Universal Display Corp (OLED) 2011 Q2 法說會逐字稿

Good day and welcome to the Universal Display Corporation second-quarter 2011 earnings call. Today's conference is being recorded.

At this time I'd like to turn the conference over to Joe Hassett. Please go ahead.

Thank you, Anthony, and good afternoon, everyone. With us today are Steve Abramson, President and Chief Executive Officer, and Sid Rosenblatt, Executive Vice President and 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 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, August 8, 2011.

All statements in this conference 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.

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

Thank you Joe, and welcome to everyone listening on today's call and webcast. It's good to be able to talk about a growing business in this current economic environment.

This afternoon, I will start with a quick overview of our second-quarter financial results, discuss highlights from the quarter and update everyone on our plans to expand usage of our proprietary OLED technologies and materials in both the display and lighting market. Steve will then follow with more detail on our financials before we open the call to questions.

Second-quarter revenues were an all-time record $11.3 million, up 33% from the second quarter a year ago. The increase was driven by both expanded commercial and strong developmental sales. In addition, we reduced the operating loss and we're operating cash flow positive for the quarter. Our balance sheet remains solid.

We also reported a significant improvement in net income and earnings per share, primarily attributable to the accounting treatment of stock warrant liability. Since we discounted the stock warranty liability when inflated the loss, it's only fair due to say when it swings in the other direction. So, we continue to focus on our operating income. Steve will go through the details shortly.

Nevertheless, absent the influence of the stock warrant liability, these results clearly illustrate that we achieved strong year-over-year revenue growth, a further progress toward operating profitability and sustained momentum throughout our business, a result of the product of our strong technology portfolio and proprietary materials in a vibrant and fast-growing market.

Leading consumer electronics and lighting manufacturers such as Samsung and LG in Korea, AUO in Taiwan, and Konica Minolta in Japan, are spearheading an evolution in the display and lighting market. Universal Display is helping these and many other companies create a whole new generation of exciting product opportunities.

Our commercial revenues were up 170% over the same quarter of the prior year, reflecting increased demand for our materials, and higher license revenues associated with sales growth for a wide variety of small form factor display devices, particularly smartphones. These devices are finally making their way into the market, which, to this point, had been limited by industry capacity.

On past conference calls, we have noted the wide appeal of OLED and the various market sizes and growth rates cellular industry analysts such as iSuppli, DisplaySearch and others. If anything, we would say their expectations for the industry continue to grow. DisplaySearch projects AMOLED revenues to exceed $4 billion this year, up from $1.2 billion in 2010, and they recently increased their AMOLED market forecast for future years yet again, with the market now expected to exceed $15 billion in 2014.

Let me mention just a few industry highlights to put some color around current industry conditions. It was reported by at least one analyst at Samsung on their quarterly earnings call last month, emphasized that the OLED market remains a key area of focus and they will continue to ramp investment in the segment. Samsung also recently announced that the Galaxy S 2 smartphone with its high-resolution SUPER AMOLED display panel sold 5 million units in just 85 days, making it the fastest-selling phone in the company's history. It was also reported that Samsung opened it's Gen 5.5 AMOLED line, an industry first, 2 months ahead of schedule. AU Optronics had originally planned to start mass production on a new Gen 3.5 AMOLED line in the second quarter of 2011, but it has been reported that there are some delays which will likely move the opening to the third or fourth quarter of this year.

According to reports from iNews24, LG Display is starting to provide AMOLED displays to Nokia, and has started producing AMOLEDs in a Gen 4.5 plant. The report says that at present, LG Display is only supplying sample quantities and overall production is expected to ramp up in the coming months.

Since we know the question will come up, let me say now that we are not announcing a new long-term agreement with Samsung today. We are making progress with the negotiations, and we continue to work with them under 3-month extension of our current agreement as we have for the past 14 months.

Developmental revenues, excluding payments received from a customer several years ago that were recognized during the second quarter of last year, were also up for the quarter. These revenues are a direct function of the growing interest in our materials and technology for product application throughout the display and lighting market. According to at least one analyst, Samsung's total for OLED tablets was more favorable on their quarterly conference call last month. While they are not ready to make a product announcement at this time, it appears they are proactively looking at OLED displays for tablets.

