Universal Display Corp (OLED) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Universal Display Corporation's second quarter 2012 earnings conference call. Today's conference is being recorded. At this time for opening remarks, I would like to turn the conference over to Mr. Joe Hassett, Investor Relations. Please go ahead.

Thank you, 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, 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, 2012.

All statements in this 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 belief, expectations, hopes, or intentions regarding the future. It is important to note that these statements are subject to risk and uncertainties that could cause Universal Display's actual results to differ from 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. Now I would like to turn the call over to Steve Abramson, President and CEO of Universal Display. Steve?

Thank you, Joe, and welcome to everyone listening today. We reported record results for the second quarter and the first half of 2012. Our revenues more than doubled over last year, and we earned $0.23 per share in the second quarter. Sid will go through the detail shortly. We also recently concluded two important strategic partnerships that will help position us strongly for future growth. We purchased Fujifilms worldwide OLED patent portfolio of over 1,200 patents and applications for $105 million. This acquisition strengthens our position in both of our core businesses, OLED technology licensing and OLED material sales.

Fujifilm has had a strong research team working in OLEDs for more than a decade. This acquisition will expand, broaden and deepen our patent portfolio. They have strong benefits for both our patent licensing business and material supply business. Since just over 90% of their portfolio is less than 10 years old, most extend beyond the expiration of our fundamental PHOLED patents at the end of this decade, helping sustain and grow our patent licensing business. About 50% of the patents are issued, and about 50% of them are pending. About 50% of their portfolio relates to device architectures, covering many important aspects of OLED devices, such as how they can be built to ensure high efficiency and long lifetimes. These are patents in relation to display and lighting manufacturers.

The other half of their portfolio covers numerous OLED materials. It covers many broad classes of host and transport materials, enabling us to expand our material supply businesses. It also includes many classes of phosphorescent emitters, particularly pertaining to the use of iridium and platinum molecules. The addition of this portfolio will give us additional design freedom, as we develop the next generation of red, green, yellow, and blue materials, systems and technologies. About 25% of their patents were filed in the US, and about 45% of the patents are filed in Japan. So as a collateral benefit of this acquisition, we have bolstered our patent position in Japan, regardless of the final decision in the pending and validation proceedings.

A second key partnership was a $4 million investment in a new three-year joint development agreement with Plextronics -- a company with which we have been working, for eight years. This partnership is focused on accelerating our material technologies for inkjet and other solution-based OLED printing manufacturing systems. Plextronic's works in materials, complementary to our emissive layer technology. They work in hole injection and hole transporting materials. The combination should provide a more complete solution, more quickly to display and lighting manufacturers who are interested in solution-based printing manufacturing processes.

Back to the present, there have been no slowdown in the pace at which our market for our products and technology continues to expand. DisplaySearch recently reported that the global AMOLED market grew a substantial 93% in the second quarter, and now is over 20% of the small and mid-size display market, compared to just 11% a year ago. Their latest projections are for AMOLED market revenues of $5.93 billion in 2012.

Smart phones remain the dominant OLED application. OLEDinfo.com recently reported that 261 million OLED smartphones are expected to be shipped in 2013, up 48%, compared to the 176 million units expected to be produced this year. Samsung continues to dominate the OLED market, and Samsung Galaxy S3 is the number one selling phone in the world. With over 10 million sold to date, Samsung has extended their lead over Apple in the share of the smartphone market. Reports from ET News suggests that Samsung recently achieved a development result of 350 dots per inch with their OLED display using Fine Metal Mask, a higher resolution than the retinal display. If 350 dpi is implemented in commercial production, Samsung will be able to use an existing proven cost-effective technology to manufacture OLED displays with the highest resolution in the industry.

According to a number of recent analyst reports, we will be the supplier of choice for green phosphorescent emitter material at Samsung, and the transition to OLED devices from a florescent to a phosphorescent green. These same reports also indicate that we will be a provider of green host materials for Samsung, which will be used in conjunction with our green emitter material. According to these reports, adoption of our green emitter and host material will be coincident with the rollout of Samsung's new product, into which phosphorescent green has been designed. We cannot predict when, or if this will occur, although we have been building inventory.

