Universal Display Corp (OLED) 2007 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Universal Display Corporation fourth quarter and full year 2007 conference call. (OPERATOR INSTRUCTIONS). Thank you. Mr. Joe Crivelli, you may begin your conference.

Thank you, Lisa, and good afternoon, everybody. Thanks 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 today by reminding you that this call is the property of Universal Display. Any redistribution, retransmission, rebroadcast of this call in any form without the express written consent of Universal Display 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, the called contains time-sensitive information that is accurate only as of the date of the live Webcast of this call, March 13, 2008.

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'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'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 disclaims any obligation to update any of these statements.

Now I would like to turn the call over to Steve Abramson, CEO of Universal Display. Please go ahead, Steve.

Thank you, Joe, and welcome, everyone, to our fourth-quarter and year-end 2007 conference call. Sid Rosenblatt will follow my review of the quarter and year with some details on our financial results. Following our formal comments, we will be happy to take questions.

2007 was a milestone year for Universal Display in terms of technology advancements, industry partnerships and, most importantly, commercialization of our PHOLED technology. The active-matrix OLED industry has grown significantly in 2007 and is expected to expand rapidly over the next few years. According to Display Search, the OLED market was $494 million in 2007, and the AMOLED portion grew to almost $120 million. Display Search projects that AMOLED sales will grow to $2.8 billion in 2010. One of the reasons for this growth is that, as quoted in the Korean Times, "AMOLEDs are increasingly being widely regarded as dream displays, due to their advantages in color, brightness, response time and thickness compared to liquid crystal displays."

As we have discussed in the past, our licensee Samsung SDI completed their active-matrix OLED line early in 2007 and began sampling OLED displays soon after. While Samsung SDI experienced some expected challenges in initial yields, by the fourth quarter of '07 they had reached volume production. They shipped AMOLED displays to their stable of global handset manufacturing companies. This list includes Toshiba, Hitachi, KDDI, Sony Ericsson, Kyocera, iRiver and Nokia. At the CES show this year in Las Vegas, Samsung won the Best Buzz award for their 14-inch full high-definition AMOLED TV and their 31-inch AMOLED TV. Insight Media, which presents the awards, had this to say about the 14-inch HD TV, and I quote --

"Samsung takes the Best Buzz for best image at CES with its full HD display from a 14-inch AMOLED, and persistent crowds at the massive Samsung booth agree. The whopping 1920 by 1088 pixels in a super-slim 14-inch OLED display rendered images in a photograph-like quality as yet unmatched by any other. Pixels were virtually nonexistent on the super-thin 2-centimeter screen, and the (inaudible) pedigree of this OLED image gives the soft, subtle hues and crisp bright tones that rival a mirror image of reality. The image quality question are we there yet gets a resounding yes. Now all Samsung has to do is find a way to replicate it in mass quantities, and, oh yes, at an affordable price."

Samsung SDI's progress in '07 was reason enough for optimism, but their comments on 2008 have been even more encouraging. They expect to double their production capacity in 2008 and ship more than 3 million displays per month by the end of the year.

Universal Display's PHOLED technology is in more devices and more hands than ever before. From cellphones to MP3 players, handset manufactures are using AMOLED displays to capitalize on their energy efficiency, thin form factor and superior display quality. Our solution is a differentiator for manufacturers, and they are touting its benefits to their customers. Our PHOLED technology is up to 4 times more efficient than conventional fluorescent OLED technology, and is significantly more efficient than current LCD products.

We are beginning to see the benefits in this success. Sid will detail our revenue breakdown later, but let me note that while our revenues for the year 2007 were down versus 2006, the volume of our commercial PHOLED and (inaudible) material shipments increased more than 50% in 2007 to $3.6 million. What this means is our customers, such as Samsung SDI and Chi Mei EL, are ordering commercial materials for display manufacturing. It also illustrates a growth in demand of display products in the OLED industry.

You may note that for the year, while commercial chemical revenue was up, royalty and licensee revenue was down compared to last year. This is due in part to the difference in the structure of our agreements with AU Optronics and Samsung SDI, and in particular, the manner in which we recognize revenue differently under the terms of those agreements.

In AUO's case, we included a license fee in the material price. When we sold materials to them in 2006, we recorded both license fee and commercial chemical revenues. This helped provide a reasonable market introduction price for AUO, and our revenue was not dependent on product yield but on the amount of chemicals purchase.