As I mentioned, LG has begun to produce mobile OLED products, and published reports have indicated that, while they're not going to be investing more in OLEDs for mobile applications, they are going to concentrate on OLED TVs. Our customers see the value of OLED TVs. To support this effort, our team has developed a highly efficient 4-sub-pixel architecture that splits the blue pixel into separate light blue and dark blue pixels. This approach takes advantage of the successes we have had over the past year increasing light blue lifetime, and also recognizes that deep blue is used infrequently in a full color display.

In addition, another possible avenue for large screen TV's is printing, either by solution-based methods, the more traditional approach, or by dry printing methods. We have been pursuing both approaches at UDC. Our solution process technology, which we call P2OLED, has advanced considerably over the past couple of years. Efficiency has doubled over the last 2 years, and lifetimes that are approximately 125,000 hours for red, 175,000 hours for green and 8,000 hours for light blue, with a 50% of an initial luminance of 1000 nits.

We are also making excellent progress with a dry printing technology that we invented, which we call organic vapor jet printing, or OVJP. If successful, this technology would enable OLEDs to be printed using our current high-performance vacuum evaporation materials.

Also within our development efforts, we continue to advance our flexible display technology. We previously reported on our work with LG Display and L3 under the Department of Defense-funded programs, to developed a flexible display on a metal foil, prototypes of which were delivered in a wrist-mounted communications device designed for our soldiers in the field.

In addition we recently demonstrated a full-color flexible AMOLED display prototype on plastic with our partners at the Flexible Display Center at Arizona State University. Also developed and successfully demonstrated are novel, single layer encapsulation technology for plastic substrate systems and thin-film devices, including both flexible and rigid OLEDs. This approach is an elegant solution to improve the manufacturability and performance of OLEDs, and a range of other thin-film devices. It offers a unique growth path in markets that are strategically adjacent to our core display and lighting targets.

There have been equally exciting advances in our white OLED lighting technology. As you may have heard at our annual meeting, we donated some of our proprietary materials to Toshiba, where we used some portable OLED lights that were used by refugees from the terrible earthquake and tsunami in Japan. We have also license our white lighting technology to Konica Minolta which is currently having it's product manufactured by Philips using our proprietary materials.

We continue to improve the efficiency, duration and luminance of our white lighting technology materials as we believe that this is an area that offers a tremendous market opportunity. We are working with more than 10 potential lighting manufactures at this time.

Recently we also announced a warm white, all Phosphorescent OLED lighting panel with a power efficacy of 58 lumens per watt, and a record-breaking 30,000 hours of operating lifetime to 70 percent of initial luminance. Based in part on our new light blue universal FOLED material system, this represents a 3-times improvement in operating lifetime over results presented last year.

I should also mention our expanded presence in Asia where we have established engineering support offices in Korea and Japan, and R&D facility in Hong Kong. We believe a more visible presence and closer proximity to Asia will strengthen the relationships, improve efficiencies and accelerate the pace of business growth.

Our industry still faces some challenges, which is reducing manufacturing costs and increasing material lifetime. To address these challenges, we continue to invest heavily in research and development. We are constantly looking to add new patents to our portfolio and to improve and expand our innovative technologies. We are making progress across a broad array of challenges that we think are key to accelerating more widespread adoption of OLEDs in the future. For example, we are making great progress with our phosphorescing green materials, where we are aggressively pushing forward with our efforts to commercialization in the near term. Our sales of green-emitter and host materials have increased significantly, amounting to approximately half our development revenues for the second quarter.

Let me talk a little about the oppositions and invalidation proceedings against our issued patents in certain jurisdictions. The first opposition was initiated a few years ago in Europe against our broad basic flexible OLED patent. This is a fundamental patent for an OLED on a non-glass substrate. We won that opposition, and the other side appealed. Recently, an invalidation proceeding was filed in Korea against one of our issued patents relating to our OVJP technology. The other oppositions, invalidation proceeding and patent interference actions we're involved in relate to our phosphorescent patents. They have been filed mainly by competitors of ours who have realized that the strength of our patent portfolio creates significant barriers to entry and reduces their revenue potential.

