Universal Display Corp (OLED) 2008 Q2 法說會逐字稿

Good afternoon. My name is Don, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display second quarter 2008 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 session. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Paul Johnson, on behalf of Universal Display.

Sir, you may begin.

Thank you. Good afternoon, everybody. Thank you for joining us again. 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 expressed, 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 website, this call contains time-sensitive that is accurate only as of the date of the live webcast of this call, August 7th, 2008.

All statements in this call that are historical are forward-looking statements within the meaning of the Private Securities Litigation 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 know 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.

With that said, I'll turn the call over to Steve Abramson, CEO of Universal Display.

Please go ahead, Steve.

Thank you, Paul, and thank you, everyone, for joining us for today's call to discuss our second quarter results. I'll highlight some key milestones during the quarter and give you an overview of our results and the industry as a whole. Sid Rosenblatt will then review the financial results for the second quarter and first half of 2008 in greater detail.

As always, we're happy to take your questions following our conference.

Looking at the results for the quarter, we continue to see a transition of revenues from the development side to the commercial side. Samsung SDI has reported that it has ratcheted up its commitment to OLED displays.

After Samsung SDI released its recent earnings report, Bloomberg News reported that the company is, quote, "betting on active matrix organic light-emitting diode streams to improve earnings," end quote.

As we've highlighted in the past, SDI, the world's largest maker of organic displays, continues with plans to double production of AMOLED screens this year, placing them at a production capacity of 3 million panels per month.

Samsung Electronics and SDI also announced they are forming a joint venture to produce OLED displays. Samsung Electronics will spend $927 million, for 50% of the venture, and Samsung SDI has announced it will invest an additional $500 million on increased capacity for AMOLED production. This will create an AMOLED venture of almost $2 billion.

Samsung Electronics has experience in large-area displays, and their expertise will be matched with SDI's AMOLED manufacturing experience. We view this as a very positive development for the industry, which should result in increased production and sales of AMOLED displays that utilize our UniversalPHOLED technology.

By the way, you may note that we have recently begun referring to our phosphorescent materials as UniversalPHOLED materials. As an additional sign of the growth and maturation of our OLED industry, we felt it was time to begin branding our materials to help us support the reputation that our materials have obtained as high-quality, high-performance product differentiators for our customers.

Our existing license and materials supply agreements have us well positioned as manufacturers continue to adopt our UniversalPHOLED technology. As you have likely noted from our 8-K report filed on July 29th, we recently executed a technology license and technical assistance agreement and a commercial OLED materials supply agreement with Kyocera Corporation of Japan.

These agreements will become effective upon notice from Kyocera Corporation, given on or before December 31, 2008. Under the license agreement, we agree to grant Kyocera rights under various patents owned or controlled by us for Kyocera to make and sell specified OLED display products.

This agreement also acknowledges certain technical assistance that we have been providing and will continue to provide to Kyocera in connection with its manufacture of licensed products. Under the agreement, Kyocera will pay us fees for technical assistance, and we will receive upfront license fees and running royalties on Kyocera sales of licensed products.

Under the supply agreement, we agree to sell to Kyocera certain OLED materials for use by them in manufacturing OLED products as authorized under the license agreement. As revenues from our commercial products grow, we continue to make excellent strides in our research and development for the next generation of UniversalPHOLED and other products and applications using our technology.

In the past, we have highlighted the progress made on white OLED technology and applications. This work took a giant step forward during the second quarter, as we reached the milestone of record-breaking power efficacy for a white OLED of 102 lumens per watt at 1,000 candelas per meter squared. This is a significant accomplishment, as white OLEDs and UniversalPHOLED technology have now demonstrated results surpassing the power efficacy of the two incumbent indoor lighting technologies -- incandescent bulbs, which are less than 15 lumens per watt, and most fluorescent lamps, which are between 60 and 90 lumens per watt.

This milestone achievement positions us well to meet the Department of Energy's roadmap goal of 150 lumen-per-watt commercial OLED light source by 2015. On the heels of that milestone, we also announced a new $1.9 million two-year contract with the Department of Energy to develop a ceiling-based white OLED lighting system. This will be done in conjunction with Armstrong World Industries, who many of you may recognize as one of the world's top manufacturers of floor and ceiling products.

