Universal Display Corp (OLED) 2009 Q3 法說會逐字稿

Good evening. I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display third quarter 2009 financial results 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). At this time, I would like to turn the event over to Mr. Johnson. Mr. Johnson you may begin your conference call.

Thank you and good afternoon everybody. Thank you 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 begin 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 written consent of Universal Display is strictly prohibited. Further, as this call is being web cast live and will be made available for a period of time on the Universal Display website. This call contains time sensitive information that is accurate only as of the date of the live webcast of this call, November 9, 2009.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act format of 1995. These included but are not limited to statements regarding Universal Display's beliefs, expectations, hopes, or intentions regarding the future. It is important to note these statements are subject to risks and uncertainties that could cause Universal Display's actual results to different than those projected. These risk 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 out of the way, I would like to turn the call over to Steve Abramson, President and CEO of Universal Display. Please go ahead, Steve.

Thank you, Paul. Welcome to our third quarter conference call everywhere. Steve Rosenblatt, is here, as well and we will review the financial results in more detail following my comments. As always we are happy to take your questions following Sid's presentation. The third quarter was positive for Universal Display in a number of ways, continuing trends that began in the second quarter. The increase in overall revenue and the improvement in net loss are obviously a good sign. The increase in royalty and licensing revenues is also a promising sign of the future. From all accounts, the events we faced earlier in the year due to economic climate have begun to subside. Our partners, such at Samsung SMD continue to demonstrate their commitment to increasing production volume and generating additional sales of OLED displays. It looks like the OLED display market is now positioned to grow through the recovery. (Inaudible) are simple, OLED offer a point of differentiation for a variety of products.

From today's mobile devices to tomorrow's larger area computer screens and TVs, OLED's are making strong end roads, they are visually compelling, gorgeous seems to be the common descriptor. The energy efficiency of our OLED technology and materials provide a powerful economic incentive for display of product manufactory to switch from LCDs to OLEDs. The growth of mobile device usage, the drive for thinner displays and the see-change in attitudes about energy efficiencies all present a compelling market for both OLED display and Universal Display technology and materials. The numbers supports these trends.

Display Search, inflates quarterly OLED shipment and forecast report reported, quote, worldwide OLED revenue has set a new record with $192 million in revenue for the second quarter of 2009 , up 32% for the quarter and 22% for the year. The report goes on to forecast that, quote, the total OLED display market will grow to $6.2 billion by 2016 from $600 million from in 2008 with accumulative annual growth rate of 33%. Mobile phone main displays will be the leading application for OLEDs with revenues of about $3 billion in 2016. OLED TVs will be the second largest application with revenues of about $2 billion in 2016. In it's report, Display Search also discussed OLED growth during the most recent quarter, noting, quote, OLED shipments grew due to strong mobile phone main display shipments. This is due to promotion of AMOLED Mobile Phones by Samsung Electronics, Nokia, and Sony Erickson in the first half of 2009. More than 15 mobile phone models with AMOLED main displays were released in 2009, end quote. Recent reports also confirmed Samsung SMD conviction that OLED display represent a strong growth product for the firm. The Korea Times recently quoted a Samsung representative as saying, quote, its [haptic] branded AMOLED phone is a product presenting a new paradigm in the global mobile industry. Samsung will lead the new segment. The report notes that SMD plans to build an additional AMOLED line in Korea after its shipment mark exceeds $2 million. And analyst are viewing some of Samsung's business, like screens made with active matrix organic light emitting biotechnology is likely to remain profitable over time.