Our team was the first to invent, develop and commercialize phosphorescent technology. Our patent portfolio is strong, and we will do everything within our power to safeguard our intellectual property. We are aggressively defending our patents in these proceedings as shown by the more than doubling of our patent-related expenses over the last 6-months to almost $2 million last quarter. As we have said, challenges to our intellectual property will be part of our business as the industry grows, and we are prepared to meet those challenges.

Let me briefly close with an update on our strategy and potential uses of the proceeds from our recent public offering. When looking to the future of OLEDs, we're always seeking ways to accelerate and secure growth of the industry and our Company. We continue to look at IP covering the technology and materials in an OLED stack to add to our already strong portfolio. We are also looking at areas where we may be able to acquire IP covering OLED lighting, or flexible OLED technologies, or attractive adjacent areas complementary to and synergistic with our existing portfolio.

On behalf of all of us at Universal Display, I would like to thank our supporters for dedication to the Company over the past 15 years. We believe that the events of this past quarter have demonstrated the value of that commitment, and shown the incredible potential of OLEDs. We look forward to our future growth prospects, and to sharing that growth with you as it materializes.

With that, I'll turn the call over to Sid who will take you through the financial results in more detail. 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 second quarter, as well as sharing some insights from the quarter, after which we will open the call up to take your questions.

Revenues for the second quarter totaled $11.3 million, a 33% increase compared to revenues of $8.4 million for the second quarter of 2010. Revenues for this past quarter are the best quarterly revenues in the Company's history, and following the expected effect of seasonality on first-quarter revenues, we also resumed our sequential revenue growth. Keep in mind that, in comparing revenues year-over-year, from an accounting perspective, we recognize $2.1 million in non refundable payments as revenue in the second quarter of last year.

Commercial revenue was $5.3 million for the second quarter, an increase of 170% compared to commercial revenues of $2 million for the second quarter of 2010. The increase is primarily due to increased commercial chemical and royalty revenues, mainly based on chemicals shipped and royalties received under our patent licenses with Samsung SMD.

As we have noted in the past, chemical revenues are recognize when our materials are purchased by OLED manufacturers who tend to buy in anticipation of the current or near-term production requirements. On the other hand, royalty revenue was recognized as products using our materials and technology are sold by manufacturers. We received royalty reports a certain period after the quarter ends, therefore royalty revenue lags material purchases by approximately 1 quarter.

Developmental revenue was $5.9 million for the second quarter, a 9% decrease compared to development revenue of $6.5 million for the second quarter of 2010. The decrease was primarily due to a $2.1million in non-refundable payments included in revenue for the second quarter of 2010.

Developmental chemical revenue was up $1.3 million for the quarter, and up by $3 million for the 6-months ended June 30 compared to the same period last year. As we said in the past, we cannot accurately predict the timing of development chemical purchases due to the early stage of the OLED product research and development. But, as Steve has pointed out earlier, more companies are approaching us seeking access to our materials and license rights, compared to this time a year ago.

Total operating expenses for the second quarter were $12.3 million, up 19% from $10.4 million for the second quarter of 2010. Sequentially, operating expenses were essentially in line with expenses for the first quarter. Outside of patent legal expense we would not expect operating expenses to vary significantly from these figures over the balance of the year.

Research and development expenses for the first quarter were $5.6 million, up marginally compared to $5.5 million in the same period of 2010. Patent costs rose to $1.9 million for the quarter, compared to $843,000 for the same quarter in 2010, reflecting our aggressive descent from certain ongoing and new patent challenges, as well as the timing (inaudible) maintenance costs associated with a number of issued patents and patent applications.

Patent costs were $1.6 million for the first quarter, and it is likely that patent costs will be sustained or increase from current quarterly levels on a going-forward basis. Selling, general, and administrative expenses for the quarter were $4.5 million, up from $3.6 million for the same quarter in 2010. The increase is mainly due to increased Board of Director stock compensation, employee costs, primarily executive stock compensations, and costs associated with the startup of certain new foreign subsidiaries.

