow.

Okay. Thanks, guys.

Thank you.

Thank you. Our next question is coming from Jed Dorsheimer from Canaccord Adams.

This is actually [Josh Barabo] on behalf of Jed. Just to make sure I understand this correctly, all the revenues right now being recognized from Samsung SDI is in the chemicals segment or there is some licensing involved?

There is some licensing involved we've got an up front payment which we amortized over the life of the agreement, which is about 5.5 years, and there are some prepaid royalties in that, also. But starting this year, as they start to ship product and we receive royalty reports we then will record royalty revenue also.

Is that a first half story or second half story?

It's in addition to the chemicals, obviously. We get quarterly reports from them 60 days after the quarter closes so we should have something for the next meeting but it's when they start to ship and when they provide us with that information.

Okay. And lastly, do you anticipate finding some other similar agreements within this year? I know we were kind of internally projecting maybe another couple in the seconds half of this year? Is that still accurate? Can you possibly comment on that?

We are always trying to sign up additional licensees. It's difficult for us to say how many. We are working with a number of companies, we work with 20 different major display manufacturers. We believe that our phosphorescent technology is key and if they want to make power efficient OLED displays, they will use our displays they will use our technology. Again it's difficult for us to predict how many will to sign up. We are going to sign up as many as we possibly can.

Okay. I will pass it on. Thank you.

Thank you. Our next question is coming from Rob Stone of Cowen and Company.

Hi, guys. Hi, Rob. I wonder if you could just comment, Sid, on sort of the expense run rate as you go through 2007. You probably have better visibility on that than do you on revenue. And I noticed an uptick around the end of the year but is that maybe some seasonal factors, so any color you can provide on your expense outlook would be great?

Sure, Rob. There is a little uptick in the fourth quarter. We, and there are obviously year end things that get in there. We expect that run rate is probably just a little bit less than that to be about our quarterly run rate. We have built a facility. We have staffed it up. We don't expect to hire a significant number of new folks this year so those numbers, the third and fourth quarter numbers, if you average them, I believe will be a good indication for what 2007 expenses will look like.

Okay. In terms of the commercialization picture, naturally, I recognize that you can't comment on specific companies or products before they put out a press release of their own, but based on what you are hearing around the industry, do you get a sense of number of potential additional products or any comments you could make just in general about applications, the ones you cited specifically we had a handset and a portable music player, it seems like those are probably the two most likely categories, but any color you could comment on, and this would not be specific to UDC licensees but just as you see, commercial activity starting up in the OLED space all together, what sense of number of products and types of products might be seen this year.

Sure, Rob, well, you clearly identified two of them, handsets and MP3 players. I think the people are focusing on small area portable electronics that show video because when you can show video you can really highlight the advantages of OLEDs, hence the new MP3 players are showing video, cell phones are showing video, they may be designed in portable televisions or thing of that nature. We still are probably in small area this year, but focusing on the low power, on the really good contrast and on the excellence video applications.

So do you get a sense of if there were a couple of products last year, might there be single-digit number this year, double-digit, what sense do you get from discussions around the industry?

I think people are very interested in new applications for OLEDs and they are really focusing on that. The consumer response has been very positive. And I believe that they are out there trying to get as many design wins as possible. But we can't specifically comment on number of different products.

Again in the SDI display search presentation, they were very positive and they said the market is looking at their displays very positively. So they were very upbeat in their last presentation.

Okay. Great. A final question for you, Sid, can you give us probable figures for this year for capital expenditures, depreciation and stock-based compensation?

The capital expenditure number would be probably about 2 to $2.5 million, in line with last year's. Stock-based compensation and where we give in terms of we pay our Board in stock, we pay our Scientific Advisory Board in stock and any Executive bonuses are paid in stock. So I would expect those numbers to be about the same as they were in the past. And a depreciation number probably will grow in 2007, because we put a lot of additional capital expenditures in 2006 and 2005. So that number probably will have about $0.5 million worth of growth.

Okay. Thank very much.

You're welcome, Rob.

Thank you. Our next question is coming from Jim Ricchiuti of Needham and Company.

A question, Sid, I think you were talking about the ramp or the pick up in royalty and license fees more toward the second half of the year. Is there any chance that that could be as early as Q2, given that you haven't really seen the quarterly reports out of SDI?

We believe that will potentially will be in Q2.

And just on the commercial chemical side, if -- excluding SDI, is there any are there any other customers?

Not in 2000 -- not in the fourth quarter of 2006. And there potentially obviously can be some additional ones in 2007.

Okay. And just on the contract research revenues line, always a difficult one, I know, for you guys; to give us help on, but any sense as to how that might shape up in '07?