We recently attended and exhibited at The Nikkei Business Publication FPD International 2009 Conference in Japan. Samsung SMD booth at the conference included a tremendous OLED exhibit. The breadth of OLED show was quite remarkable and some product concepts were further developed including a 20-inch 3-D OLED display for viewing with glasses. Also at FPD, LG Display communicated it's OLED road map. The Company has strong ambitions in the large area OLED display market, namely TVs. During the conference, LG Display OLED Sales and Marketing VP, Juan Kim had said the Company is looking to introduce its 15-inch OLED TV this year followed by a 20-inch OLED TV in 2010 and OLED TVs of 30-inches and larger in 2011. Mr. Kim also said that a 40-inch OLED TV is on it's way for 2012. Perhaps more significantly, Mr. Kim stated LG Displays forecasting OLED TVs and displays will cost less than LCD screens by 2016 thanks to new manufacturing processes.

Also during the FPD International Conference, our partner AU Optronics exhibited a 14-inch OLED TV that runs at full high-definition resolution and has a pixel density of 157 PPI. Its display boosts a contrast ratio of 100,000 to 1 and a brightness of 200 candela per meter squared. Our booth at the conference was located in a prominent location along the main street of the exhibition hall. We were situated between Sharp and NEC and across from the LG Display. Traffic at our booth remained heavy throughout the conference. Our public message was our FOLED technology materials are being used by the three leading OLED display companies, Samsung SMD, LG Display and AU Optronics. We exhibited sample products from each of these companies on our front counter.

Turning to R&D and Commercial technology development, the third quarter saw a number of new contracts with US Departments of Energy and Defense. These included a new Phase II contract with the US Air Force for the development of flexible OLED displays for in cockpit use and $1.65 million two year contract from the US Department of Energy to demonstrate a thin, highly efficient white OLED lighting concept for under-cabinet applications and more recently in the fourth quarter, two new Phase I programs from the DOE to demonstrate further advances in the performance of white OLEDs and to continue working towards achieving the DOEs solid state lighting commercial targets and an extension to a US Army [surdak] Phase III contract to continue working on flexible OLED display technology and to deliver proto-type flexible displays built on metal foil. These contracts and the research and development associated with them represents the next revenue streams for Universal Display of flexible display's and white OLED lighting. We are especially excited about the rate of progress that has been made through these programs and we anticipate they could become significant markets for us in the future.

On another topic, I am pleased to report that the European Patent Office recently rejected an opposition to one of our core flexible OLED patents in Europe. The opposition was filed by Cambridge Display Technology back in 2006. The EPO, the European Patent Office announced its decision at an oral hearing on October 6, upholding the patent as originally granted. The minutes of the hearing are available online through the EPO website and a formal written decision should be issued soon. We view this result as further confirmation of the strength of our broad OLED patent portfolio.

Finally, I'd like to note that during the quarter our FOLED materials business received certification in accordance with the ISO-9001 2008 Quality Management Systems Standards and Guidelines, this is a significant achievement and testament to the quality of our materials business demonstrating how we consistently meet and exceed the expectations of our customers in the OLED Display and Lighting industries.

With that, I will turn the call over to Sid for a review of the financial results. Sid.

Thank you, Steve and again, thank you everyone for joining us on the call today. I will begin today with a detailed look at revenues for the third quarter 2009, and then a review of our key financial results, net loss, operating expenses and cash use and operating activities. I will then turn the call over to the operator for your questions.

For the third quarter of 2009 , revenues totaled $5.145 million compared to $2.626 million for the same period in 2008. Commercial revenue, which relates to the incorporation of our OLED technology and materials into our customers commercial products and includes commercial chemical revenue, royalty and license revenue and commercialization assistance revenue increased to $1.621 million in the third quarter of 2009 compared to $1.325 million for the same period in 2008. Development, which relates to OLED technology and material development and evaluation activities for which we are paid and includes contract research revenue, development of chemical revenue and technology development revenue increased to $3.524 million for the third quarter 2009 from $1.301 million for the same period in 2008.