For the quarter, we reported an operating loss of $1.1 million, down from $1.9 million for the same quarter of 2010. the current quarter illustrates a leverage in our model as incremental revenues yield very attractive margins and contributed to improved operating results. I would also note that our operating loss improved by nearly $1.7 million from the first quarter of this year. In contrast to the stock warrant liability charges we have absorbed over the past quarter, the change in fair value of these warrants during the second quarter resulted in a $4.5 million non-cash gain. This compares to a $2.6 million loss that we recorded for the stock warrant liability in the second quarter of last year.

The remaining warrants will expire in 2 weeks unless they are exercised by them. For the quarter, we had income tax expense of $289,000 reflecting the May 2010 expiration of our 5-year exemption from Korean withholdings tax on royalty payments received from Samsung SMD under our patent licenses. Since May 2010 Samsung SMD has been withholding 16.5% in taxes from our royalty payments under our agreement.

After taking the stock warranty liability expense into account, we reported a net income of $3.2 million for the second quarter, or $0.07 per basic share, compared to a net loss of $4.4 million or $0.12 per basic and diluted share for the same quarter of 2010.

In earnings per share calculation for the second quarter of 2011, diluted EPS does not include the stock warrant liability gained in the numerator as it assumes the warrants were exercised at the beginning of the period. In contrast, there were no similar assumptions in the basic EPS calculation.

Reducing GAAP net income by $4.4 million stock warranty liability gain, which produced roughly a $1.2 million loss for the quarter, which equates to $0.03 per diluted share. For the quarter, cash provided by operating activities was $223,000, compared to cash used of $2.3 million for the same period in 2010. This is the third consecutive quarter in which we generated a positive cash from operating activity. The increase this quarter was mainly due to an improvement in the net loss, excluding non-cash items of approximately $2.4 million, on a year-over-year basis.

As Steve briefly mentioned, our financial position is currently the best in the Company's history. Our balance sheet remains strong with cash, cash equivalents and short-term investments of approximately $326 million as of June 30, much of which represents the net proceeds of our $250 million from our equity offering earlier this year.

With that, I would like the operator to compile the Q&A list, and Steve and I will be happy to take your questions.

(Operator Instructions) Darice Liu with Brigantine Advisors

Good afternoon guys. First question deals with your green. Can you provide an update on the status of your green color? Is it in commercial production yet?

It is not yet. No company has yet announced that they are using green in a commercial product, although about half of our development revenues this quarter were from the sale of green emitters and [host].

If I could deconstruct your answer for 1 minute. No one's announced it, but half of your developmental revenue is actually from the green emitter.

In the second quarter, that's correct.

In the second quarter. So, even if someone hasn't announced it and because you're still in negotiations with your top customer, any use of green -- will that remain within the developmental line?

No, I think you're reading to much into it. We would not be the ones to announce it in a product; that would be the customer.

Can you talk about how many customers are still evaluating your green color?

Certainly more than 10.

Then, do you have any timeline in terms of when we will see commercial product with green?

No we have to wait and see how the customer's release product.

Are most of these evaluations at the last inning or are we still in early innings with some of these potential customers?

They are all over the ballpark.

Okay. Moving along, in terms of your revenues, I was wondering about the mechanics of royalty payment will change if the materials they use of yours are only going to be used for backlighting display? The reason I ask is because an hour or so ago, the Nikkei reported that LG Display will be investing about JPY220 billion or $2.83 billion for an 8.5 G OLED [staab], and from what I've heard, the initial OLED TVs will be more white OLED on LCD.

I would say first of all that, what you heard on the Nikkei is certainly good news for the OLED industry but passed that we really couldn't speak to what any specific company would be doing.

I guess just in general -- (multiple speakers)

The arrangements we have are, Darice, we negotiate with each individual company trying to get an appropriate value for the use of our technology.

So, it doesn't really matter what the end product is or where exactly your materials are placed in?

All those things are things we would take into account when we discuss the relationships with the customers.

Okay. I guess the last question is, can you provide an update on what your game plan is for your encapsulation technology? Have you decided what you are going to do with that? Are you going to outsource that, and if so have you selected an equipment OEM?

