Universal Display Corp (OLED) 2010 Q1 法說會逐字稿

Good day, and welcome to the Universal Display Corporation first-quarter 2010 financial results conference call. As a reminder, today's call is being recorded. At this time I would like to turn the call over to Mr. Paul Johnson, on behalf of Universal Display Corporation. Please go ahead sir.

Thank you and good afternoon everybody. 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 expressed written consent of Universal Display is strictly prohibited.

Further, as this call is being webcast live and will be made available for a period of time on Universal Display's website, this call contains time sensitive information that is accurate only as of the date of the live webcast of this call, May 10, 2010.

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 out of the way, I'd like to turn the call over to Steve Abramson, President and CEO of Universal Display. Please go ahead.

Thank you Paul, and welcome to everyone listening on today's call and webcast. I'll give you some short insights into our first-quarter financial results, ahead of Sid's more detailed review. Then I will discuss some highlights from the first three months of 2010, as well as some exciting prototypes and design concepts in OLED lighting being exhibited by some of our partners that use our UniversalPHOLED technology. As always, we'll be happy to take your questions following Sid's remarks.

First, our revenues for the first quarter of 2010 rose to $4.2 million, compared to $2.8 million for the same quarter of 2009. We're pleased with the increase overall and that both commercial revenue and developmental revenue were higher.

The first quarter of 2010 saw a continuation of the trends in OLED displays and lighting that emerged in 2009. On the display side, manufacturers like LG Display and Samsung SMD have continued to bolster AMOLED display production and commit additional capital to OLED manufacturing growth.

This is exemplified in recent news from LG Display that the company committed $226 million more towards its OLED production capacity. According to LG Display's CEO, Kwon Young Soo, they've essentially tripled their production of AMOLED displays, from 4,000 substrates per month to 12,000 by the end of 2011.

Samsung SMD also appears to be adding production capacity for OLED displays. Just last month they announced a commitment to the investment needed for a new gen 5.5 AMOLED plant.

Makers of cell phones, smart phones and other personal electronic devices continue to utilize attractive displays as their focal point. Their power consumption, thinness and visual quality of an AMOLED screen makes them a natural choice for these highly visual products.

Samsung SMD has highlighted its super AMOLED displays as the next innovation in AMOLEDs. The super AMOLED is an active-matrix OLED display with an integrated touch function. This is a case of a manufacturer adding innovation to OLED technology, utilizing its energy efficiency and visual quality along with innovations like a touch sensor 1,000th of a millimeter thick over the display. According to Samsung SMD, this thinness allows the AMOLED screen to provide better images and have great visibility, even in direct sunlight. Production of the first super AMOLED displays was to have begun in March.

While innovation and growth drives the OLED display industry, we are seeing the same kind of movement on the OLED lighting front. Although OLED lighting is currently behind OLED displays on the commercialization timeline, the work that Universal Display is doing through our own internal R&D and our contracts with the DOE is helping to shorten that timeline.

Today we launched a new portion of our corporate website under the OLED marketplace section of www.UniversalDisplay.com to showcase some of the company's prototypes and relationships in OLED white lighting development that use a UniversalPHOLED technology and materials. We thought it would be interesting that you see the work being done to commercialize OLED lighting today and make it a mainstream product tomorrow.

For example, LG Chem of Korea has announced that they plan to commercialize white OLEDs for lighting applications. On October 2009 they exhibited a variety of white OLED product concepts at FPD Green Devices '09 in Yokohama, Japan using our UniversalPHOLED technology and materials.

Our website shows a set of white OLED prototypes LG Chem developed that illustrates the beautiful, bright and uniform light emission from an OLED.

Another company creating innovation with our UniversalPHOLED materials and technology is NEC Lighting of Japan. They've developed a variety of beautiful lighting concepts based on white OLEDs, recently shown at ENEX 2010 in Tokyo, Japan. These prototypes illustrate how the very thin form factor of white OLEDs creates a variety of new lighting design opportunities.

