Universal Display Corp (OLED) 2008 Q3 法說會逐字稿

Good afternoon. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display Corporation earnings 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 Corporation. You may begin your conference.

Thank you, and good afternoon, everybody. Thanks, as always, 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, as always, 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 website, this call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, November 6, 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.

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

Thank you, Paul, and welcome, everybody, to today's call. This quarter's call will follow our traditional format. I will review highlights for the third quarter and provide some comments on the state of our technologies and the OLED industry. Sid will then review the financial results for the quarter and nine months in detail, followed by your questions.

I would like to begin this quarter's call by addressing something on everybody's mind, the state of the global economy and markets. Obviously, there have been significant developments since the last time we talked in August. I'm not going to go into detail; we all know the headwinds this economy is facing.

However, I do want to put you at ease with regard to Universal Display and our position in the market. While we are not immune to the current economic environment, there are many reasons to feel confident about Universal Display as a company and an investment.

We have always understood that strong capital position was an absolute must for us in both good and bad markets. For this reason, we chose to raise capital when we didn't necessarily have to do it. That decision was a prudent one, giving us the necessary reserves and resources to continue on our current path of growth, to seek new innovations in our universal Universal PHOLED and other proprietary OLED technologies, and gain increased traction in commercial, licensing, and materials sales for small and large area OLED displays as well as OLED lighting applications.

The core reasons to be at Universal Display investor remain, as evidenced by the wide array of new products on display at the FPD show in Tokyo last week. Manufacturers continue to be bullish on OLEDs for the future.

As with many things about the current economic situation, it is unclear whether and to what extent it may affect the timing of new OLED product launches. However, our Universal PHOLED and other proprietary OLED technologies provide highly energy-efficient and cost-effective solutions for these manufacturers, and we expect them to be an integral part of display and lighting applications now and into the future.

Collectively, we have faced economic challenges before and became stronger for it. As we emerge from these challenges, we are confident that that will again be the case.

Recent reports from our licensee Samsung SDI, now known as Samsung Mobile Display, indicate that they remain well positioned to continue producing AMOLED displays for a variety of products. This is evidenced in two new handset models from KDDI that feature 3.1-inch Samsung OLED panels as their mainly displays. They are being sold by Hitachi as the Wooo mobile phone W63H and by Casio's Computer as the Exilim mobile phone W63CA. They both have a contrast ratio of 10,000 to 1 and they display 100% of the NTSC coloring gamut. KDDI is marketing the new models as the, quote, ultimate beauty.

Samsung also showcased several impressive OLED products at this year's GITEX Technology Week in Dubai. The lineup at the Samsung booth included two OLED TVs, 14.1 inch and 31 inches in size.

Bo Joong Kim, general manager of Samsung's AV division, was quoted in Media Reports as saying, quote, electronics manufacturers have already begun exhibiting these next-generation displays at major trade shows. However, Samsung is going a step further at GITEX, presenting the OLED as a finished TV product that features an elegant optimized design. Samsung's OLED TV represents greater technology innovation and sets a new standard for TV sophistication. End quote.

These finished products weigh 40% less than LCD TVs of the same size, while boasting a contrast ratio of 1 million to 1, a color gamut of 107%, and a brightness of 550 nits. Reports have Samsung beginning commercial production of mid to large sized OLED TVs around 2010.

At the FPD show in Tokyo last week, Samsung also demonstrated a 40-inch full high-definition OLED TV, as well as what they call a, quote, window display using a series of four transparent OLED panels.

There was a great deal of OLED activity last quarter in addition to Samsung. For example, at the FPD show, CMEL demonstrated 25-inch OLED TV that is less than 1 millimeter thick -- or thin, if you want to describe it that way. CMEL has also recently announced that they are going to shift their AMOLED focus to medium and larger size panels, and that they expect to begin producing AMOLED TV panels in volume in 2010 or 2011.

Kodak has recently announced that they are selling a 7.6-inch wireless OLED picture frame which retails for $999. Reports indicate that this OLED display is being manufactured for Kodak by CMEL.

LG Display recently unveiled a 19-inch OLED display at a conference in South Korea. During the quarter, they also announced plans to invest in a Gen-3.5 OLED production line.

AU Optronics, the large Taiwanese flat-panel display manufacturer, announced that they have decided to restart their AMOLED program, after having suspended it about two years ago.