The goal of this contract is to develop a ceiling-based OLED lighting system that would represent the next generation of lighting solutions, offer significant cost and energy savings over traditional lighting systems, and serve as a platform for general commercial OLED lighting products.

This contract shows the Department of Energy's commitment to OLED lighting technology as an attractive solution to solid-state lighting needs and the goal of reducing power consumption across the country.

During the second quarter, we also announced a number of significant technical achievements, which were presented at the 2008 SID, Society of Information Display, annual symposium. Dr. Brian D'Andrade presented a paper outlining a simplified WOLED, or white OLED, architecture that boasted an extremely long operating lifetime, exceeding 200,000 hours at 1,000 [MITs], which may render it suitable for a number of lighting applications.

Dr. [Ray Ma] presented a paper outlining the successful fabrication of a low-power, flexible AMOLED device built on an ultra-thin, 25-micron metallic foil substrate. The monochrome device combined an amorphous silicon backplane developed and fabricated by Professor Jin Jang of Kyung Hee University of Korea, with UDC's top emission and UniversalPHOLED technologies.

Dr. [Shawn Sha] presented a paper outlining advances in red, green and blue printable phosphorescent OLED material systems, which we call P2 OLEDs, announcing solution-based materials and lifetimes of 100,000 hours at an initial luminance of 500 candelas per meter squared for red, 63,000 hours at an initial luminance of 1,000 candelas per meter squared for green and 6,000 hours at an initial luminance of 500 candelas per meter squared for light blue.

Dr. Jason Brooks was honored with a distinguished poster awarded for his paper, a near-infrared phosphorescent OLED for day and night displays. We demonstrated advances in flexible phosphorescent OLED displays that offer both day and night functionality.

The dual display utilizes visible color emission for daytime use and infrared emission for covert night-vision applications. We also demonstrated a four-inch, full-color QVGA AMOLED prototype on thin, bendable metal foil, which we developed jointly with LG Display.

This prototype, which is one of the hits of the SID show, used our UniversalPHOLED and top emission catheter technologies, together with LG Display's amorphous silicon backplane technology.

In conclusion, we believe that the technical advances and commercial business successes that we have seen during this past quarter position us well to participate in the growth of the AMOLED industry, which has only just begun. With that, I will turn the call over to Sid to review the quarterly and half-year financial results in more detail.

Sid?

Thank you, Steve, and again, thank you, everyone, for joining us today. As a reminder, beginning last quarter we made some changes in how we report line items for revenue on our P&L. As such, today's review of revenue for the quarter and six months will be broken down into two categories, commercial revenue and developmental revenue.

These categories more closely reflect our business objectives and our customers' use of our technologies and materials. Additionally, I will also review the specific components for each category in the quarter -- commercial chemical, royalty and license revenue on the commercial side, and contract research, developmental chemical and technology development revenue on the developmental side.

Let's begin today by looking at the financial results for the quarter ended June 30th, 2008. Revenues for the quarter totaled $2.1 million, compared to $2.3 million for the second quarter of 2007. However, total commercial revenue during the quarter was approximately $1.4 million, compared to $400,000 for the second quarter of 2007.

The increase of approximately $1 million in commercial revenue is a result of increased OLED manufacturing activity during the first half of 2008. Commercial chemical revenues and royalty and license revenues for the quarter were $938,000 and $457,000, respectively, compared to $230,000 and $163,000, respectively, for the second quarter of 2007. The majority of commercial chemical revenue for the second quarter was attributable to sales of our UniversalPHOLED to Samsung SDI.

We also sold small quantities of these materials to two other commercial chemical customers. During the same period in 2007, we recorded all of our commercial chemical revenue, as well as the majority of our license and royalty revenues, from Samsung SDI. Royalty revenue totaled $229,000 for the second quarter of 2008, compared to $31,000 for the same period in 2007.

This revenue represents royalties received under our patent license agreement with Samsung SDI. Under our agreement with Samsung SDI, we receive royalty reports at specified periods of time after the end of the quarter in which the royalty-bearing products are sold by Samsung SDI.