For Panasonic Electric Works of Japan, we have been providing red and green phosphorescent OLED technology materials for their NEDO government program in Japan. PEW is a strong leader in OLED lighting innovations, and through their efforts and others, white OLEDs have the opportunity to play an important role in a global, green lighting solution.

And as we have previously announced, we have executed license agreements with Konica Minolta and Showa Denko for UniversalPHOLED technology for white lighting applications.

Demand for energy efficient technology is increasing. Our UniversalPHOLED technology and materials, by offering a significant improvement in the amount of energy used to power an OLED device, holds promise for new and better lighting solutions.

The energy efficiency of our technology and materials, together with how they are being utilized, developed and deployed about our licensees and partners in innovative displays and lighting prototypes, led us to being added to the NASDAQ Clean Edge Green Energy Index during the first quarter of this year.

The early months of 2010 have provided some cautious economic optimism. We continue to see growth in AMOLED display production by our partners, increased consumer adoption of AMOLED products, and innovation and advancements that further entrench us on the display side and create new markets on the lighting side.

As we approach this year's SID conference at the end of the month in Seattle, Washington, we look forward to sharing some new advances and insight into our technology development efforts. If you plan to attend the conference, please visit us at our booth, number 1213, on the show floor.

With that I'll turn the call over to Sid.

Thank you Steve, and again thank you everyone for joining us on the call today. I will be reviewing the financial results for the first quarter of 2010, and I will also share some insights from the quarter. We will be happy to take your questions following my formal comments.

Revenues for the first quarter totaled approximately $4.2 million, compared to $2.8 million for the first quarter of 2009.

Total commercial revenue for the first quarter was approximately $1.8 million, compared to $1.4 million for the quarter of 2009.

The improvement in commercial revenue year-over-year was partly due to an increase of $288,000 in royalty revenue, which was mainly -- represents royalties received under our patent license agreement with Samsung SMD. Also during the quarter there was an increase of $107,000 in license revenue based on the license agreement we entered into with Showa Denko in December of 2009. An increase of $42,000 in commercial chemical revenue had an additional positive impact on commercial revenue during the quarter.

Developmental revenue totaled approximately $2.4 million for this first quarter, compared to $1.5 million for the same quarter of 2009.

The increase in development revenue was attributable in large part to an increase of $746,000 in development chemical revenue based mainly on increased purchase of development chemicals by a customer. In addition there was an increase of $236,000 in contract research revenue, principally due to the timing of work performed and costs incurred in connection with existing government contracts, as well as an overall increase in the value of our government contracts.

Total operating expenses for the first quarter decreased to approximately $8.5 million, compared to $8.8 million for the same quarter of 2009. Once again, R&D comprised the largest portion of our expenses, at approximately $4.5 million for the quarter, compared to $5.2 million for the same quarter of 2009. The decrease in R&D expenses was mainly due to a decrease of $942,000 in costs incurred under our agreement with PPG Industries. We are pleased with the overall reduction, though we expect operating costs to remain in the $9 million range on a quarterly basis for the next several quarters.

The operating loss for the quarter totaled $4.2 million, versus an operating loss of nearly $6 million for the first quarter of 2009. The decrease in our operating loss for the quarter was mainly due to an increase in revenue of $1.4 million and a decrease in operating expenses of $356,000. We are pleased with the improvement in the operating loss as we continue to see growth in revenue and to manage our costs on a quarter to quarter basis.

Our net loss for the first quarter totaled approximately $3 million or $0.08 per diluted share, compared to a net loss of approximately $5.6 million or $0.15 per diluted share for the same quarter of 2009. The improvement in our net loss is primarily attributable to a gain on stock warrant liability of $540,000 and an increase in an income tax benefit of $464,000, compared to the same quarter of the prior year.

