Universal Display Corp (OLED) 2008 Q4 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display fourth quarter and year end 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to Mr. Paul Johnson, on behalf of Universal Display.

Thank you, and good afternoon, everybody. Thank you for joining us today. With us today as always 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, or rebroadcast of this call in any form, without the express consent of Universal Display is strictly prohibited. Further, as this call is being webcast live and we 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, March 12, 2009.

All statements in this conference call that are 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, President and CEO of Universal Display. Please go ahead, Steve.

Thank you, Paul. And welcome everyone to our conference call and review of financial results for 2008, and the fourth quarter. I will begin today by discussing the current state of the OLED industry, highlighting some of our business accomplishments for the year and sharing thoughts on 2009. Sid Rosenblatt will follow with a detailed review of our financial results, after which we will be happy to take your questions.

As we all know, the global economy is facing significant challenges. These are challenges that few would have predicted just a year-ago. Given the scope of the current economic crisis, it will be very difficult for any company, including ours, to remain untouched.

Relatively speaking, however, we believe that Universal Display is in a strong competitive position. Our balance sheet, the envy of many other companies, remains strong. To help us weather any short-term problems that may arise, whether forecasted or not. From a long term perspective, our proprietary PHOLED technology and materials, are being incorporated into more and more commercial display products.

We are also seeing accelerated interest in the use of our technologies and materials for next generation commercial applications. Such as lighting products and flexible displays. These developments indicate us to that Universal Display is well-positioned for future success.

Prognosticators are predicting that the current economic crisis may last for a while. We cannot say for how long but we believe that the coming is cyclical, and the situation will eventually turn around. With this in mind, we are preparing to emerge from this down cycle as a recognized OLED industry leader, with our red, green and blue PHOLED technology and materials, for both displays and lighting.

In preparing for the future, we used strategic hiring to grow the Company by about 25% last year. We have added approximately 20 people, almost all of whom have technical degrees or backgrounds. This increased staffing will enable us to accelerate our progress, in anticipation of the rebound in the economy.

We were encouraged by the level of our fourth quarter revenues, totaling approximately $3.6 million. This makes the fourth quarter of 2008, the best quarter we have ever had from a revenue standpoint. We believe that this reflects an increased demand for our technology, materials and expertise.

And as I said earlier, it is encouraging to see the number of commercial products in the market today that are utilizing our PHOLED technology and materials. I have highlighted a number of these products in the past, including cell phones from KDDI, Casio, Hitachi, and Nokia, MP3 players from iRiver and a variety of products from Samsung, such as cell phones and digital cameras. As exciting as these products are, we believe that more are on the way.

Samsung recently reiterated it's commitment to AMOLED display production via corporate blog, and at the World Mobile Congress in Barcelona in early February. The quotes by Samsung regarding AMOLED display, 'AMOLED panels will reach an economy of scale in terms of production some time during 2009. Medium and large scale applications will become ever-increasingly relevant for mobile phone technology, as production ramps up, and cost per unit becomes more realistic. Samsung SMD has a current capacity of $2 million a month. That figure is set to doubled this year, at which point economy of scale will be reached. Samsung plans to double production capacity once again in 2010.'

To continue with Samsung's comments, 'Samsung envisions it's monitor notebook and TV displays all being suitable for AMOLED in 2009, on 2010 flexible displays will be commercially viable.'

Another of our business partners, LG Display, described OLEDs as a key differentiator in their recent quarterly presentation for investors. According to LG Display, AMOLEDs are the 'future [video] solution for mobile applications, TVs, and flexible applications.. This is obviously music to our ears, and it reflects a shared vision of the promise of OLEDs. Industry participants are committing to OLEDs, because of what they provide for a variety of devices and applications. Thinner displays, clearer pictures, more vivid individual colors, superior viewing angles, and energy efficiency.

Anyone wondering what the future holds for OLEDs can see it being showcased at this year's Consumer Electronics Show in Las Vegas. OLEDs were a prominent part of the show. From the world's largest display manufacturers, to smaller device and component companies, OLED displays could be found in flat screen televisions, cell phones, multimedia devices, and picture frames.

Samsung, LG Display, Sony, and Nokia, were among the many companies showing off the latest OLED prototypes and products. Samsung exhibited eye-popping large area displays, including vibrant captivating 14" and 31" OLED television prototypes. They also demonstrated smaller area OLED displays, including 3.3" and 7" units. LG Display exhibited equally impressive 15", less than 1 millimeter thick, OLED prototype display, for applications of televisions and laptops. Sony demonstrated 21" and 27" OLED televisions. Nokia exhibited N85, a sleek new cell phone with an OLED display. Innovation was also on display at the CES show.