Consequently, the royalty revenue from Samsung SDI for the three months ended June 30th, 2008, reflects royalties for products sold by Samsung SDI during the first quarter of 2008. License revenue for the second quarter of 2008 totaled $229,000, compared to $132,000 for the same period in 2007. These revenues were received under our patent license agreement with Samsung SDI, as well as a cross-license agreement we executed with DuPont displays in December of 2002.

In connection with each of these agreements, we've received upfront payments that have been classified as deferred license fees and deferred revenue. The deferred license fees are being recognized as license revenue over the term of the agreement with Samsung SDI and over 10 years with DuPont.

We also recorded small amounts of license revenue from two additional commercial customers for the second quarter of 2008. Total developmental revenue was approximately $750,000, versus $1.9 million for the second quarter of 2007. The decrease in developmental revenue was primarily due to a reduction in contract research revenue for the quarter.

Contract research revenue totaled $345,000 for the second quarter of 2008, compared to $1.3 million for the same period in 2007. The decrease was principally due to the timing of revenue recognition in connection with several new and completed government programs, including a $500,000 milestone under one of our contracts achieved in the second quarter of 2007.

However, the number of contracts and overall contract value remained relatively consistent in those quarters. Sales of developmental chemicals totaled $305,000 for the second quarter of 2008, compared with $367,000 for the same quarter of 2007.

The timing and frequency of development chemical purchases remains difficult to predict on a quarter-to-quarter basis due to our customers' differing OLED technology development and product launch strategies. Technology development revenue totaled $100,000 for the second quarter of 2008, compared to $250,000 for the same period in 2007.

The decrease quarter over quarter was attributable to the completion at the end of 2007 of certain work under a technology development agreement with one of our customers. The net loss for the second quarter of 2008 totaled $5.2 million, or $0.15 per diluted share, compared to a net loss of $5.2 million, or $0.16 per diluted share, for the same quarter of 2007.

Although revenue was reduced for the quarter, the net loss remained constant, mainly due to reduced research and development expenses as a result of reduced costs associated with our government contracts. For the six months ended June 30th, 2008, total revenue was approximately $4.9 million, compared to $5.3 million for the same period in 2007.

Commercial revenue for the six-month period totaled approximately $3 million and developmental revenue totaled $1.9 million, compared to $1.8 million and $3.5 million, respectively, for the same periods in 2007. The difference in revenue for these two periods was mainly due to an increase in commercial revenue of $1.1 million, offset by a $1.2 million reduction in government contract revenue and a $375,000 reduction in technology development revenue.

The net loss for the six-month period ended June 30th, 2008, was approximately $9.4 million, or $0.26 per diluted share, compared to $9.8 million, or $0.30 per diluted share, for the same period. The net loss for the first half of 2008 was impacted by costs associated with government contracts being significantly lower than they were in the first half of 2007.

As expected, revenues continued to transition from developmental revenue to commercial revenue, as our UniversalPHOLED technology continues to see increased adoption for commercial OLED products.

Going forward, we believe that commercial revenue becomes an ever-larger percentage of our total revenues. We also anticipate an increase in commercial revenue as a result of expected higher sales of AMOLED products by our customers. Operating expenses were consistent with our expectations on a quarter-to-quarter basis at nearly $8 million for the second quarter. This compares to an operating expense of $8.3 million for the second quarter of 2007.

For the six-month period ended June 30th, 2008, operating expenses totaled $15.9 million, compared to $16.5 million for the same period of 2007. As previously stated, the decrease was mainly due to reduced costs associated with our government contracts. Cash used in operating activities totaled $6.3 million for the first six months of 2008, compared to $6.9 million for the same period of 2007.

The decrease was partially attributable to an improvement in the net loss for the six-month period. Our balance sheet remains strong with cash, cash equivalents investments of approximately $80 million as of June 30th, 2008, compared to $83.7 million as of the end of 2007. We continued to place a high emphasis on cost control and prudent use of cash as revenues continued to transition and our technology gains commercial traction.

With that, we will now open the lines up for questions.