It is in-house, assuming that we could do the work, which we can, the number is somewhere around $4.5 million. That's what we know about right now. There may be some additional ones. It does take a few months even when you win $50,000 SBIRs, it takes six months before you actually get to revenue.

On the commercial chemical revenues that you did see in the quarter, can you give us a sense as to how that might have flowed through the quarter, was it more back end loaded, was there a heavy amount in the early part of the quarter?

It actually for the fourth quarter was clearly flat. They were ordering a constant amount for every other week or every month depending on how they would order, but it started out a little bit lower, but then for the last couple of orders at the end of the fourth quarter, it was fairly flat.

Just as we think about Q1, Q2, should we assume kind of a modest uptick off of that Q4 level?

It's hard for me to predict. But it was -- it was a growing number in the fourth quarter.

Okay. Thanks. That's it for me. Thank you.

Thanks, Jim.

Thank you, Jim.

Thank you. Our next question is coming from Hugh Mai from First Albany Capital.

Hi, thanks for taking my question. I have just a few quick questions. Have you heard anything regarding use of new Samsung facilities?

We really don't get that information and anything that we would have we would not be able to share. I don't know if anybody else has heard any published data about that. Anything that we do know is that we believe that they are getting better.

In terms of pricing points for the new screen, do you know if they have paid competitively, premium versus the LCDs?

We really are not privy to that. It may be in some of their, in their presentation that they made at Display Search but I don't remember seeing anything like that.

I am going to try another one, you probably don't have it, but are you aware of any customer wins in terms of the mobile phone at Samsung SDI other than products that you listed?

There is really nothing that you can say about that.

Got it. Do you have a licensing agreement with LG in terms of the technology evaluation, or is that something that you don't publish either?

We have not announced anything with LG.

Okay. Got it. And on a different note, you mentioned that a reclassification from technology evaluation over to deferred licensing revenue. Was that customer Samsung SDI?

We don't specifically name each customer.

I'm shooting blanks today.

That's okay, Hugh, we do that, too, a lot.

And in terms of the licensing fees that you booked on the balance sheet, is that all that we are expecting in terms of 7.2 or is there something in the future as a percentage of the ASP, things on that line?

We always in our negotiations ask for up front fees or prepaid license fees. So as we continue to have progress with customers and sign up additional customers, we would expect that to grow.

But we also get a royalty in addition on the products that they will sell.

Okay. So you are getting some additional royalty fees.

Yes, our license agreements have a component of a license fee, an up front fee, and ongoing royalty and then a component of them buying our commercial materials.

Yes, I believe that when I backed out the licensing fee it just seems, it seems to suggest that the Samsung factory is ramping very aggressively. But having said that, do you have any sense of whether or not how many days of inventory do they hold of your chemicals, is there any sense of that?

We actually ship to them on a fairly regular basis so I don't believe that they keep a lot of inventory inhouse. We are constantly getting purchase orders from them.

Okay. Thank you very much. Those are all my questions.

Thanks, Hugh.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Andrew Abrams of Avian Securities.

Hi, guys. Just some clarification on two things. First, your evaluation agreement with Sony, is that chemicals entirely, is there any IP associated with it or is it, is it just on the chemical side? And, second, can you kind of bring us up to date on progress that's being made on the inkjet side with you guys, just to bring us up to where you guys are now?

Well, the evaluation with Sony is the technology evaluation agreement, so it's a relatively broad evaluation agreement. Inkjet printing, the last announcement we made which was in the third quarter, was where we had made significant progress, I think it was about 14,000 hours on red and about 8,000 hours life time on green and we are continuing to push that envelope. So we are very excited about the work we are doing both with Seiko Epson company and Mitsubishi Chemical and on inkjet printing and phosphorus material.

And the technology side of the Sony evaluation, would chemicals be a separate agreement if they should so desire to go in that direction?

We have development agreements and we have commercial agreements so they would be different agreements.

But if Sony purchased materials today, they would be sold as developmental materials and be listed as a developmental material. We transfer to commercial materials when they enter into a commercial license agreement with us.

Got it. Thank you.

Thank you. Our final question is a follow up from Darice Liu from the Maxim Group.

Following up on Andrew's question, so the Sony televisions that were displayed at CES, what colors did they use of yours?

They did not discuss whose technology was in their display and we can't do it unless they do it.

Okay. Thanks, guys.

Sorry. Thank you all very much for calling in and, again, if you have any specific questions or follow up questions you are welcome to give me a call directly. Thank you again for your time.

Thank you very much. Have a good evening.

Thank you. That does conclude today's conference. You may disconnect your line at this time, and have a wonderful day.