You may have seen our own Janice Mahon showcasing our rich mounted flexible display prototype on CNET and the CBS Evening News. We developed this prototype for the Department of Defense, with our partners LG Display and L3 Communications. This prototype garnered a great deal of attention as a harbinger of the commercial potential that many see for flexible OLED technology. We share this optimism.

In 2008 we continued our cutting edge work on flexible OLED technology with support from the US Department of Defense. At the start of 2009, we were awarded a $1 million extension to our Department of Defense contract to continue this work, and develop next generation flexible OLED prototypes for use in military applications.

White OLED lighting was also a key highlight for Universal Display in 2008. As many of you know, we signed a license agree with Konica Minolta this past year for white OLED lighting. Using our PHOLED technology we also demonstrated a record-breaking white OLED device with a power efficacy of 102 lumens per watt at 1000 cd/m2. The US Department of Energy continues to help support our work with OLED light. The DOE used OLEDs as a critical component of the solid state lighting initiative.

As Green Energy initiatives grow in importance, and receive greater funding, we believe our work in this area will generate even more attention. I am looking forward to 2009, we are encouraged by the public statements of our licensees, the commercial potential for our PHOLED technology and materials, and the resilience of the OLED industry as a whole, showing in a difficult economy.

With that, I give you Sid, who will review the fourth quarter and full-year financial results in greater 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 for the quarter, and then discuss the specific components for each revenue category.

On the commercial side, these categories include commercial chemicals, royalty and license, and commercialization assistance revenues. On the developmental side, these categories include contract research, development chemicals, and technology and development revenues. Revenues for the quarter totaled approximately 3.6 million, compared to $2.9 million for the fourth quarter of 2007.

The fourth quarter of 2008 was the highest revenue quarter in the Company's history. For the rest of 2008, revenues were $2.7 million in the first quarter, $2.1 million in the second quarter quarter, and $2.6 million in the third quarter. Total commercial revenue for the fourth quarter was approximately $1.4 million, compared to $1.2 million for the fourth quarter of 2007. Commercial chemical revenue and royalty and license revenues for the quarter were $803,000, and $385,000 respectively, compared to $872,000 and 354,000 respectively for the fourth quarters of 2007.

All of our commercial chemical revenue for the fourth quarter of 2008 was attributable to sales of our universal PHOLED materials to Samsung Mobile Displays. Most of our commercial chemical revenue for the fourth quarter of 2007 was from Samsung Mobile Displays, with small amounts receipted to other customers. For the fourth quarter of 2008, we received royalty revenue under our patent licensed agreement with Samsung Mobile Displays. Under that agreement, we received royalty reports after the end of the quarter in which royalty bearing products are sold by Samsung Mobile Displays. Consequently, our royalty revenue from Samsung SMD for the fourth quarter, reflects royalties for products sold by Samsung during the third quarter of 2008.

Royalty and license revenue for the fourth quarter of 2008 totaled 385,000, compared to 354,000 for the same period in 2007. For the fourth quarter, we received license revenue under our patent licensing agreement with Samsung, a [closed] license agreement we executed with Dupont Displays in 2002, a patent license agreement we entered into with Konica Minolta in August of 2008, a joint development agreement we previously entered into with a subsidiary of Konica Minolta, and two other agreements we entered into during the fourth quarter of 2008.

We also received commercialization assistance revenue, under a new contract we entered into during the fourth quarter of 2008, and there were no similar revenues received in 2007. Total development of revenue was approximately $2.2 million for the fourth quarter of 2008, compared to $1.7 million for the fourth quarter of 2007. Contract research revenues totaled $974,000 for the fourth quarter of 2008, compared to 952,000 for the same period in 2007. Developmental chemical revenue totaled $862,000 for the fourth quarter of 2008, compared to $244,000 for the same quarter of 2007.

Our development chemical customer base increased, as did the average dollar value of developmental chemical sales per customer, compared to the fourth 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 different OLED technology development and product launch strategies. Technology development revenue totaled $397,000 for the fourth quarter of 2008, compared to $477,000 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. Our net loss for the fourth quarter of 2008 totaled approximately $4.4 million, or $0.11 per diluted share, compared to a net loss of approximately 3.3 million, or $0.08 per diluted share for the same quarter of 2007. The rise in the net loss was attributable to an increase in operating expenses, most notably Research & Development, partially offset by an increase in revenue during the quarter.