Looking at a more detailed breakdown of the categories under revenue, our commercial chemical revenue and royalty licensing revenue for the third quarter of 2009, were $808,000 and $646,000 respectively compared to $1.025 million and $300,000 respectively for the third quarter of 2008. In the third quarter of 2009 the majority of the commercial chemical revenue was from sales of proprietary OLED materials to Samsung SMD. We also sold small quantities of our proprietary OLED materials to two other customers for commercial usage during the third quarter. The sales to these customers were recorded as commercial chemical revenue and license revenue. The decrease in commercial chemical revenue from the third quarter of 2008 to the third quarter of 2009 resulted primarily from lower volume of OLED material sales to Samsung. As we discuss in our last conference call our understanding is that this lower sales volume was due to Samsung's implementation of manufactured processing efficiencies, improved material utilizations and more efficiency and improved device structures offset in part by increased production volumes. We cannot accurately predict how long our material sales to Samsung or other customers will continue as they frequently update and alter their product offerings in respond to market demand.

We recorded royalty revenue of $402,000 for the third quarter which ended September 30, 2009 , compared to $148,000 for the same period in 2008. This revenue primarily represents royalties received under our patent license agreement with Samsung. Under this agreement, we received royalty reports at a specified period of time after the end of the quarter during which royalty bearing products are sold by Samsung. Royalty revenue in these sales is recognized when the report is received. Consequently, our royalty revenues from Samsung for the three months ended September 30, 2009 and 2008, represent royalties for licensed products sold by Samsung during the second quarter of 2009 and 2008 respectively. Licensed revenue for the third quarter of 2009 was $245,000 compared to $152,000 for the same quarter of 2008. These revenues were derived from our patent license agreement with Samsung as well as a cross license agreement with DuPont Displays, Inc. that we entered in December 2002. License revenue for the quarter ended September 30, 2009 , also included amounts received under a patent license agreement we entered into with Konica Minolta in August of 2008 and a joint development agreement we previously entered into with a subsidiary of Konica Minolta .

During the third quarter of 2009 and 2008, we also recorded license revenue from two other customers who purchased our proprietary materials for commercial usage. Commercial revenue for the quarter ended September 30, 2009, also included $167,000 in commercialization assistance revenue that were received under a business support agreement executed during the fourth quarter of 2008. We received no such revenue for the same period in 2008. We earned $1.125 million in contract research revenue from agencies of the US Government for the third quarter of 2009 , compared to $610,000 in the third quarter of 2008. The increase was due to overall increased value of our government contracts increasing by approximately 50%, as well as the timing of the expenses incurred under these contracts.

We earned $718,000 in development chemical revenue for the third quarter of 2009 compared to $628,000 in the same quarter of 2008. The increase was due primarily to increased development chemical sales to three customers offset to some extent by decrease commercial chemical revenue to two other customers. Technology development revenue for the third quarter of 2009 was $1.681 million compared to $62,000 in the third quarter of 2008. This includes non-refundable payment of $1.500 million that we received from Kyocera Corporation during the third quarter of 2008. This payment was for technical assistance previously provided under an evaluation agreement with a subsidiary of Kyocera. We have previously classified this payment as deferred revenue because it was credible against a portion of the upfront fee under our license agreement with the Company. The license agreement was to become effective upon notice from Kyocera given on or before December 31, 2009. In September 2009 we received notification from Kyocera that it was terminating the evaluation agreement. Based on this notification, we determined and confirmed Kyocera would not send us a notice declaring the license agreement effective on or before December 31, 2009. As a result of this development, we recorded the $1.500 million payment as technology development revenue for the third quarter of 2009. Technology development revenue for the third quarter of 2009 also included amounts received under two joint development agreements that we entered into during the second half of 2008. Payments received under these agreements were classified as deferred revenue and recognized as revenue over the life of the applicable agreement.