Our agreement with Samsung SDI is different. It is a five-year licensing agreement signed in 2005. This agreement included an upfront payment and a running royalty on each display sold by them. They also purchase materials from us. We record the royalty revenue on a quarterly basis when we receive a royalty report from Samsung SDI. This is usually in the quarter after the sale of the display by SDI, and even longer from the time they purchase materials from us.

Also, because of our arrangement with Samsung SDI, in contrast to our agreement with AUO, our revenue from Samsung SDI is more dependent on yield percentages and the number of displays that they sell. We believe that our royalty and license fee will increase in 2008 as Samsung SDI has reached high-volume production and significantly improved their product yields.

We're also seeing growth from other customers. For example, Chi May of Taiwan has announced that it currently offers 2.2 and 2.8-inch AMOLED panels, and that it is shipping approximately 150,000 displays per month. They expect to begin installing equipment for a second production line in September and to be in volume production by the end of the year.

In 2007 we also made significant progress on our phosphorescent materials. We currently have four different red phosphorescent materials in commercial use. We are working with a number of manufacturers to insert phosphorescent green into their products. And although it is not yet ready for commercial introduction, we have also made significant advances on blue lifetime, efficiency and color.

Our collaborations with Asian chemical companies, such as Idemitsu Kosan and Nippon Steel Chemical, are also proceeding well. We believe it is important to OLED manufacturers that technology and material suppliers work together to provide the optimal material systems based on our PHOLED technology to help accelerate the commercialization of OLED products.

We also extended our agreement with PPG Industries, our long-time partner and contract material manufacturer, for an additional three years, so that we will be able to meet the growing market need for our OLED materials. That agreement now runs through the end of 2011.

In addition, we continued to advance our white phosphorescent OLED technology for lighting applications. This also continues to be an area of focus for the U.S. Department of Energy as they look for the next generation of green energy-efficient lighting solutions. Our work with the DOE on this front continues, and we announced two new SBIR contracts during 2007 for white OLEDs. The DOE also honored us for achieving 45 lumens per watt for a warm white OLED device. Through the use of our high-efficiency PHOLED technology, white OLED lighting has a potential to reach 150 lumens per watt -- significantly better then incandescent and fluorescent lighting today.

Turning to flexible OLED technology, we were excited in 2007 to collaborate with LG Philips LCD on a flexible AMOLED display. The 4-inch QVGA prototype was the world's first high-resolution AMOLED built with flexible metal foil using amorphous silicon backplane technology. It combined LG Philips LCD's backplane technology with our proprietary high-efficiency PHOLED technology. The prototype was demonstrated at the SID conference in May, and an improved version was demonstrated at the CES show in Las Vegas earlier this year. This is an excellent testament to the power of collaboration in the OLED industry.

We have a multidimensional relationship with LG Philips LCD, as they signed a material supply agreement for our phosphorescent materials last year. LG Philips LCD and LG Electronics recently merged their AMOLED businesses. The combined business has been renamed LG Displays because, as a spokesman noted, it reflects their goals for a bigger presence in the next-generation display market. They are considering building a new additional plant for AMOLEDs, and have said they will make an announcement about this no later than June.

In addition, in a joint paper with Seiko Epson, we reported significant advances in printable phosphorescent OLED materials. We announced increases in red lifetime to 7000 hours from less than 1000 in 2006, and increases in green lifetime to 18,000 hours from approximately 5000 hours in 2006. Both of these lifetimes are at a display brightness of 1000 nits. We also increased our light blue lifetime to 2500 hours from less than 1000 hours in 2006 at 500 nits.

While other manufacturing methods, such as vacuum thermal evaporation, continue to be successful in producing commercial OLED displays, we share Seiko Epson's optimism for a printable method as well. In 2008 we plan to continue working to improve this process for our PHOLED technology.

Towards the end of 2007, Sony began selling limited quantities of an 11-inch OLED TV for a price of $2500 in the U.S. Sony also recently announced the investment of approximately $200 million to strengthen their middle and large-size OLED panel production technology. Howard Stringer, Chairman and CEO of Sony, has said, "OLED TVs are a serious investment. While there will be little money made off OLEDs in the short-term the next business cycle is about innovation. OLED brings back some of the Sony wow factor."

It's an exciting time to be in our business. The OLED industry has never before seen the success it is seeing today. New AMOLED products continue to enter the marketplace on a regular basis. OLED TVs are a commercial reality. Handset manufacturers are designing a variety of new products to take advantage of the novel features of OLED technology. And display manufacturers have overcome various initial challenges to make high-volume OLED production possible. From what we are seeing and hearing, it is clear that manufacturers view our PHOLED technology as the superior solution for AMOLED products of all sizes. With that in mind, we believe 2008 will see progress in not only our technology and industry, but in Universal Display's commercial business as well.