We are actually currently evaluating our various options, so we don't have a game plan we can present yet. But we are very excited about that technology because it addresses a significant market need both for glass-based OLEDs and flexible OLEDs as well as a number of other thin-film devices.

Do you foresee your product actually being in the market in the next 6 to 9 months? Or are we looking further out?

Probably not.

Thank you guys.

Mihn Park with Goldman Sachs.

Thank you for taking my questions. Going back to the color green, can you tell us, what would trigger your recognition of commercial green chemical sales? Is it predicated on a public announcement by an OEM or is your awareness that's going into a commercial product enough for you to recognize it as a commercial sale?

The customer will notify us in their purchase order, because they have a requirement in their contract to notify us whether it's going into a commercial product or whether it's still developmental. So, when we get notification from the customer, that order is in a commercial product which then would be covered by license agreement. If we're talking about Samsung, we would then categorize it as commercial chemical.

I see. Is there any chance that some developmental chemicals that you recognized this quarter will be used for commercial products in future quarters? If they just tell you, hey, we're actually going to use these for commercial products and not for our test lines?

There's nothing -- are you talking about the second quarter?

Right.

The second quarter would all be developmental. It literally occurs when they place the purchase order, how we determine what category it goes into.

Given what appears to be a little bit more higher near-term interest for a large screen OLED, can you talk about how we should think about materials, pricing, and your recognition of revenue as you start putting materials into larger form factor displays?

Our material pricing is based upon volume of grams of material or kilograms of material that you purchase. It does not have to do with the size of the product that is going into it, but we do structure our material sales with breakpoints based upon larger volumes of material purchases.

Lastly, can you just help us understand why R&D was down so much Q-to-Q, and if this is the new normal level we should be looking at going forward?

There's a few things that impacted. I think this level plus a little bit is what we should look at going forward.

Thank you very much.

Jed Dorsheimer with Canaccord

Thanks for taking my question. Just a couple quick ones. I guess the first one just Sid, on the mechanics of -- by the way, nice boost in the commercial royalties in chemicals -- why, though, in terms of the mechanics, did deferred revenue come down a little bit?

Deferred revenue is a number of different pieces; some of it is customers where we have done some work that they get credit, if and when they sign a license agreement, so it stays in there. Some of the deferred revenue is technology development contracts that we have with some customers that we do the work over a period of time and we just amortized that as we do the work. It's fairly stable at this point. We had a number of customers that we've done some work for and then, when they enter a license agreement, they will get credit for some of these payments, so at that time it would be amortized.

Maybe just, Steve or Sid, at a higher level, clearly LG's decision to move to TVs is a nice boon for the OLED industry in general and certainly you guys, but in the near-term here, a lot of people were looking at LG coming in as sort of the potential second source in the mobile market to maybe draw some of the larger handset and tablet type players in the marketplace. So, right now Samsung's been operating at a 100% capacity. They've added a significant amount of capacity in terms of the first phase of the 5.5. Does it concern you at all or do you think it pushes things out in terms of the ramp of the OLED market? Is you don't have the potential for the Apples or some of the other guys that need and require second sources to come into the marketplace until we start to see TVs?

I think that there may be some other people that might step up to the plate to provide additional mobile opportunities because there's other people in Taiwan, for example, that are looking at that space. I think the LG concentration on TVs is real positive for that OLED industry and my recollection of the way they announced it was they weren't going to make any further investments in the mobile space because they were going to concentrate on TVs. Overall, we'd like to see more investment by everybody quicker. I think it's good for OLED industry.

So, as you look at from a milestone perspective, should we be focused on AUO and [Chimei] in terms of providing those second source opportunities? I know you don't want to talk on specific customers, but in general, are those the Taiwanese players that we should be looking at?

Those are the Taiwanese players that we're working with in this market. I can't speak to their specific product plans but those are the Taiwanese players in the market. I will jump back in the queue. Thank you.

John Bright with Avondale Partners.

Good afternoon, Steve, Sid. I'm going to go back to the green question. Either in the response to a question or in your prepared remarks you talked about half the development revenue being associated with green. Has there been any relationship in the past between revenues in the development segment moving into commercial and timeframe between them that might be applicable the green?