Total operating expenses were $8.9 million for the quarter ended September 30, 2009 compared to $8.5 million for the same period in 2008. The operating expenses remained relatively consistent over the corresponding periods. Our net loss for the third quarter of 2009 was $4.629 million or $0.13 per share compared to $5.303 million or $0.15 per share for the same quarter of 2008. The decrease in net loss was primarily due to an increase in revenues of $2.520 million, partially offset by a decrease in interest income of $420,000, an increase in operating expenses of $480,000 and a loss on stock warrant liability of $1.002 million.

Looking at the nine month results, revenue totaled $10.9 million for the nine months ended September 30, 2009 compared to $7.5 million for the same period in 2008. Commercial revenue remained relatively consistent at $4.2 million compared to $4.3 million for the same period in 2008. For the first nine months of 2009 development revenue increased to $6.7 million compared to $3.2 million for the same period in 2008. Total operating expenses were $27 million for the nine months ended September 30, 2009 , compared to $24.4 million for the same period in 2008. Net loss for the first nine months of 2009 was $16.6 million, or $0.46 per share, compared to a net loss of $14.7 million or $0.41 per share for the same period in 2008.

Our balance sheet remains strong as of September 30, 2009, with cash, cash equivalents and short-term investments totaling $66 million compared to $77.5 million as of December 31, 2008. Cash used in operating activities was $11.832 million for the nine months ended September 30, 2009, compared to $6.035 million for the same period in 2008. The increase in cash used in operating activities was mainly due to the receipt of an additional $2.033 million in cash payments in 2008 rather than 2009 from various customers for license rights granted to these customers, and/or the joint development work performed or technical assistance provided at the request of these customers. An additional net loss of $2.453 million and timing of accounts payable and accrued expenses net of non-cash charges of $953,000.

With that, I would like to turn the call over to the operator to take your questions. Operator, would you please compile the list.

(Operator Instructions). The first question comes from the line to have Chris [Everall].

I have a question regarding the royalty rate structure. Does your royalty rate percentage depend on the number of (Inaudible) materials used in the display. That is notes I would like to confirm from a couple years ago presentation.

Our royalty rates are based upon the AFP of the average sale price of the products that they sell.

Of course, I am trying to understand if a manufacturer dots red and green, does that change the royalty rate basically?

Well, we have different structures for different companies, and the current arrangements that we have with customers today are royalty rate is a royalty for the right to incorporate phosphorescent materials into a display and they are not based upon number of colors that are used. Each customer is different.

Okay. Thank you so much.

Thank you.

Your next question comes from the line of Jim Ricchiuti.

Good afternoon.

Hi, Jim. Sid, I am wondering if you can comment on -- you have had now a few quarters of reports from Samsung. Are there any observations that you can draw from this relative to predictability or growth of seasonality. You have had a few quarters of these reports coming in. What can you tell us?

I think we are starting to see a little clearer picture. But to be perfectly honest, I think the second quarter, and we have not seen what the third quarter looks like as of yet, so once we see this year -- because this year they seem to be focusing on and delivering of displays as in the past, it really jumped all over the place. I think after another quarter or two we will have a good feel on the real progression. Right now I do not have enough information that I can predict, but it is getting there.

Fair enough. Can you remind us, Sid, or Steve, just about the current licensing agreement with Samsung. When does it expire, and maybe you could also talk about what you are seeing out there in terms of new licensing coming on?

Well, the current agreement with Samsung expires at the end of June, 2010. We are obviously, based upon Steve's comments, you have LG that is expanding it's OLED operations and talks about having new fab coming online at the first part of next year. You have seen AUO, FPD demonstrating a number of different OLED products. We think that 2010, 2011 should show significant growth in the overall number of OLED products that are being shipped into the marketplace, so we do see a lot of activity.

Okay. And would you -- just getting back to Samsung, would you expect to be in active talks with them in the early part of next year, or do you see this agreement actually being hashed out maybe closer to the June time frame?

We are in contact with all of our customers all the time. And the process is one that you are very aware of in negotiating, and we would -- we are going to do our best to get everything done in a timely manner, but negotiations are negotiations, and we will see how they go.