Cash used in operating activities totaled approximately $443,000 for the first quarter, compared to approximately $4.5 million for the same period of 2009. The primarily reason for this decreased use of cash was a decrease in the net loss of $2,064,000, which includes the impact of non-cash items, a $925,000 increase in cash payments for license rights granted and advanced payments received under a government contract, and the timing of payment of accounts payable and accrued expenses.

Our balance sheet remains strong, with cash, cash equivalents and short-term investments of approximately $63 million as of March 31, 2010, compared to approximately $63.9 million at the end of 2009.

Our working capital at the end of March 31, 2010 was $53.5 million, compared to $53.7 million at the end of 2009. This -- we believe that this reflects our prudent use of cash during the quarter.

With that I will now open the lines up for questions. Operator, could you please compile the list for questions?

(Operator Instructions). Jim Ricchiuti, Needham & Co.

A question regarding the Samsung agreement. It does expire I guess sometime next month, and I'm just trying to get a sense -- as we -- if the pace at which the negotiations are taking place, is there an urgency here? Or is this basically a customer that, because you've been working with them for so long, this will basically just run on through until it's -- a new agreement is -- plays out sometime this summer? Or can you give us some sense as to how we should think about this agreement?

Well actually, as you've known, because you've known us for a long time, we continue to work with our customers and our partners, and the agreements get done as they get done. Sometimes they get done quickly, sometimes it takes some time. But the object is to build this industry, create win/win situations with everybody.

And in your R&D discussion, it sounds like you guys are putting a little bit more R&D for the OLED lighting space. Can you give us any sense as to what portion, what percent of your R&D is going in that area right now?

It (multiple speakers)

Or is it still fairly small?

It is still fairly small. We don't specifically look at these. We do -- the government programs that we have with the DOE is where we focus a lot of our efforts. And there are a num -- there's a lot of work that's done on the materials, and material relates not only to lighting, but it also relates to displays. But we do think that OLED lighting is probably the next area that will start to get commercialized, and it is an area that we think is important, as we have over the past few years, in addition to flexible displays.

So it is -- I don't think it's anything that we say is a major portion of our expenses, but it is something that gets our attention.

Okay. Last question, and then I'll jump back in the queue. Just in looking at the 10-Q, it looks like there are a couple of other items that have cropped up in the legal proceedings discussion. I'm just wondering how we should think about possibly higher legal expense over the next couple of quarters? Or is this basically -- are we starting -- are we already seeing this in your quarterly expenses?

These are oppositions that have been filed against some of our patents recently, and we'll probably be continuing at about the same level of legal expense that we have been continuing at.

For the next few quarters I mean. These are things that just get filed and they take time.

Sure. Thanks very much.

(Operator Instructions). Jed Dorsheimer, Canaccord.

Look forward to seeing you up at SID later this month.

The first question I have for you is, the green -- it looks as if green is a lot more important for larger area displays. I'm just wondering if we should look at the timing of licensing green as sort of a proxy for interest on large area OLEDs, or if you would disagree with that.

I think green is important for small area and large area OLEDs as well because of the power efficiencies and the power savings. And I've said it before, we are continuing to work with our customers to get green into their products. But I don't really think it would just be a proxy for larger displays, although it's valuable for that, as well as small displays.

All right. So then I guess why hasn't it been implemented in the small area displays at this point?

It just takes time to go through the -- to go through all of the introductory steps.

Do you think that the super OLED is a catalyst for -- as you're obviously using touch, maybe requiring more power? Is that -- so does that become a catalyst for using green? Because it seems as if for the small area, using red and florescent hits the power acquirements.

The more power efficiency you can have, the more products you can sell, the more products you can make -- is really the -- almost a trend mantra at this point. So we are working hard to get the green into the various products of our customers.

And then just moving over to the lighting, the fundamental patent expires I think 2017. Please correct me if I'm wrong on that. I'm just wondering, is that -- as we look at the lighting opportunity, is there a risk if it takes longer than -- or I assume you've tied other patents to that. How should we look at the patent portfolio as it changes from sort of a fundamental material science to more application related beyond the expiration?