On the OLED TV front, both Samsung and LG expect to have their TVs out in time for the winter holiday season according to a USA Today online report. We are working very hard and very closely with both companies on their OLED TVs. We continue to be cautious in our expectation regarding the timing of meaningful OLED television revenue. But consider the comments of DisplayMate founder and CEO, Raymond Soneira, who described LG's OLED TV, quote, as the most impressive TV he has the ever seen, end quote, according to reports at OLEDinfo.com. That is why we are confident, that over the long-term, OLED will represent the next big thing in television.

In Taiwan, AUO and Chimei Innolux, two of our industry partners are continuing to accelerate their efforts to manufacture commercial OLED displays. As most of you know, we have been working with both companies for quite some time, and are strongly supporting their commercialization efforts. We also believe there are great OLED growth opportunities in flexible displays. According to OLEDinfo.com, the OLED Association is reporting that Samsung could be introducing products using flexible displays into the market as early as the end of this year. We are supporting the development of flexible displays, most recently with a demonstration at SID of a single layer barrier film prototype that, among other advantages, may enable the design of bezel-less displays, increasing the active area.

We also recently announced, along with L-3 Display Systems, that we delivered a novel touch functionality, unbreakable, full-color, phosphorescent knee-mounted OLED display system for the US Air Force. By using an PHOLED display built on a plastic substrate, paper maps can be replaced with an electronic flight bag system that is ejection safe. In SID in June, we also announced a series of what we believe to be record advancements in flexible white OLED lighting technology. These white OLED lighting panels are built on plastic substrates, using our single-layer barrier technology, and highly efficient PHOLED technology and materials.

We are working with about a dozen companies in lighting. For example, Lumiotech, a Japanese OLED lighting manufacturer announced that this month they are planning to launch a new series of lighting panels with a brightness efficiency of 28-lumens per watt, according to DigiTimes. In addition, a recent OLEDinfo article reported that Toshiba has produced prototype lighting panels that operate at a very efficient 91-lumens per watt, which they hope to start selling in early 2015.

To further solidify our management team, we recently hired Mauro Premutico as Vice President, Legal and General Manager, Patents and Licensing. Mauro brings to us tremendous patenting and licensing knowledge and experience, including having most recently served as Managing Vice President and Chief Patent Counsel at the Walt Disney Company. Mauro will manage our portfolio of over 2,700 patents, including the recently purchased Fujifilm patents, and play an integral role in developing and implementing our intellectual property strategy. It has been a very busy and productive time, and it is rewarding to see our efforts produce record results now, and also build for future growth. With that, I will turn the call over to Sid.

Thank you, Steve. Again, thank you, everyone, for joining our call today. Revenues for the second quarter of 2012 were $30 million, up 157% compared to $11.3 million in the second quarter of 2011. The results in the second quarter of 2012 include the recognition of $15 million of revenue under license agreement with Samsung Display Corporation, under which Samsung is obligated to make payments to the Company in each of the second and fourth quarters of this year. There was no similar license revenues in a year ago quarter. However, we did record $1.8 million of Samsung royalty revenue in last year's second quarter.

In the second quarter of 2012, revenues from material sales were up 92% to $12.8 million, compared to $6.7 million for the second quarter of 2011, growing in line with the OLED industry. Material sales include the sale of red, green, yellow, and light blue phosphorescent emitters, as well as host materials. The number of customers purchasing OLED material in the second quarter increased by approximately 40% from the second quarter of 2011.

Sales of emitter material comprised 85% of total material sales for the three months ended June 30, 2012, compared to 71% for the three months ended June 30, 2011. In the second quarter red phosphorescent emitter sales to our largest customer under commercial agreement nearly doubled compared to last year. Green emitter sales in the quarter were about the same as the first quarter of this year, although sales of host materials in the second quarter were sequentially higher than in the first quarter of this year. Both green emitter and host material sales in the second quarter of this year were less than the third quarter of 2011. We believe the slowdown is temporary, and sales of green phosphorescent emitters and host materials will increase.

Revenues from outside of North America represented 96% of our total revenues for the second quarter, of which 82% was from South Korea, and 14% from Japan. In a year ago quarter 87% of revenue was from outside North America, of which 71% was from South Korea, and 26% was from Japan. Cost of materials increased to $1.6 million in the quarter, compared to $142,000 in the second quarter a year ago, due to increased material sales and increased cost of manufacturing materials.