Operator, would you please compile the Q&A roster, please?

Yes, sir. (OPERATOR INSTRUCTIONS)

And your first question comes from the line of Jim Ricchiuti with Needham & Company.

Good afternoon. Question regarding the commercial chemical revenues and royalty revenues. You showed very healthy increases in both these areas year over year, but my question is with respect to the sequential decrease that we saw from the March quarter, I'm wondering if you can help us understand, if Samsung SDI is ramping and presumably its yields are improving, why wouldn't we be seeing both commercial chemical revenues and the royalty revenue increasing sequentially?

To some extent, Jim, they're using the same amount of material. If their yields are increasing, you would see more product being sold, but we sell them pretty much the same amount of material. If the factory is running the same level in both quarters, in some cases, the material gets into more products. But what you see from our side is pretty consistent sales of commercial chemicals in Q1 versus Q2, because if their capacity is 1.5 million, it's 1.5 million equivalent 2.2-inch displays.

And, Sid, what about on the royalty revenue?

Well, on the royalty revenue, our royalty revenues reported in this quarter really relate to the first quarter. And for the first quarter, it related to the fourth quarter of '07.

Right. So you're saying, I guess, maybe Q4 seasonally would have been a little better for them?

I believe so.

Yes, okay. And I'm wondering if there's any further light that you could shed on this agreement that you announced with Kyocera beyond what you said in your 8-K. I'm just wondering if publicly, if there's any color you could provide based on some commentary that Kyocera has made.

We have not heard anything, and as we filed the 8-K and as we've told folks, there is an option that they have until December 31st to exercise. At that time, we probably can talk more about it. But today, everything that we said in the 8-K is all we can say, and I have not seen anything from anybody at Kyocera discussing it.

Okay, thanks, that's it for me.

Thanks, Jim.

And your next question comes from the line of Bennett Notman with Davenport & Company.

Hey, Sid, can you hear me? I apologize for what's probably a bad connection.

We can hear you.

All right, great. Just following up on the Kyocera question, then, should we assume that there will be no impact on your financials until they do exercise that option, so it probably would be later in the year it would show up in deferred revenue or in the royalty and licensing line, if there's an upfront payment?

Until they exercise their option, there's really nothing that will occur relating to them.

And then just could you talk a little bit about what's going on at Samsung and SDI and to what extent you expect that to impact your business, and when might we see that in the financials positively? Or maybe if there's a delay while they consolidate activities negatively. I don't know if you can just sort of talk about what you expect to see out of that entity?

What we have read and what we would expect is additional capital investment in this entity to increase the volume of displays. I do not anticipate and there is no reason that we should that we can see today any interruption in the operation of the factory as it is running. What we believe will happen is they will increase their capacity in the fourth quarter of this year, as they have said, and then they will continue to use the capital that's being infused to increase the capacity.

We suspect it'll be the end of the year before there's anything that really happens with this venture.

Okay, and then could you maybe give an update as to what's going on with Sony and what we should expect in that relationship?

We're continuing to work with Sony to work on our development work in getting our materials into their products. Sony is talking about putting larger-area TVs, 27-inch TVs, into the market in the next few years.

And we continue to work with Idemitsu Kosan, which we announced in December of 2007.

Are there any particular milestones, then, that you guys are looking from Sony or any of these other players sort of as the next step for validation in the market?

All we can look for is manufacturers to announce building of fabs or increased capacity.

We took it as a very good sign that I guess it was earlier this year Sony had announced they were investing an additional $200 million into the manufacturing processes, and we take it as a good sign that senior management of Sony continues to talk about OLED displays as being one of the key drivers of their next-generation flat-panel TV technologies.

Thank you.

Sure.

And your next question comes from the line of Jed Dorsheimer with Canaccord Adams.

Hi. Thanks. Just one question, pretty straightforward. As you start to ramp the lighting business, how is that going to look? Is it just going to stay the same from a modeling perspective? In other words, is that a royalty-based model, too, or I know you've done some other development work. Is there a change in the business model there? Thanks.