With that, I will turn the call over to Sid to review the quarterly and full year 2007 financial results in more detail.

Thank you, Steve. And again, thank you, everyone, for joining us today.

First I'm going to run through the basic revenues for the fourth quarter and full year of 2007. Then I'll be reviewing the specific numbers and details behind our individual revenue components for the same time periods, as well as other key financial data. For the purpose of this discussion, we have rounded the numbers. Of course, the detailed numbers are available in both our earnings release and Form 10-K filing. At the conclusion of my remarks, Steve and I will be happy to take your questions.

Revenues for the quarter totaled $2.9 million compared to $2.5 million for the fourth quarter of 2006. Revenues for the year totaled $11.3 million in 2007, compared to revenues of $11.9 million in 2006. While we continue to experience a shift in our revenue mix as our technology is commercialized, we have and expect to continue to experience fluctuations in revenues as the market for our OLED technology develops. As the market grows, we expect display manufacturers to continue to incorporate our OLED technology and materials into their commercial products.

Commercial chemical revenues were $877,000 and $3.6 million, respectively, for the three months and year ended December 31, 2007, compared to $940,000 and $1.9 million for the same periods in 2006. Commercial chemical revenue for the quarter and year ended December 31, 2007 was positively impacted by material shipments almost entirely to Samsung SDI. Comparatively, material shipments to AU Optronics comprised the bulk of our commercial revenue for 2006. The increases in commercial chemical revenue over these periods indicate positive growth in the OLED industry.

Royalty and license revenues were $354,000 and $828,000, respectively, for the three months and year ended December 31, 2007, compared to $128,000 and $2.4 million for the same periods in 2006. The decrease in royalty and license revenue for the year was attributable to the suspension of OLED display production by AU Optronics, as well as a difference in our agreements with AU Optronics and Samsung SDI. As Steve discussed earlier in the call, under the terms of our agreement with AU Optronics, license revenues were earned when we sold material to AU Optronics, while under the terms of our agreement with Samsung SDI, corresponding royalty revenues are not earned until products incorporating our materials are sold by Samsung SDI and the sales are reported to us.

Technology development revenues were $477,000 and $1.2 million, respectively, for the three months and year ended December 31, 2007, compared to $228,000 and $2.2 million for the same periods in 2006. The decrease on an annual basis in this area was mainly due to our completion of work on two agreements in 2006. In addition, we received a non-refundable payment for the continuation of work on one of these agreements. That payment is credible against future amounts payable under a commercial license agreement, if one is executed, and so cannot be recognized as technology development revenue at this time. The payment is included in deferred revenue on our balance sheet.

Development chemical revenues were $244,000 and $1 million, respectively, for the three months and year ended December 31, 2007, compared to $192,000 and $1.7 million for the same periods in 2006. The decrease in annual development chemical revenues was primarily attributable to the transition of Samsung SDI from development to commercial chemical sales.

Contract research revenues were $952,000 and $[4.6] million, respectively, for the three months and year ended December 31, 2007, compared to $1 million and $3.8 million for the same periods in 2006. The growth in this area reflects additional activity under our government contracts with the U.S. Department of Defense and U.S. Department of Energy, and is a result of the timing of payments we received under these contracts. We commenced work on 10 new contracts in 2007, and completed work on eight contracts during the year. I am happy to report that both the DOD and the DOE continue to value our contributions to the development of OLED technologies in the emerging areas of flexible displays and OLEDs for lighting.

Operating expenses totaled $8 million and $31.7 million, respectively, for the three months and year ended December 31, 2007, compared to $8.1 million and $29.8 million for the same periods in 2006. Operating expenses were consistent with our company's expectations on a quarter-to-quarter and annual basis. The year-over-year increase in operating expenses reflects increased research and development, staffing, as well as operating expenses resulting from our expansion of our facility in Ewing, New Jersey.

Net cash used in operating activities was $11.1 million for the year ended December 31, 2007, compared to $4.7 million for the prior year. The increase was mainly attributable to decreased revenues and increased operating expenses, a decrease in non-cash expenses under our PPG Industries, and a decrease in the receipt of deferred license fees, and a reduction in accounts payable and accrued expenses. Our increased use of cash in operating activities was offset to some extent by proceeds received from warrant and option exercises during the year.