R&D expenses increased to $7.2 million in the quarter, from $5.6 million in the quarter a year ago. The increase is attributable to an increase in outsourced R&D expense, where we are using specialty chemical companies to help us accelerate the development of new materials and increased employee costs, which reflect an increase in retirement benefits and stock-based compensation. These higher employee expenses are essentially non-cash, and not discretionary. The increase in royalty and license fees reflect the higher payment to our university partners, coincident with increased revenues. Selling, general and administrative expenses were up 15% in the quarter to $5.2 million, again primarily due to increased employee costs.

Operating income for the second quarter of 2012 was $12.9 million, up nearly $14 million from more than a $1 million operating loss recorded in the second quarter of last year. The Samsung license revenue incurs a 16.5% withholding tax payable to South Korea, which is included in income tax expense. For the second quarter, reported net income of $11 million or $0.23 per share, a significant improvement from net income of $3.3 million or $0.07 per basic share, and a loss of $0.03 per diluted share in the second quarter of 2011. The results a year ago quarter, were aided by a $4.5 million gain on stock warrant liability.

Looking at the year-to-date results, revenues were $42.6 million, a 104% increase from the first half of 2011, with material sales up 108% from a year ago to $23.4 million in the first half of this year. For the first half of this year R&D expenses increased to $13.9 million from $12.1 million. The rate of growth in R&D is higher due to our accelerating the new material development, both internally and externally. SG&A expenses over the first half of this year increased to $9.5 million from $8.4 million last year, which is a 13% increase. The rate of growth in SG&A is in line with last year's actual expenses.

Operating income in the first half of 2012 was $11.4 million or 27% of revenue, and up from an operating loss of $3.8 million in the first half of last year. For the first half of 2012, we reported net income of $9.7 million or $0.20 per diluted share. Again, very significant improvement from a net loss of $8.6 million or $0.20 loss per diluted share in the same period last year. In anticipation of what we expect to be increased material sales in the second half of the year, we increased our material inventory to $8.6 million at June 30, 2012 from $3.8 million as of December 31, 2012. We have been building inventory of our red, green emitters and host materials, in order to meet what we believe will be an accelerating demand for OLED materials.

Our balance sheet remains strong, with cash and cash equivalents and short-term investments of approximately $3 million -- $350 million as of June 30. For the second quarter, cash provided by operating activities was approximately $11.2 million, compared to $223,000 for the same period in 2011. For the first half of the year, operations generated cash of $9.2 million, compared to $1.8 million for the first half of 2011. Subsequent to quarter end, we used cash of $109 million to purchase Fujifilm's patent portfolio of approximately 1,255 OLED patents and patent applications, and a $4 million investment in Plextronics.

The Fujifilm patent acquisition will increase our amortization expense as we move forward. Historically, we have amortized these types of acquisitions over 10 years. We have been providing some revenue guidance, in an effort to increase our transparency. With the qualifications noted in today's press release, we continue to see our revenues for 2012 as being in the range of $90 million to $110 million. Quarterly results will vary, particularly in light of the timing of payments with our new agreement with Samsung. With that, we would be happy to take your questions. Operator, could you please provide instructions, and questions for this portion of the call?

Certainly.

(Operator Instructions).

We will go first to Andrew Abrams with Avian Securities.

Could you go into a little more detail in terms of the breakdown all material sales, perhaps how much red, how much green, how much host material?

I can give you a little bit more of a breakdown. Our commercial material was -- material sales was approximately $8 million, development was $4.8 million to give you $12.8 million, and host materials were approximately $1.8 million, and red emitter sales was approximately $7 million.

Got it. I know you gave -- Steve gave a good overview of the Fuji patent issues. Can you further detail any of that, particularly them material patents and how they lay out in terms of the definition of materials used in those patents, relative to the Thompson patents?

Not quite sure I understand your question, Andy.