Operating expenses were $9.4 million for the fourth quarter of 2008. This compares to operating expenses of $8.0 million for the fourth quarter of 2007. The increase in operating expense was primarily attributable to Research & Development expenses, our operating expenses were in-line with our internal expectations on an annual basis.

For 2008, total revenue was approximately $11.1 million, compared to $11.3 million for 2007. Commercial revenue for the year totaled approximately $5.6 million, and developmental revenues totaled $5.4 million, Compared to $4.4 million and 6.9 million respectively for 2007.

As has been the trend we are seeing an increase in commercial revenue, as our customers transition from development to commercial activities. We expect this to continue as our technology realized in increased commercial adoption. Our combined material revenue for the commercial and developmental increased from 3.5 million in 2006, to 4.6 million in 2007, and to $6.7 million in 2008. We believe this is an indication of our proprietary PHOLED materials being accepted by the OLED manufacturers.

Commercial chemical revenue was 3.75 million for 2008, compared to 3.6 million for 2007. The majority of our commercial chemical revenue convergence in both years was from Samsung Mobile Display. Royalty revenues was $797,000, for 2008, compared to 61,000 in 2007. The increase in royalty revenue was mainly to the increased sale of licensed products by Samsung Mobile Displays. Royalty revenues for 2008, also included a small amount of revenue received under an agreement we entered into during the fourth quarter of 2008.

Contract research revenue was $2.8 million for 2008, compared to $4.6 million for 2007. The decrease in contract research revenue was principally due to the timing of work performed, and costs incurred in connection with several new and completed government programs during 2008. However, the overall value of these contracts remained relatively constant during those years. Development chemical revenue was $2.048 million for 2008, compared to $1.05 million for 2007.

Our development chemical customer base increased significantly during 2008, as did the average dollar value of development chemical sales per customer. Our net loss for 2008 was approximately $19.1 million, or $0.53 per diluted share, compared to $16 million, or $0.47 per diluted share for 2007. The net loss for 2008 was impacted by increased operating costs, and contract research revenue being reduced from what it was in 2007. Total operating expenses were $33.7 million for 2008, compared to $31.7 million for 2007. The increase was consistent with our expectations for 2008.

Research & Development expenses were $22.3 million for 2008, compared to $20.9 million for 2007. The increase was mainly due to increased patent costs, increased personnel and operating costs at our Ewing facility. We increased our staff by 25% in 2008.

Interest income decreased to 2.6 million for 2008 compared to $3.6 million for 2007. The decrease was mainly attributable to decreased rates of return on investments during 2008, compared to rates of return during 2007. Due to the current market conditions, we anticipate that these lower rates of return will continue for the foreseeable future.

We received payments from various customers with license rights granted to these customers and-or for joint development work performed, or technical assistance provided at the request of our customers. We received $3.7 million of these payments in 2008, and 1.1 million of these payments in 2007. All of these payments have been classified as deferred revenue, and we are recognizing them over the life of the agreement for which they relate.

Cash used in operating activities totaled approximately $7.8 million for 2008, compared to $10.4 million for 2007. The decrease in cash usage was partially attributable to an increase in deferred revenue and deferred licensees, and an increase in Accounts Payable at year-end. Our balance sheet remains strong, with cash, cash equivalents and short term investments of approximately $77.5 million as of December 31, 2008, compared to approximately 83.7 million at the end of 2007. We continue to place a high emphasis on cost control, and prudent use of cash, as our revenues continue to transition, and our technology gains commercial traction.

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

(Operator Instructions). We will pause for just a moment, to compile the Q&A roster. Our first question comes from Jim Ricchiuti.

Good afternoon. I wonder if you could comment, Sid maybe you could take this one. This commercial assistance revenue of around $170,000. What does that relate to, Sid?

We are working with one of our customers, and helping them commercialize some of their materials, which work very well with our materials. And so, we are working, we actually announced a number of relationships with other chemical companies, and this is one of them that we are helping to integrate their technology into the OLED community.

Okay. Is this more one-time, or do you expect this to be recurring?

This arrangement will last for about a year, and the question is whether it will renew. It depends on the success.

Okay but it is something we could potentially see each quarter this year?

That is correct, you should see it over the next few quarters.

Okay. And if I heard you correctly, I believe you alluded to two new agreements in Q4. Did I understand that correctly? Is there any way you can elaborate on that, Sid?