There is no change in the business model. We expect it to be a royalty-based and material business, the same as the display business has. As you're well aware, there's been a lot of activity in the lighting side between Armstrong and developments, and you're reading more and more about OLED for lighting applications that we think it's a very exciting area that you'll hear a lot more about over the next 12 months.

All right, is GE using phosphorescent or fluorescent?

We can't answer anything for GE, Jed.

All right, thanks, guys.

Thanks.

And your next question comes from the line of Mark Miller with Brean Murray.

I'm sorry I missed it, but I was wondering if you could give me the combined royalty and license revenue for the current quarter and the year-ago quarter.

Combined royalty and license revenue for this quarter is $457,000 and I can tell you what it was for the prior quarter. It's a little bit above that. Let me just look it up.

It was 457 versus 163.

Thank you. You made progress on a number of fronts and I think one thing that's exciting to most people is the possibility of selling another color. Any ballpark feeling in terms of do you have any goals or milestones where you think you could have a commercially viable product that could be sold? I mean, are we years away or a year away? Any gut feeling about that?

We've been working with a number of customers on getting some additional color into their products. I think I would expect that we would get it in sooner than the timeframes that you're describing.

Thank you.

Thanks, Mark.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Jim Ricchiuti with Needham & Company.

We saw pretty good sequential decline in contract research revenue this quarter, and I know this is a tougher number to model. Actually, all the numbers are tougher to model. But, Sid, is there any sense you can give us as to how that might play out over the next couple of quarters?

Yes, what has occurred is, as we said, we think the effort and the work we're doing is pretty much the same as it was in the prior year. We did have a significant milestone payment that impacted our revenues in 2007. I think you will see an increase in the third quarter and the fourth quarter also, and right now we're probably looking in the $3 million range for the year.

We've been awarded a number of programs and it has taken longer to get the contracts started and the work done, but we have the work in house.

Okay, and it sounds like -- I mean, are you seeing more activity on that side? I think this question may have been asked before, but are you seeing more activity on this side coming from the lighting side or the display area?

We see them both. The lighting side is newer, and the Armstrong program, the milestone of 102 lumens per watt that we made has created a buzz in the industry and you've seen improvements. We announced an OLED lighting source using an all-phosphorescent material that has almost 200,000 hours of lifetime. And we are hearing more and more from customers that they are looking at OLED lighting, the lighting companies, just because of all the energy consciousness and everything else that's going on.

So I think you're hearing more of the buzz because of everything else that's going on. There clearly is still a big buzz and a lot going on in the display side.

And just on one of the expense items, your G&A, it looks like it was up about 12% from Q1. Anything unusual, or is that kind of the level we should be using, the base we should be building off of?

I think you could be using that level as a base. I mean, included in that number that impacts it a lot is patent expenses and things like that from our side, but I would use that number. I don't anticipate it changing very much in the next quarter.

Okay, thanks.

And your next question comes from the line of Bennett Notman with Davenport & Company.

Hey, Sid, just another follow up on the Kyocera contract. I just want to understand, they have an option to I guess make this go live by December 31st, but I want to understand what happens if they don't exercise by December 31st? Does that just mean there's kind of no contract at that point? And then what do you think are the parameters or the drivers for their decision, to the extent that you can talk about that, as to whether or not they exercise the option?

Well, we've negotiated a full set of agreements with Kyocera. We've been working with them for a long time, and this was just an initial term that they put in at the end. But the agreements were all signed and they have until December 31 of this year to declare it effective.

Unfortunately, we really can't say a whole lot more about it other than what we said and what's disclosed in the 8-K.

So if they declare it effective, though, that would basically trigger a payment from them to you to have the license and then they'd be operating under a license, and if they decide not to declare it effective, they don't make that payment and in effect no license exists?

If they declare it effective, then they have the right to make commercial products under the license agreement, and the commercial financing terms come into play. That's correct.

Okay, thank you.

Thanks, Bennett.

And there are no further questions at this time. Do you have any closing comments, sir?

We'd like to thank you all, and as you're well aware, we're available for follow-up questions, so please feel free to give me a call at any time. Thank you, and have a good evening.

And this concludes today's Universal Display second quarter 2008 conference call. You may now disconnect.