Well --

Let me see if I can help you. The -- on the emitter side, the patents that they have are dominated by our fundamental patents. If that was your question. The host and transport layer patents, because those materials are dominating patents, that is completely additive to our patent portfolio. What the Fuji portfolio does, is it gives us a lot more design space with a lot more families of molecules in the emitter area, as well as additional material systems for hosts and transporters. Does that answer your question?

That was right. Just lastly, what was the makeup of the inventory increase? Is this standard red and green, I should not say standard green, but standard red and green? Or were there other things in there you are building up for the second half?

These are materials we sell commercially, so it is red, green and host materials.

We will take our next question from Jim Ricchiuti with Needham & Company

Hello. Thank you. I was wondering if you can comment on whether the Fuji acquisition of the Fuji patent portfolio in any way of affects the existing agreement with Samsung? Do you have any plans to amend that at all?

No.

It does not impact that.

And, is there any way you can give us a sense as to what the timing around any kind of revenue potential for this -- these patents that you have acquired -- in other words was Fuji seeing any kind of royalty, any license payments around this?

We are really doing this patent portfolio as building for the future.

And, would you anticipate any expense associated with this patent portfolio, whether it's in the form of increased R&D, or in the form of any kind of increased royalty or patent costs?

Well, we would have increased patent costs, because half of the patents are applications so we have to continue prosecuting those patents. We would have additional annuities that we would need to pay for the patents. The R&D group is -- we are continuing with our standard ramp of R&D.

We will take our next question from Brian Lee with Goldman Sachs.

Hi, thanks for taking the question. I had a couple. First, I wanted to better understand, what is lead time for manufacturing and shipping green materials?

Well, the lead time -- we literally shipped materials within 24 hours of receiving a PO. The lead time for manufacturing depends on the batch size. It depends -- there are a number of long lead items, but it is not years, it's months. We have a really good handle on that, and we are ready, if and when the ramp starts to pick up, we are ready for that.

Okay. Because I guess I am trying to rec --

And the manufacturers are ready also. (Multiple Speakers).

Okay, great. Okay, thanks. I guess what I'm trying to reconcile is just you are building inventory. At the same time, I can appreciate the sensitivity a round your largest customer what they want said in a public forum and not said. But it seems to imply that it's a lead times are not that long for manufacturing, and ultimately shipping these materials, you would not necessarily have to build this inventory, unless you really had good visibility. So I guess I'm trying to reconcile why, building inventory on what is a short lead time material, unless you really have a good visibility into what the potential ramp could be here over the next couple quarters?

We have to manage our manufacturing process. So we build inventory and we try to use dedicated equipment, so we will build one color, and then another color, and then host material. We will not do these simultaneously. We do try to manage how we are building the inventory, what it is we think we will need. And as we said, we are building our inventory for expected accelerated sales of material systems.

Okay. Great. I appreciate the color. Maybe one last one, and I will hop off, related to that, I am just wondering how are you thinking about your manufacturing strategy? You have talked about this in the past. Do you have any updated views around how you are manufacturing strategy will evolve and the potential timing for that, as you grow beyond the emitter opportunity in materials? Thanks.

We are continuing to talk internally about that strategy. So Brian, at this point, we have nothing more to share.

We will go next to Carter Shoop with KeyBanc.

Good afternoon. Thanks for taking my questions. First, on the Fuji, the acquisition, can we maybe just crystallize the thoughts on the impacts from Fuji in 3Q and 4Q, with regards to revenue, OpEx and amortization?

As we said, we don't expect to see revenue immediately from this. This is part of our long-term strategy. In terms of amortization and expenses as we have said, we amortized historically when we acquired IP over a 10 year period. So this would be $105 million plus some expenses divided by 10, so it would be $10 million to $11 million on an annual basis, for six months it would be a little bit over $5 million in amortization expense. In terms of dollar amounts for increased patent costs, I don't really have an estimate for that. I don't think it is a significant number for the next couple of months.

Okay, great. One housekeeping question, thanks for providing the number for red emitter in the second quarter. Can you tell us what was in the first quarter of 2012?

For the first quarter -- I can give you the first half of red emitter sales, and for the first half, it was $12 million. And for the second quarter, $6.7 million, so it would be about $5 million. (Laughter).

We will go next to John Bright with Avondale Partners.