We always talk about developmental revenues being the first phase before you move into commercial production, and we've talked about LG in the past moving into commercial. Timeframe though is very difficult for us to calculate. We have said for the past year that we have a number of customers evaluating green material, and it really depends upon their production schedule. So, it's difficult to say how quickly things will move from one category to the other because it really is based upon decisions of the customers.

So, is it fair to say it's a strong indicator of potential commercial revenue coming from green?

Yes, absolutely.

Next question is on the OpEx. I think if I piece together some of the guidance there, Sid. It looks like you are expecting the patent line item to be at or above the remaining of the year -- and stop me or correct me if I'm wrong, yet on the other items you expect those effectively to be flat for the remainder of the year? Is that right?

Fairly flat. There may be some growth but not significant growth. We talked about maybe 5% growth in some of the areas in the beginning of the year, but the patent cost is one that clearly is going to accelerate.

Order of magnitude on what we could expect in acceleration? If its $2 million today are we talking about doubling, are we talking about 15%? What are we talking about?

I hope it's not doubling.

We really have to see. The way a lot of these proceedings operate is, they'll be a big burst of energy and then you don't do anything for a while. So it really depends on the specific timing of this specific proceeding. But generally, we're getting more of these administrative or patent oppositions, and so the amount of patent expenses are going to be higher, but if you look at it year-to-year, that's probably a better indicator.

Lastly, the 10% customers in the quarter?

It would be Samsung, and I think we disclosed, LG.

Thank you.

Hendi Susanto with Gabelli and Company.

Great results. First question; you said 50% of developmental revenues were green [emitting materials]. How about the other half?

There are other materials which would be reds and some other materials, for example blue material, light blues and blues we sampled. So, it can be any other materials that we sell and we sell a lot of materials on developmental customers that are red material that they are not in production yet. So, it's all other materials we have.

Do you disclose what percentage of revenue comes from Samsung and LG Display respectively in the second quarter of 2011?

I don't believe we have the specific number, but I will check.

Then next questions, how do you see your ordering trends in the month of July and the first week of August?

We don't talk about that on these calls. Since we don't really give guidance, we don't discuss the quarter. We're only really going to talk about Q2. I apologize but that's just been our policy.

Last question, do you have updates on the timing and your plan to build a secondary manufacturing facility in US?

I'm sorry? Can you repeat the question?

Do you have updates on the timing of your plan to build a secondary manufacturing facility in the US with PPG?

We talked about on the last call, with PPG. We are working with PPG to put another facility in place and we are still working with them. I don't think we have any specific dates when that will occur, but we are making sure that as we believe the demand goes up, that we can meet all the demands of our customers. We are continuing to work very closely with them on that. I don't have any specific dates.

Thank you.

Jim Ricchiuti with Needham and Company.

Good afternoon. Just a follow-up on the questions on the green phosphorescent material; you talked about the fact that you are working with more than 10 partners in this area. Can you give us a sense, is the revenue concentration development revenue concentration with 2 or 3 of these customers, or is it fairly we'll dispersed?

It's more concentrated than that. It's more concentrated than the first.

And then, Steve, I know you're not going to talk about specific customers and that's fine, but with respect to your conversations with your various partners, your individual licensees, prospective licensees. Are the discussions that you're having with these partners with respect to their timetable, their capacity expansion, consistent with the published accounts or are these reports that we are seeing out there are somewhat optimistic?

I wish I could answer that question. It's a very well phrased question, but I can't. It can only go into published reports. (laughter)

Just to switch gears for a second, just because it's been in the news so much. The question is, is it going to have an impact on your business, on the development revenue side. The government-funded revenue that you see, do you guys see any change there at all? Probably not in the near-term but what's your thinking along those lines?

We don't see anything in the near-term. We don't have a lot of visibility out past -- I know what we have in house for the next 12 to 18 months. These programs that we're part of normally last that long, so it's hard for us to say we see any changes at this time.

We've not had any indication that any of our programs are any type of problem.

Thanks a lot.

Andrew Abrams with Avian Securities.

Couple of questions. First real quick, inventory levels, are we still at a year? Are you still holding as much as you are going to need for the next 12 months?