Okay. Anything you can say about maybe an update on where you stand with green phosphorescent material, what the status might be of that looking out to next year?

We are still in manufacturing tests and qualification with a number of different customers to get green phosphorescent into products, Jim.

Okay. I will jump back in the queue. Thank you.

Okay.

And your next question comes from the line of Yair Reiner from Oppenheimer.

Congrats on the next quarter, Your commercial chemical sales were up pretty significantly quarter on quarter. Could we see that as a decedent proxy for the type of momentum we would see in royalties next quarter? In other words, shouldn't be commercial chemicals that you sold this quarter translate into royalties and licenses next quarter?

I mean logically it makes sense if you sell more material you should have more products, but it depends on whether they are building inventory because the royalty is based on what they ship as as opposed to a what they actually make. It makes sense that if you sell more materials you should see a larger royalty, but I can't say for sure because I have not seen a royalty report yet.

Fair enough, do you have any sense of how Samsung's inventories may have changed from Q2 to Q3, if at all?

That we really have no visibility into, to be perfectly honest.

Any progress report on blue?

We have nothing yet to announce. I will tell you that the team is working extremely hard on blue. There making some very nice progress. We have some announcements to make, we certainly will.

One final question from me. It looks like LG Display and AUO are becoming recommitted to a certain degree to OLED now. Do you think they will initially follow Samsung's past and focus on hand held devices, or do you think they will, from the first focus more on medium and large area displays?

LG is talking about having a 15-inch TV this year. So, at least from a public announcement, it looks like they are moving toward the TV market. It is not yet clear from the public announcements what destruction AU Optronics is moving.

And just to be clear, LG will be using your materials for the red?

Yes. And there are a number of customers that are qualifying our green material.

Great. Thank you.

And your next question comes from the line of Andrew Abrams from Avian Securities.

Hi, Sid. I was wondering if you could work through a little of this whole Samsung process improvement. I know that you guys are not there watching it, so it is hard to get real perspective, but does this look like this will be a trend going forward, or is there a finite point they reach where you start to get very, very small improvement in the chemical usage? Is this something you guys can shed a little light on?

In the past, the Samsung line was used for a number of different purposes. And as a -- they were scaling up the manufacturing process, the line would be turned on and off and they would do development work in the same line and a number of different things. When you start and stop the line, because these materials are loaded into sources, you end up wasting a lot of material in the starting and stopping process. During this year, they have focused on keeping the line running as much as possible, making product, and also looking at efficiencies in their source design and utilization to use as little material or anything in a device to try to maximize the profit. Once you get to a certain point, there is very little room from improvement unless you somehow redesign it, but we believe that right now the manufacturing line is running most of the time and we think we are at a stable rate of material utilization in that line today.

Got it. So, as that line increases, your utilization rate should -- or their utilization rate should move along or the chemical sales should move along with that production line.

That is what we believe, Andy.

Got it. Thank you.

(Operator Instructions). And the next question comes from Jim Ricchiuti of Needham & Company.

I was wondering, in the bullish forecast for OLEDs, if you can comment on the direction Kyocera has taken here pulling back from the market. Admittedly this they have been quiet, but I was wondering if you can provide perspective on that?

They have been quiet and we have not seen much activity. It appears today if you look at Korea and Taiwan, that is the area that is becoming -- particularly Korea, the area that OLED technology seems to really be getting traction. In Japan, I think the economic downturn that occurred, impacted a lot of what they are doing, and it has really hurt a lot of the companies there to where some extent Korea was insulated from it and the conversion rate of the one still made the products fairly cheap, so they have been doing pretty well through this mess. They have had some issues, obviously. But it I peers to us, the large guys, LG, Samsung, AUO, are really now starting to focus on new technology and trying to be the leaders in it. We are hearing positive and bullish reports that you are reading for OLEDs by those guys specifically and a few others.