Steve, you mentioned in your prepared remarks that 45% of the Fuji patents were based in Japan. Did the litigation in Japan play a meaningful part in buying these patents?

That really wasn't our primary focus. That was more of a collateral benefit.

Okay.

The primary focus was really to acquire a very significant patent portfolio in the OLED space, of which there are very few, so we can continue to extend our lead.

Got it. Sid, two questions I have for you. One, with a half a year in the bank for the results, OpEx is what it is. 10% to 15% is what you have talked about for OpEx growth. Do you think we will are going to be at the high-end of that with a half a year behind us?

I do think that. I looked at for -- if you look at the total operating expenses for 2011, I think the 10% to 15% for the year will be the right number for R&D. I think the SG&A number will not be as high.

Okay.

If you just look at the total for 2011.

Okay. And the other question I had for you was, also in the prepared text you talked about green and Samsung. And you also talked then you talked about emitter and host for it, and you talked about the potential for the LG and Samsung TV rollout. How much of that is still in the guidance for 2012?

We really have not talked about what's in our guidance. I mean, clearly we have got a range, and the range would include -- what you would have to assume that the higher end assumes increased revenue from green and host material. That was our estimate at the beginning of the year, and we still are very comfortable with those estimates. As we said, it is difficult for us to predict when things will occur. Even though it's been reported by a number of different sources that our green emitter and our green host material are going to be in Samsung, the question is how quickly it ramps up, and how -- when it starts, and when it starts, how quickly it ramps up. And there are things that we really are not just comfortable talking about at this point.

We will go next to Rob Stone with Cowen and Company.

I wanted to focus on the points you made about that increase in the number of customers to whom you are selling material. Can you comment maybe on which vertical that is coming from, display versus lighting? What slice of the material portfolio? What is driving the growth? Thanks.

It's across the board. I mean, it is some lighting companies and display companies. I mean, the number of our customers did increase. Some of them are larger than others, still the major customers that we have, are the ones we talk about that are today. It's -- the major customers clearly are Samsung. And we have got LG, AUO, and Chimei and others on that. We talked about a number we signed, I think we have about 5 lighting agreements, and each of those buy small quantities of material, because it's really early stage, and a number of other companies. So it's probably I think it's 50/50. I don't have the exact customers in front of me.

Okay. Is it fair to conclude from this that the leadership position being taken by the likes of Samsung and LG, is maybe causing other players to feel like they have got to get going and catch up?

We believe that to be the case.

We will go next to Darice Liu with National Securities.

Good afternoon. Just a couple questions on the material side. Starting off with green, can you provide update on the non-Samsung customers using your green, and whether or not these customers are utilizing the green host?

I think -- we don't specifically go through customer by customer. I do know that we talked about our host material working with our green material, and our yellow material which is used for light OLEDs. So I mean -- that pretty much is where our host materials are being sold, is with those two customers.

I guess I'm asking more about the green material. Two or three quarters ago, you mentioned at least 10 companies were evaluating green. Just wondering whether or not we are seeing these customers moving from evaluation to commercialization outside of Samsung.

Right now, it's still evaluation.

A lot of those are lighting customers, Darice, and they are still moving through the prototyping process.

We will go next to Jon Dorsheimer with Canaccord.

Thanks for taking my question. I guess the first, maybe just dig in a little bit deeper on the materials. Sid, it looks like $4 million for yellow and green, any split between yellow and green? Or maybe just said differently, what percentage I'm assuming sort of the 90% range, but --?

Probably 75% green, and 25% yellow.

Okay. Maybe one more question on that, is the majority of that commercial or development?

Well, there's really no commercial product using our green materials in the marketplace. So, it would mostly be development.

We will go next to Hendi Susanto with Gabelli & Company.

Good evening, thank you for taking my questions. First question, for flexible display materials, can display manufacturers use the same emitter materials that you currently have?

Yes.

Okay. Then would you verify whether Samsung license agreement will cover the new Fuji film patents that are applicable on red and green emitter materials?

Yes.

We will go next to Craig Irwin with Wedbush Securities.

Good evening, gentlemen. Thank you for taking my question. Most of the things that I would like to know have already been asked. But the big question that remains is, can you update us on the overall status of development of a commercial blue? And how far out you think you are for potentially launching a commercial product as far as blue host in an emitter?