We have also signed a number of recent contracts focused on advancing our white OLED technologies for lighting. This includes a $1.9 million contract with the US Department of Energy to develop a ceiling-based white OLED lighting system in conjunction with Armstrong World Industries; a $100,000 SBIR Phase 1 contract with the DOE to approve the out-coupling efficiency of white OLED devices; and most recently, two $750,000 SBIR Phase 2 contracts with the DOE.

Work under these contracts will focus on demonstrating further advances in the performance of our white OLED technology and progress toward meeting the DOE's specific targets for solid-state lighting, including the goal of a 150 lumen per watt commercial OLED light source by 2015.

Our white OLED technology has seen significant progress throughout the year. In the second quarter, we announced record-breaking power efficacy for a white OLED of 102 lumens per watt. To remind you, we have now shown that our white OLED and Universal PHOLED technology can surpass 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.

The advances in our OLED lighting business are not just limited to developmental revenue gains. This is clearly illustrated by our licensing agreement signed during the quarter with Konica Minolta for the use of our Universal PHOLED and other technologies in Konica Minolta's OLED lighting products.

This agreement is a direct result of our long-standing collaborative relationship Konica Minolta. It represents not only a future revenue stream for Universal Display but recognition that our Universal PHOLED technology is a true differentiator for manufacturers of OLED lighting products because of its power efficiency.

The green benefits of our Universal PHOLED technology are also an important factor for OLED lighting manufacturers. In addition to reducing electricity consumption, our Universal PHOLED materials are environmentally benign when compared to mercury-containing compact fluorescent lamps.

The Konica Minolta agreement was not the only commercial agreement we signed in the third quarter. In July 2008, we entered into an OLED technology license and technical assistance agreement and a commercial OLED material supply agreement with Kyocera Corporation. These agreements for flat-panel displays will become effective upon notice from Kyocera given on or before December 31, 2008.

The OLED lighting market has become an increasingly attractive market for us in the past year. In early October, industry analysts from NanoMarkets published a report predicting the OLED lighting market will reach almost $4.5 billion by 2013. This represents a significant opportunity for Universal Display. We believe that OLED lighting has the potential to be not only an alternative to traditional lighting but a preferred solution in a world increasingly focused on energy efficiency and the environment.

On the R&D front, we continue to make progress in our materials development. We have made advances in the lifetime of all of our PHOLED materials systems. Our green PHOLED materials are being evaluated by a number of our customers for use in commercial applications, and we are encouraged by the results of far. We are also making good progress on blue.

As we continue to improve our Universal PHOLED technology and materials, we gain increased traction with OLED display and lighting manufacturers. Our technology and materials are increasingly being integrated into OLED products around the world.

As the OLED market grows, we remain steadfast in prudently managing our capital. We've built this Company to succeed and weather any challenges we might face. We can confidently report that our efforts to date have been successful, and our outlook for the future remains optimistic.

With that, I will turn the call over to Sid to review the quarterly and nine-month financial results in more detail. Sid?

Thank you, Steve; and again, thank you, everyone, for joining us today. I will begin today with a review of commercial revenue and developmental revenue and then discuss the specific components of each category in the quarter -- commercial chemical, royalty, and license revenue on the commercial side; contract research, developmental chemical, and technology development revenue on the developmental side.

Revenues for the quarter totaled $2.6 million compared to $3.1 million for the third quarter of 2007. Total commercial revenue during the quarter was approximately $1.3 million compared to $1.4 million for the third quarter of 2007. Commercial revenues stayed relatively constant between the two quarters because commercial revenues from Samsung SDI, now Samsung Mobile Displays, were essentially the same. This is a result of Samsung's production capacity remaining constant over these two periods.

Commercial chemical revenue and the royalty and licensing revenues for the quarter were $1,025,000 and $276,000, respectively, compared to $1,185,000 and $183,000, respectively, for the third quarter of 2007.

All of our commercial chemical revenue for the third quarter of 2008 was attributable to sales of our Universal PHOLED materials to Samsung. During the same period in 2007, the majority of our commercial revenue was from the sales of materials to Samsung. In the third quarter of 2007, we also sold small quantities of our materials to two other commercial chemical customers.

Royalty revenues were received under our patent license agreement with Samsung. Under that agreement, we receive royalty reports at a specified period of time, after the end of which in a quarter royalty-bearing products are sold by Samsung. Consequently, our royalty revenue from Samsung for the three months ended September 30, 2008, reflects royalties for products sold by Samsung during the second quarter of 2008. Royalty revenue was $[141,000] for the third quarter of 2008 compared to $16,000 for the same quarter in 2007.