Sid, quit question on the operating expense, I was a little surprise to see the R&D come down in Q3 and your G&A also came down a little bit, just wondering how would we should think about those two line items going forward?

There were some non-cash things that go up and down and things based upon stock price for accrual and things like that. I expect it to be relatively constant at this point. In 2008 we hired a number of folks and staffed it up. At this point going forward you can look at these number, and I think, assume that will be fairly steady.

And the final question, looking at Q4, can you give us a sense at what your contract research revenue might look like from the US Government. Make you can comment if you are sees more activity come from the US Government relative to lighting, or display, just to give us some feel as to how that is playing out?

I would expect this -- as we said in the past, we do have a number of additional contracts compared to last year. The Summer specifically, whether it is going to -- I don't believe it will grow, but it will be in the ballpark. There have been a number of program that is have been either extended or we have been granted additional dollars for them. There are a number of programs we have bid on that we will probably find out specifically in the lighting area over the next three to six months, a pretty long process that it goes through, but the area of OLED for lighting is a hot bed at the DOE for solid state lighting and moving ahead with this technology and trying to focus on different proposals in specific areas to continue to development. So, we see that as an area that over the next few years is going to get more and more traction.

Is there anything you have said you pursued in terms of Stimulus funding related to the OLED lighting applications?

It is interesting. The Stimulus funding dollars, some of it is flows into the DOE, and there have been a number of requests for proposals. Some of the other Stimulus dollars were shovel ready. Folks had stuff ready to go. Everything ready to go. Building plans or whatever it is. Construction plans and permits and everything. All they needed was money. So those are the problems, because they were really looking to create jobs quickly, are the ones that got a lot of the Stimulus money. There is a lot of stimulus money flowing into the DOE and we have responded to proposals of them but it appear it is granting of those is a lot slower process than some of the other things.

So if some of those come to fruition, it looking like next year?

Yes.

And the next question comes from Jonathan Steel from Davenport.

Can you talk about the latest monthly unit shipment rate is from Samsung or what you have heard from press accounts?

The published reports we have seen is approximately 2 million displays a month. We read those the same way we get them from display search and other places. They are the latest numbers we have heard.

And with respect to LG, they are currently a development customer, and do you still expect them to convert to being a commercial customer some time next year?

Yes. We expect them to use our technology and to use our materials in their commercial products.

And your current agreement with them is up at the end of this year, right?

Yes. And it was extended, and as with all customers, we continually work with them and fully expect to continue to work with them.

Okay. And then, can you talk a little maybe about what you heard as far as the ASP for an AMOLED display for Samsung SMD relative to OLED display?

It is difficult to get specifics because it is based on depending on size. I can tell you the latest display search estimates for the first six month of this year AMOLED displays averaged $17 and the LCD displays were anywhere, depending on the quality to have display, that I can recall, was in $12 to $13 range for a comparable display, but this is all out of display search.

As far as the cash burn, can you talk about how we should think about that number in 2010 relative to 2009?

It -- obviously, we would like to enter into a number of additional agreements we get up front fees and continue to sell the materials as the top line grow it is cash utilization will go down. When you look at 2008 versus 2009 , we did receive a number of up front fees such as the Kyocera one and others. It is difficult to predict, but I don't think cash is an issue for us. We have $66 million worth of cash in the bank. I would expect as revenues grow, the cash in the quarter, even if you look at third quarter and fourth quarter, they should continue to go down versus where it was. But it is all obviously dependant upon revenue.

If LG were to convert with a commercial customer in 2010, would there be a fee associated with it?

Our standard licensing agreements are up front and royalties, so if that happens, I think we would have it.

Okay. Thanks a lot.

Thanks, Jonathan.

And there are no further questions at this time.

Again, we would like to thank you, all, very much, for participating. As a lot of you do, we are available, please feel to give me or Steve a call and with that, again, thank you for participating and you all have a good night.

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