Our balance sheet at year-end was strong, with cash and cash equivalents and investments of $83.7 million as of December 31, 2007, compared to $49 million as of the end of 2006. In addition, our working capital increased to $74 million at year-end, up from $37.4 million at the end of 2006. Our balance sheet was positively impacted during 2007 by our offering of 2.7 million shares of common stock at a price of $14.50 per share during the second quarter, which netted the Company $38 million in proceeds.

With that, we'd like to open up the line for questions at this time. Operator, could you please compile the Q&A roster, please?

(OPERATOR INSTRUCTIONS). Darice Liu, Maxim Group.

Yesterday GE announced that it had demonstrated the first roll-to-roll manufactured OLED for nex-gen lighting. You've been working with the DOE for many years now. When do you envision working with more mainstream partners for this application? Secondly, GE uses a roll-to-roll printing process. Does that mean the ideal manufacturing process for lighting would have to be where the material would have to be solution processable?

Good afternoon. The first question, when do we expect to be working with additional people in the lighting industry, the answer, I guess, is we have announced a development program with Konica Minolta. As you know, we also work with other people in the industry, but we have not released their names. So when events happen and we're able to make announcements, we will certainly do so.

The second question was is a solution process required for lighting. I don't think the -- I think the answer is no. I think it is too early to tell. There are a number of different manufacturing alternatives, and people are working on them. Solution process -- solution processing and roll-to-roll is one of them. But there are other options as well that people are working on. Clearly, for lighting, for general commercial lighting, cost is one of the key attributes. The other one is efficiency.

Following up on the first part, you mentioned that you're working with a couple of other players right now, which are unnamed. When you do plan to name them, will it be in the form of some sort of R&D development license agreement, or something of that sort?

Darice, I can't predict now what the nature of the announcement might be.

Fair enough. Moving on to financials, can you help us understand how to model 2008's growth potential, or how help us at least reconcile what the revenue opportunity from your main customers will be? As you mentioned earlier, all of them have essentially made announcements about ramping capacity this year, and most of them saying they're at double capacity. What does that mean for your 2008 revenues? And in addition, how should we be modeling OpEx for the year?

To actually answer your second question first, operating expenses, we don't -- we do not anticipate significant increases. We have talked, I think, for the last few quarters of bringing on some -- a limited amount of additional folks. We have the core here. And when folks ask me if I talk about a 10% increase for the year, I think that is a reasonable number.

To answer your first question, clearly, our opportunity is dependent upon how quickly the SDI's and the Chi Mei's and other customers ramp up their production. You can see from our commercial chemical revenue for the year, based upon how large the AMOLED market was for the year, that if it grow to what we believe it can be, I can't say it is a one-to-one increase, but it should be significant increases. We should stay in line with the growth in the industry. But it's difficult for us to give guidance, as you are well aware, just because things are not in our hands, but they are in the SDI's hands and the Chi Mei's and the LG Philips LCD's, and the other guys that we think will be in the marketplace. But it is really difficult for us. I mean, the government contract number in the past we have said has been fairly stable. We would expect that to be the same for the year, but you can see some of the other categories are also lumpy.

Then maybe you can help me with this. Outside of SDI, Chi Mei, Sony and LPL, are there any other customers out there that are ramping capacity that we're not aware of, that could help (multiple speakers)

You're fading a little bit. Could you ask the question again?

Outside of the customers you had mentioned earlier, SDI, Chi Mei, Sony and LPL, are there any other customers that we're not taking into account that might contribute to your revenue stream this year?

Unfortunately, any announcements like that would have to come from the customers themselves, so we really can't say anything.

I think you can look at Display Search and see what they say about who they believe may be or may not be entering the marketplace. We, obviously, can't make predictions until we can -- until we have signed agreements that we can announce.

Rob Stone, Cowen & Company.

Taking a look at the royalties and commercial chemicals from a slightly different vantage point, I'm trying to understand how your quarterly revenue pattern might look in relation to what the industry shipment patterns might be. Normally for consumer electronics-type products, you've got a substantial majority of the year shipments happening in the Q3/Q4 timeframe. It seems like your chemical sales would need to lead that, because it's going into the supply chain. But if I understood you correctly, royalties might be a quarter or even possibly two quarters behind. So, can you help was understand how those factors might cause your revenue pattern on a prototypical year to look different than the shipments of devices?