We've created a matrix of patents around our key technologies, particularly the phosphorescent technology. And while the initial patent expires in 2017, the end of 2017 in the US, and the end of 2018 in a number of other countries, we have a number of other patents that are also fundamental in that area that stretch out over a number of years.

All right. Then last question, maybe just asking for sort of your thoughts on predictions at SID, anything new that you think will be shown there that might be interesting? Or do you think the super OLED is probably going to be one of the newer highlights of the show?

You know what? I am as excited as you are to get to the show and see what people have.

All right. Thanks.

(Operator Instructions). Yair Reiner, Oppenheimer.

This is actually Mike [Sutton] for Yair. I was wondering if -- I guess at first a housekeeping question, was there $191,000 of commercialization assistance in the quarter? Just want to confirm that.

I'm sorry. Of commercialization assistance fees?

Yes.

Probably. Let me see. Technology development revenue and commercialization assistance fees -- that is correct. A hundred (multiple speakers)

Okay. Do you have any sense of how -- I remember you thought it might end before December quarter, but it's still going on. Any sense of how long you think that might keep going for?

We are hoping that it gets extended. We are working with the customer to try to extend it, so we are hoping that will continue through the year.

Oh. It is on a quarter-to-quarter basis right now?

No, it is not, but we are working with a customer to extend it, and we don't really have a time frame at this time.

In regards to LG Display's ramp-up, so you -- do you have any sense of their yield and/or their material efficiency as compared to Samsung's?

It's very early. They are working through a lot of the startup issues, and at this -- when you're working with startup issues, you're trying to optimize what you're doing, so I don't think you'll know any yield or anything like that for at least a number of quarters that they are producing. They are trying I believe to start out very, very efficiently, and they have been working on OLEDs for quite some time, but until they really start to churn out the displays and they get a feel for what their yields are going to be, they will announce it. We probably wouldn't announce it anyway, but it is early in the ramp-up phase. So we haven't heard anything, and you would have seen it in the press.

Right. In regards to the Samsung's gen 5.5, I mean, do you think we could see some 10-inch or larger screens coming out of that? Or is it still really way too difficult?

Gen 5.5 can make obviously much larger screens. And it really depends on what their plans are. We've -- you've -- we've read some of the public documents that we have read also. But you can see larger screens out of that. That's a pretty large substrate.

Right. Of course. And my last question -- one of your customers clearly contributes a significant portion of your revenue. Do you have the number percentage in which they -- of your revenue they contributed this quarter?

I'm sorry, our one customer?

Yes.

Are you talking about the developmental customer?

Oh no, just a percent of (multiple speakers)

Oh, okay. Samsung is our largest customer. And we don't break out specifically what that percentage is, but they are a significant piece, but developmental chemicals was $2.4 million. That's not Samsung; there may be a little bit in there. So your commercial revenue of $1.8 million, that really would be a lot of Samsung.

Got you. Thanks very much.

Jonathon Skeels, Davenport.

Have the phone manufacturers been hoping for green material to be incorporated into the Samsung manufacturing process at some point soon? Have you heard about demand maybe from their side in this?

I think you have to talk to them, but as any handset manufacturer who wants to put more and more functions on their devices, they're going to want to reduce the power so that their -- they can continue to add functionality and charge more money. So I am pretty sure that they're getting pressure from the handset guys.

I guess it -- would it be safe to assume that maybe the incremental costs associated with green and the fact that you have the upcoming license renegotiation with Samsung may be a reason why we just haven't seen that adopted yet?

Your assumption is as good as any of our assumptions. I can't comment.

All right. Thanks a lot.

That will conclude our question and answer session. I'd now like to turn the call back over to management for any additional or closing remarks.

We'd like to thank you all very much for participating on the call. And hopefully we will see a number of you at the SID conference, and if not, as you're well aware, you're welcome to contact us at any time. So thank you and goodnight.

Thank you very much.

That does conclude today's call. We appreciate everyone's participation.