License revenue for the third quarter of 2008 totaled $152,000 compared to $167,000 for the same period in 2007. These revenues were received under our patent license agreement with Samsung, our license agreement with Konica Minolta signed in August 2008, and a cross-license agreement we executed with DuPont Displays in December 2002.

In connection with each of these agreements, we received upfront payments that have been classified as deferred license fees in deferred revenue. The deferred license fees are being recognized as license revenue over the term of the agreement with Samsung; and based on current assumptions, over 10 years with DuPont and Konica Minolta. We also recorded small amounts of license revenue from two additional commercial customers in the third quarter of 2007.

Total developmental revenue was approximately $1.3 million for the third quarter of 2008 versus $1.7 million for the third quarter of 2007. We saw a decrease in developmental revenue on a quarter-to-quarter basis due primarily to reduced revenue from government contracts.

Contracts research revenue totaled $610,000 for the third quarter of 2008 compared to $1.2 million for the same period in 2007. The decrease was due principally to the timing of revenue recognition in connection with several new and completed government programs. However, the overall value remained relatively constant in both quarters.

Sales of developmental chemicals totaled $627,000 for the third quarter of 2008 compared to $230,000 for the same quarter of 2007. We had the same number of developmental chemical customers in both periods. However, the dollar values of our shipments to two of these customers were significantly higher in the third quarter of 2008.

The timing and frequency of development chemicals 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 $62,000 for the third quarter of 2008 compared to $250,000 for the same period in 2007. The decrease quarter-over-quarter was attributable to our completion at the end of 2007 of certain work under a technology development agreement with one of our customers.

During the third quarter of 2008, we received $2.2 million in fees from customers for licenses, technical assistance, and joint development work. We have recorded these fees as deferred revenue and began recognizing a portion of them in the third quarter.

The net loss for the third quarter of 2008 totaled approximately $5.3 million or $0.15 per diluted share, compared to a net loss of approximately $3 million or $0.08 per diluted share for the same quarter of 2007.

The rise in the net loss was partially attributable to a decline in revenue of $450,000 and a decrease of $570,000 in interest income due to reduced rates of return on investments.

This quarter also saw an increase in operating expenses, specifically research and development, compared to the third quarter of 2007, which had been lower than average. Operating expenses increased to $8.4 million for the third quarter of 2008 compared to $7.2 million in the third quarter of 2007.

Operating expenses for the third quarter of 2008 were in line with prior quarters of 2008. Operating expenses averaged approximately $8.1 million per quarter for the first three quarters of 2008. Operating expenses for the year 2007 averaged approximately $7.9 million per quarter.

Operating expenses have been consistent with our expectations on a quarter-to-quarter basis. The increase in operating expenses between the two years is primarily attributable to increase in R&D spending associated with increased personnel costs and continued innovations in our red, green, and blue PHOLED materials.

Total revenue was approximately $7.5 million for the nine months ended September 30, 2008, compared to $8.4 million for the same period in 2007. Commercial revenue, though, for the first nine months total approximately $4.3 million; and developmental revenue totaled approximately $3.2 million, compared to $3.2 million and $5.2 million, respectively, for the same periods in 2007.

Almost all of our commercial chemical revenue for the nine months ended September 30 and 2008 and 2007 was from the sales of our proprietary OLED materials to Samsung.

The net loss for the nine-month period ended September 30, 2008, was approximately $4.7 million or $0.41 per diluted share compared to $12.7 million or $0.38 per diluted share for the same period in 2007. The increased loss was primarily due to an increase in operating expenses of $711,000; a decrease in interest income of $320,000; and a decrease in revenues of $919,000.

Cash used in operating activities was $523,000 and $6.8 million, respectively, for the three months and nine months ended September 30, 2008, compared to $2,576,000 and $9,450,000, respectively, for the same periods in 2007.

The decrease in cash used during the quarter was mainly due to the receipt of $2.2 million in fees from customers for licenses, technical assistance, and joint development work, which fees were recorded as deferred revenue; as well as an increase in accounts payable accrued expenses, which included increased amounts due to PPG Industries and accruals for year-end compensation payments.

Our balance sheet remains strong with cash, cash equivalents, and short-term investments of approximately $79 million as of September 30, 2008, compared to $83.7 million as of the end of 2007. We continue to place a high emphasis on cost control and prudent use of our cash as revenue continued to transition and our technology gains commercial traction.

With that, I will now open up the lines for questions. Operator, would you please compile the list for the Q&A roster?