[We] don't have a prototypical year, unfortunately, that we can --

I know you're not for enough into the industry yet. But it seems like, for example, let's say 2009 is really a lift-off year for unit shipments. It sounds like perhaps the first big quarter of that in royalties might actually fall into March 2010. Is that a fair observation?

I think that's a fair observation. I think we have a one to two-quarter lag. I'm not so sure that this OLED industry is going to be tied to holiday seasons. I believe it is going to be introduced in more and more products. As Steve said, SDI has said their capacity for the year is 90% spoken for. So clearly, a lead indicator will be growth in our commercial materials, which as it grows, you will see the corresponding royalty income coming in on a one to two-quarter lag behind that. We really do need a couple more quarters at least behind us to have any real indication of how quickly SDI's and Chi Mei's are going to ramp, and what impact that will have on royalty income.

A few more questions related to the commercial chemical then, if I may. One is that as yields improve, I assume that means that your commercial chemical sales in proportion to shipping products would also go down.

That is correct. As their yields improve and their efficiencies improve on using the materials, the quantity of materials will go down on a per-display or per-square inch basis. What we believe will more than make up for that is the increase in the volume of displays that they will be shipping as they increase their capacity.

Conversely, though, at the moment, am I correct that all of the commercial chemical shipments are for the red material set only, and not green or blue?

That is correct.

So if you get green designed in, that would significantly increase your uptake vis-a-vis the display unit volumes?

That is correct.

You said that you're in testing with some number of customers with green right now, is that right?

Yes, we are. And we -- the timing of that is difficult to predict when it can be -- when the design wins will occur.

Any comment you could make on sort of relative rate of progress or time horizon to have a combination of lifetime and hue for blue that would be commercializable?

It is really difficult, Rob, as you're well aware. We have made improvements and there is a lot of the chemistry effort and organic chemists here working on that. They also are continuing to work on improving the color coordinates and lifetime of reds and greens, and it is really difficult, obviously, for us to predict.

Let me ask the question in a different way, then. If you had a number that was the target for commercializable lifetime, and you said you were 50% of the way there now, and X% of the way six months ago, could you give us some sort of relative rate of progress to your latest measurements versus some period of time, six months or a year?

I'm not sure that if I -- even if I said we have gone up 10% or 20%, or we're 60% there, or 80 or 40, whatever it is, that I can say it's taken us two years to get there; it will take us another eight months based upon that. This is really something that could happen in a very short period of time, or it could take a significant amount of time. I'm not trying to be evasive; we just can't predict.

I recognize it's chemistry, so it's somewhat unpredictable. So it could well be a step function, a breakthrough as opposed to just chipping away at some rate?

Yes. That is correct.

Bennett Notman, Davenport & Co.

This is [Jonathan Skeels] for Bennett. Just a couple of questions on what you're seeing so far in Q1 here. With Samsung SDI ramping, have you seen any increase in their material orders so far this quarter?

We can't really comment on that because we don't give guidance, so it's difficult for us to talk about the first quarter at this time. If they are ramping, though, you've got to assume that they're using more stuff.

Sure. I guess as far as other chemical customers, either on the commercial side or development side, are there any -- is there anyone new that has come in and started to order chemicals, or anything like that? Not specific names, but just in general. Have you seen any increased interest?

We always have increased interest. I mean, clearly, from the development site and talking to new customers, this industry is being followed closely, and there are a significant number of companies who have OLED development programs, R&D OLED development programs, and are looking at this as a technology that really can change their form factor and the way that they make displays. So there is renewed interest, and we have seen significant renewed interest over the last six months.

(OPERATOR INSTRUCTIONS). [Andy Aranda], Needham & Co.

Would you comment on whether you see this area up this year given the strength in this revenue streams in '07? And how does this mix of contract research revenue look going forward in terms of lighting versus display contract?

I'm sorry, Andy; can you repeat the first part? We didn't hear it.

I'm sorry. Looking at the contract research revenue in '08, would you comment on whether you see this area up or down, given the strength in '07? And then, can you comment on the mix of lighting versus display contract revenue?

It has been pretty much even for the past couple of years, and I don't see 2008 being significantly different than that. As you're well aware, sometimes they're $100,000 agreements, sometimes they're 750, sometimes they're significantly more. Based upon what we see for 2008 that we have in-house today, I don't see the mix changing. I see almost a 50/50.

At this time there are no further questions.

We would like to thank you all for participating. And as you all know, you have our phone numbers; you're welcome to call either me or Steve for follow-up questions at any time. Thank you for your attention.

Thank you very much. Have a good evening.