Yes, we keep a lot of inventory on hand because we want to make sure that our customers know that any time their business ramps up, we're ready to meet their needs. So, we keep plenty of emitters on hand.

Dual blue; have you gotten past the conceptual stage with customers? Are you actually -- are they qualifying that technology? I know it takes a slightly different setup for the customer. Is there anybody who is committed to it at this point, or at least from the developmental side committed to it?

There are a lot of people that are interested in it, more than anybody that's committed to it.

What about other items in the stack? Are you guys actively looking to participate, directly in other parts of the stack? Or is this more we're working more closely with those who provide the other layers to enhance the way our emitters work?

We have been doing a lot more work on the host side recently, as well as working even more closely with some of the other materials companies, both on the host and the transporter side. The answer to your question is both, because we think the materials business, as piece of this industry is a very important piece. So, we want to help grow it as large as we can and we want to get as much of it as we can.

What is the status with [Moser Baer] on the lighting development project?

We are continuing to work with them under the government contract.

Have they actually produced a facility yet or are we still in the developmental stage?

They have the facility in upstate New York, and they're in the process of designing and developing the equipment, and putting it together.

Lastly, can you give us a little guidance on the way we should be looking at the commercial revenue breakdown between materials and royalty? Is there any way you can give us a little bit of guidance there?

It's really difficult, mainly because it's difficult to predict the timing of the material purchases by our customers. You can look at some of the market projections for the second quarter to look at whether it is growing or not growing in the third quarter, but it's really difficult for us to give any guidance on that level.

Lastly, the impact to you if, let's say, Samsung decides to come out with a tablet in fourth quarter or first quarter of next year, the impact that you guys see would be strictly on a per square meter basis material side before we get to the royalty side? The royalty side you'd see later, but are we thinking just along those lines? Is there any way that they could reduce the amount of material on a larger display than what they are using now?

I think that they are always looking to be as efficient as possible, but in theory you are correct. The more square inches square meters produced, the more material they're going to use. I don't think there's anything that says if you go from a 4-inch diagonal to a 10-inch diagonal, you get X-deficiency in the material, but they're constantly working on reducing their material utilization and their deposition process.

From your perspective, and this is probably looking more at LG than anybody else, doing large-sized displays, outside of the mask method, have you guys been working closely with anyone in a specific area for doing the deposition on a larger basis rather than masking and overlapping and things like that?

We basically work with almost everybody in the space and try to make sure that our materials will conform to whatever manufacturing methodology there is.

And you see no limitation using the mask method for larger displays, or at least you haven't so far?

That's always been an issue, how far can you extend fine metal masks? When we first started in this industry they said you couldn't get to Gen 2, and now you're using it in a Gen 5.5 facility. There may not be a limit on how far you can go with the mask method but there are other methods as well that people are working on, and we are working with them as well to ensure materials and technology can fit into those manufacturing plants also.

Rob Stone with Cowen and Company.

Hi guys. Most of my questions have already been asked and answered, just a few housekeeping things. Can you give us a little bit more detailed breakdown within commercial and development on how much were chemicals in each case?

On the development side, it is all chemicals. With development revenue, most of it is. There's very little, while you've got government contracts which were about $1.3 million and technology development revenue was less than $0.5 million. So, that's the difference on developmental side, and on the commercial side we really don't break it down but you can almost back in to the SMD numbers in the fact that we tell you how much taxes were withheld and we tell you the rate.

What were CapEx and depreciation in the (technical difficulty).

Sorry, there's static on the line I can't hear you.

Capital expenditure and depreciation in the quarter?

The CapEx in the quarter was, I have to look at the cash flow statement. I don't think it was significant, though.

Within development or commercial for that matter, can you give us a sense of how much contribution lighting is making at this stage to revenue? Just roughly.

It is still not significant. The bulk of our revenues are related to displays.

We have no further questions at this point. I'd like to turn the conference back over to Steve Abramson for any additional, closing remarks.

I would like to thank everybody for all their support, and as usual, if anybody has any questions please call Sidney or myself. Thank you very much.

This does conclude today's conference call. We thank you all for your participation.