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Steve, in your opening remarks, you alluded to AU Optronics planning to restart their activities in OLED market. You guys have had an agreement with them in the past. I wonder, can you talk a little bit about how that relationship could unfold? Are they still a licensee?

No. Our relationship with AU Optronics in the past was that we sold them material, and we recorded material sales revenue and license fee. During this hiatus, we have obviously maintained a good relationship with the company, and we continue to have a good relationship with the company now that they have restarted their efforts.

They are obviously one of the largest flat-panel display manufacturers in Taiwan, and their reentry into the OLED business is, I think, a very good sign.

Question on royalty and license revenue in the quarter. It is down sequentially. I just -- we've seen reports -- I'm sure you guys have as well -- of Samsung SDI showing some softer shipments in Q2. So if that in fact were true, would that explain the sequential decline in your royalty revenue in this quarter?

No, the royalty revenue, I believe, is up. It is the license fee revenue that is down.

Okay, thanks for correcting me, Sid.

Yes, royalty revenue was up, so compared to that; and that would be for the second quarter. When we have a commercial supply agreement such as the one that Steve alluded to with AUO and some others, when we sell material we record commercial chemical sales to them; and included in that is a license fee.

So the reason that it is down, we only sold commercial materials in this quarter to Samsung SDI and we did not have any commercial materials which we would also record a portion of as license fees to other customers that had commercial supply agreements.

So it's the license fee portion that is down, because the commercial chemical sales to customers other than Samsung are down.

Okay, thanks for clarifying that.

Darice Liu, Maxim Group.

Good afternoon, guys. Steve, in your prepared remarks you had mentioned that there were some ongoing evaluations for your green material with a number of your customers. Can you provide a bit more color what stage of the trial runs you are at? When do you believe we will start seeing your green material in commercial products?

Well, we are at various stages with various customers trying to move the green materials and technology into their products. I suspect that we will be seeing green phosphorescent in 2009.

And should we expect to see it in more than one customer's product?

Well, we're working with more than one customer, and I would hope that to be the case.

Okay, fair enough. Then in terms of the industry landscape, you had mentioned that there's still ongoing activity in spite of the macroeconomic woes. But are you seeing any terms of slowdown in capacity spending, or are folks still trying to ramp up just because the industry is so nascent?

Well, we are watching very closely. Thus far, we have not seen any or we have not heard of any delayed tool orders or any deferred capital expenditures. But we are watching that very closely.

What we are seeing so far is that the development activities and the commercialization activities are still moving forward very nicely.

Are you seeing any new players coming to the game in terms of either wanting just to try out the technology or actually planning to go into this area as a commercial player?

AUO is -- I guess, we can describe them as a new player. At the Flat Panel Display conference in Japan, there were some new players involved in OLED lighting that were showing some OLED lighting. So we are starting to see some interest from some other players as well.

To add to that, Darice, you can see an increase in this quarter in developmental chemical revenue, compared to prior years, by a significant amount. So it is still the same number of customers, but there are two customers that we mentioned that purchased a significant more amount of material in this quarter than in the past. So I think that is a precursor to looking at commercialization.

Fair enough. Then, in terms of Samsung, now that they are officially merging with their sister company Samsung Electronics, who has a much larger treasure chest, does the mechanics of the relationship change in any way?

Currently we see no change. They are integrating the companies together, and our agreement with them runs through 2010, and we have seen no change in that. The relationship is still very good.

The last question is just a quick housekeeping question. Sid, in terms of R&D, should we be modeling a slight sequential increase? Or are we staying around this area?

I think in this area is probably good. We have -- included in there is cost of patents; and that in this period was a little bit higher than in the past. But I don't think you need to model anything significantly different than you have seen in this quarter.

Okay, thank you, guys.

Jed Dorsheimer, Canaccord Adams.

Thanks. I guess I have one main question, but three different parts. The first is, if I look at OLED, if we look at some of the challenges, it seems to sort of narrow into three different categories.

The first being in display applications, the backplane, with amorphous versus low temp. Then the second being scaling, whether or not you are going to use a pattern RGB or use an RGBW. The third is in terms of a physics issue with the lifetime of blue.

I was wondering if you could update us on each of those three challenges. Because it would seem as if many of the companies are dabbling just to -- for lack of a better word -- keep a hedge on the position of OLEDs. But the commitments are few out there and there seem to be some fundamental challenges still in trying to figure out whether or not we have actually hit some physics roadblocks in each of those. Thanks.