There are two new agreements, that were small agreements and small dollar amounts. And we really didn't disclose who they are, they are not material amounts of money.

And these would be display-related?

Yes.

Okay. And there has been a lot of, obviously a lot of concern about the economy, and we have also seen some other players in the OLED market, scaling back some investment, notably Kodak, at least that they made some mention of that. I wonder how, Steve, maybe you could take this. How do you see this playing out? What impact do you see of this on your business, on the development of the market?

Well, I think that there are a number of different manufacturers in the industry, and they all seem to be impacted in different ways. As you see from the comments by Samsung and LG, they seem to be moving forward fairly aggressively. So thus far, we are not seeing a significant impact on our business from the economic situation.

And final question, and I will jump back in the queue. But I wondered for either of to you answer. Obviously you are tracking I would guess, what Samsung and LG and Chi Mei are doing. Do you have a feel for how many devices are currently in the market that employ your technology?

I would basically say that substantially all of the active matrix OLEDs in the market use our technology. I just don't know what that number is of how many devices there are.

But I mean, we clearly have seen more phones introduced, there appear to be more on the way.

Yes, we are continuing to see an ever-increasing supply of products using our technology from our manufacturing partners.

Can you comment if the new Sony Walkman that we have been hearing about is using your technology? I would assume it is?

We cannot comment.

But basically all of the active matrix OLEDs that are out there are using your technology?

The active matrix OLEDs from our announced partners, Samsung, LG, Chi Mei, all of those.

Okay. Thank you very much. I will jump back in, thank you.

Our next question comes from Yair Reiner.

From Oppenheimer. Just a couple quick questions. First, on the developmental chemicals, that was up again, kind of on quarter on quarter. Anything specific happening there? I apologize if you addressed this in the comments, it is a bit hard to hear, the sound quality of the call was a bit poor.

We apologize, there was an issue with the sounds we realize. It has actually doubled during the year. The number of customers and the dollar amounts per customer has gone up. And we believe it shows increased activity by a number of companies, that are either looking at OLEDs, or in early stages of development, and late stages of development, before they start to manufacture. So we think it is a very encouraging sign, that not only did the number of our customers increase year-over-year and quarter over quarter, but the dollar amounts also.

Okay. There is research out there, and comments from display search, and they seem to be projecting a pretty substantial spike in AMOLED shipments in the second half of '09, particularly from handset penetration. Is there anything that you see in your pipeline, in your conversations with your customers, that lead you to believe, that there could be a product, a couple of products, that could potentially change the profile of OLEDs in consumer electronic devices?

Our next question comes from Jed Dorsheimer with Canaccord Adams.

Hi. Are you there?

We are here. Could you not hear us Jed?

I didn't hear the response to the last question. I don't know if you want to repeat that. I certainly didn't hear it.

Let me repeat it. Talking about developmental customers and our commercial, and the increase in products that display search says in the second half of the year, and based upon what Steve said earlier, as Samsung increases their capacity, we believe that the second half of this year there will be a significant new numbers of products in the market place, we are hearing that from a number of different places so we are very encouraged by that.

All right. A few questions for you. I guess, maybe a follow-up to that, would you expect all of the products, or the majority of products to be small form factor, I guess less than 4 inches, related? Hello? Yes. Can you hear me? Yes, would you expect all of the, as you look, from your last comment, as you look at the number of applications increasing, would you expect that those are I guess all small form factor, less than 4 inches?

Jed, we think that there will be a significant number of small form factors in the market, but we also will probably see some of the manufacturers increasing the size of the displays that they are going to be selling.

And so with the exception of Sony, what have you seen that gives you confidence that the OEMs will be bringing a larger form factor to market, and what form factor do you think that would be in the size of?

Chi Mei has talked about focusing on middle sizes around 7 inches, and they in fact, manufactured an OLED picture frame for Kodak this past year. LG Display has talked about a a 15-inch TV coming out this year. So we are starting to hear some talks like that. Samsung is also talking about larger area form factors, 11-inch or 14-inch this year.

And so would those, I guess medium sized form factors, be manufactured using a Gen form mother glass?

They could be manufactured using anywhere between the existing factories, or anywhere from Gen2 through Gen4.

Guess what I am trying to get at is, has there been any breakthrough, or anything that you have seen, that will allow the OLED market to scale beyond Gen4, that gives you confidence that we will be able to get to sort of Gen5 through 7, or through 8 actually?

Well, I can't predict the specific generations, but what we are seeing is a lot of good engineering work being done, at a lot of manufacturers, to increase the manufacturability of OLEDs, which would include going to larger mother glass sizes. glass sizes.