Well, to take them one at a time, although we are not backplane experts, from what I am hearing out there, they are making some significant progress on the backplane issues. Samsung SDI, for example, has made excellent progress and they are producing displays, LTPS, with good commercial yields.

The companies out there are making some good progress. So it doesn't seem like there is any physics roadblocks there. People are looking very seriously at large-scale patterning issues, whether it be white with color filters or shadow masks or some type of solution processing or printing technology.

Again, we are seeing some increased activity there, both within our Company and with some of the other people in the industry, as well as the manufacturers. So people are, I think, they are looking even more seriously about these issues of how are you going to get generation 6, 7, and 8 OLED displays into the marketplace, both from a patterning standpoint and the backplane standpoint.

Lastly, we are seeing some very nice progress in understanding phosphorescent materials and lifetime. We look at our lifetime charts, you will see significant improvement quarter over quarter and year over year in the lifetime. I don't think we are hitting any physics issues to that extent.

I think we are still just at the beginning and making significant progress on those fronts.

Okay, Jed, are you still there? Or operator, can we move on to the next person?

Bennett Notman, Davenport.

Good afternoon. Hey, it seems like the focus of the industry has shifted somewhat from the small-panel market to the TV market. I realize a lot of that is just sort of hype and consumer focus. But what is going on in the small-panel market that we are not hearing more about developments there, or wins, or rollouts, or other things that would bring that market to the floor?

On the small-area display, Samsung has stated in this quarter they are going to double their capacity. I think they are getting -- Steve went through a few of them. We don't see a significant change.

I mean Samsung, I think, is the guy who is focusing right now on the small-area display market. You are hearing TVs from Samsung and from others, but I don't think that is going to cause the small-area display market to go away.

We are hearing that power efficiency from the handset manufacturers is still very, very important. That is why we are working hard to get more than one phosphorescent color into these customers, so that they can then take advantage of this power benefit.

But, clearly big TVs are sexy; and you are correct, you do hear that a lot.

And when you -- everybody likes to demonstrate the big-area TVs; but when you walk around the trade shows you will see a lot of small-area portable products and prototypes that people are demoing and using.

So what type of visibility do you guys have into the product flow that will come to market using Samsung's panels, through Nokia, or whoever else?

Do you feel confident that the design activity is there and the product flow is there to show some growth in that activity in '09?

Yes, we think that there is a lot of activity there with the ultimate customers as well as the manufacturers. Again, from an OLED standpoint, not looking at the macroeconomic issues, we think that the demand pull is there and we think that the manufacturing capacity will be in place.

Thank you.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Just a question on the opportunity in the lighting market. If you go back and look at that market, say a year ago versus today, are you more bullish about the outlook for that market? When might you see that begin to move toward commercialization?

Jim, I would probably say the OLED lighting market has moved quicker than I would have expected it to over the past year. Osram has put out a designer lamp that costs I think EUR15,000. It is a collectors' item; it is not really a product.

But I think over the next few years, you are likely to see OLED lighting products into the marketplace.

Steve, you talked a little bit -- you guys talked a little bit about the big increase in development chemical revenues. Were those both display-related customers?

No, it was a little bit of each.

A little bit of each, so a lighting and a display application?

Yes.

Okay. Sid, the G&A declined from Q2 levels. Anything going on there or is that -- should we look at the run rate you were at, at the end of Q3, for G&A?

No, it sort of goes -- it jumps around a little bit. I think we just need to maintain -- we've always talked about, I think, a fairly consistent rate. The R&D was up a little bit. But I think the G&A number that we've talked about, probably we will go back up to that level.

Okay. Then one final question for me. You sometimes have a little bit more visibility with the contract research revenue line. Would you expect that revenue to be up in Q4 from Q3 levels?

Yes, I believe it will be up. That number has -- we gave a -- talked about what we thought it would be for the year. We basically have the same total dollar amount of contracts in the house today as we did about a year ago. It has just taken longer for some of these contracts to get executed.

But we have announced the number that got executed and we will get to work on them. So you will see probably some bump up in this area for the fourth quarter.

I don't know if maybe we are reaching a little too far, but is there any sense you can give us as to what that line might look like in '09? Only because it is a fairly sizable part of your revenue.

I can't give you specifics for the year. I think it will -- this year was lower than the prior year. I would expect next year to be higher than this year.

Okay, thank you.

Okay, there are no further questions at this time. I would like to turn the call back over to management.

Thank you all for calling. As you know, we are freely accessible to you, so you can call us directly. And I thank you for your participation. Thanks, everybody.

Thank you very much.

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