But I guess before we see that we would probably see a commitment of a multi-100 million commitment, in terms of a fab which we haven't seen at this point, right?

Well, what you have seen is a number of companies that have allocated significant amounts to OLED research development or manufacturing, but they haven't specifically said, haven't specifically appropriated I guess is the word, and said what specifically they would be, what size fabs they would be using.

Just I have a couple more questions, and then I will jump back in the queue. The agreements that you have signed, are those all for red and green, or have any of them been for red, green, and blue, or RGB plus W too?

We have our red material today, at all of our customers, green materials are being evaluated by a number of customers, and we are continuing to development our blue materials, and we are not shipping blue materials commercially at this time.

But each of the agreements themselves are different, Jed.

Sure. And what are the lifetimes on blue right now?

I don't think we have been asked announced any additional lifetimes since our last announcement, which our recollection was about 15,000 hours. Just about 15,000 hours.

All right. And I guess, two last questions, as we look in the switching from the display to the lighting markets, if you are just doing a solid white light, what are lifetimes encapsulated in glass right now for white lighting applications? And what efficacy can those be achieved at, too?

From a prototype standpoint, we have gotten 100 lumens per watt, 102 lumens per watt on an efficacy base. Nobody is shipping production volumes yet of white lighting.

We have talked about the fact that using, when we announced using a light blue phosphorescent material, that we can get almost 20,000 hours today at a 1000 [lm/W] using red, green, and blue phosphorescent materials.

All right, great. I will jump back in the queue. Thanks, guys.

Thanks Jed.

(Operator Instructions). Our next question comes from Jim Ricchiuti with Needham and Company.

As we look at the Q4 revenues the $3.6 million, would you be able to tell us how much of that revenue came from lighting applications, or from lighting contract research revenue?

Well, we did announce a license agreement with Konica Minolta, and the upfront fee of that is amortized in our licensing, but we don't specifically break it out by customer. But from a commercial material standpoint, there are no commercial materials being sold to lighting applications as of yet. It is still only displays.

Right. Obviously there has been a lot of speculation about the stimulus spending, and the focus on trying to improve lighting efficiency, are you seeing, I am sure it may be too early for you to see it, but do you anticipate pursuing perhaps some new contract research revenue, in light of the increased spending in this area?

Certainly we think that white OLED lighting fits squarely in the Obama Green environmental energy stimulus plan. Energy efficiency, and so we are talking to people, to see what type of funds are available to accelerate the growth of that industry. But you are right, Jim, it is a little too early at this point to know what is actually out there.

Sure. Is there any way that you guys can maybe get us some help as to how you view contract research revenue in '09. Would you anticipate it being up? Certainly it was up, if we look back at '07 it was at a very high level, and came back down in '08. How should we think about it in '09?

Right now based upon what we have in house, I think it will be more than '08, but right now, probably not quite as high as '07. But we do think it will be higher than '08, and depending on what happens, over the next few months, because we do get awarded programs. We had one that Steve talked about $1 million or so, we would hope that it would be back at the 2007 levels.

Okay, that is helpful. And quick question. There was an income tax benefit of around $1 million in Q4?

Yes, well, do that each year. New Jersey is a very benevolent state, in that it allows you to sell your NOLs to for-profit companies, and they can use them dollar for dollar. And we have some NOLs in New Jersey that actually would have expired worthless, so you sell them for about $0.87 on the dollar to essentially the utilities in New Jersey, and they use those dollar for dollar to pay their tax bill. So it is to help R&D companies to get some cash back, so we have done this for each of the past few years.

All right. Okay. And Sid, I just what was the share count at the end of Q4, at the end of December?

As of today or yesterday.

Yes.

36,308,000.

As we look at your R&D expense that picked up quite a bit from September. Where do you see R&D going forward?

As we said, we hired approximately, we have increased our staff here on the, basically on the R&D side by about 25% during the year, and in the fourth quarter we actually had all of those folks here, and the costs associated with ramping them up. So we don't anticipate significant additional expenditures for personnel or R&D during the year. If you look at the fourth quarter, it should be a good indicator of what the first and second quarter should look like, on the expense side.

Great. That is helpful, thank you.

Thank you. We apologize for the sound problems that we are having.

And with that, there are no more questions, so we would like to thank you all very much for participating. And as most of you are well aware, please give me or see Paul if you have any follow-up questions, we will be happy to answer them. And again thank you for your time.

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