Well, I would start off by saying with light blue, we are selling a full set of phosphorescent materials including light blue host and emitter to lighting companies. For deep blue, I would say probably a majority of our technical are blue, a majority of our technical team is focusing on that issue. And I cannot give you any specific timeframe on when that will be accomplished. We are however making some good progress.

Okay. And then my follow-up question is, can you share with us your overall level of priority, as far as migration into other areas of OLED stack over the next couple of years? How do you prioritize that in your R&D budget, and your patent licensing strategy out there?

That's a good question. Our priority right now, is really to maintain our leadership in red, green and yellow, to develop host material there, and to develop blue material. One of the things we have seen with blue is, that it is such a sensitive situation that every material in the stack is important. So we are looking to develop the blue, and deploy it as a system.

We will go next to Vishal Shah with Deutsche.

Thanks for taking my question. I just want to get a better understanding of what your customer engagements are right now, in terms of -- (inaudible).

We could not hear what you said. Hello?

Can you hear me now?

Yes.

Okay. I just wanted to understand, of the customers, the new customers that you have added for material sales, have you been engaging with some of those customers for potential license agreements, or even some of the existing customers? And what kind of timeframe are we looking at, for additional license contracts being announced?

Well, some of those new customers actually have license agreements in place, and some of those customers work under material supply agreements. We really work under the two different types of agreements, depending on what makes sense to the customer, or what makes sense to us. So we have a number of license agreements with lighting companies who are, frankly still in the development phase. But we have some material supply agreements with display companies who are closer to the manufacturing phase.

Great. One follow-up question, I wanted to understand if your customers are really keen to change the -- open to host concentration ratio. And what of the implications of changing that? I mean in terms of performance, is that something that is constantly enter development at their end? And has that impacted your revenues in the near-term? Thank you.

Well, there is usually optimum doping ratio. And then the question becomes, what is good enough for a product? And it is a constant iteration in that circumstance.

The customers, the emitter materials are more expensive than other materials on a program basis, and customers are doing everything they normally would, to make sure they can get a product that meets customer specs, at their lowest cost. So it is something we know, all of our customers work on. But we don't expect to see significant changes in what we sell based upon that, at this time.

It is a gradual process.

We will go next to James Ricchiuti with Needham & Company

Can you give us the development revenue -- material revenue in Q1? It was $4.8 million, I think you said in Q2?

For Q1, it would have been about $3 million.

$3 million. And were the revenues in Q2 in that area concentrated with just one or two customers?

That, I do not -- and probably not, because that's really where, as we have said, we had significant increase in the number of customers, and that would be in the development and chemical area.

We will go next to Jagadish Iyer with Piper Jaffray.

This is [Masand Mohan] for Jagadish, and thank you for taking my question. I have, my first question is the guidance that you have given, the $90 million to $110 million, can you give us what is baked into the high end of guidance? Do you have additional customers different, additional applications? Can you discuss where you can have a positive on a negative surprise to this guidance range?

As we said, just a little bit earlier, we have not really broken that down, or discussed what is in the components of the guidance are. It's based upon our estimate of when accelerated use of our green emitter and host materials will occur. And as we stated, we are comfortable still with the range of $90 million to $110 million.

Can you give us a ratio of emitter to host for end of the calendar year?

As we said we have not given guidance on the specific components of that. So, I really can't do that.

We will hear next from Rob Stone with Cowen and Company.

I have another question related to doping concentration. Specifically in your continuing development work with customers on green emitter and host, can you give a sense of what kind of ratios you are seeing for that material? Not the revenue but --.

Unfortunately, at this point, Rob, we don't disclose the doping concentrations.

You can't even put it in a range?

Not one that would be really meaningful to you.

It's really, A, it's customer proprietary, if we do know it too -- what is just -- they really can be all over the place.

Okay. Thank you.

We'll go next to Darice Liu with National Securities.

Just a follow-up on a material question. On yellow, outside of LG, is anyone else looking to use yellow, or are most folks using RGB to achieve white? And secondly, can you elaborate more on your commentary on the material COGs? I understand increased volumes affects the COG, but you also mentioned increased costs of manufacturing materials?

On that yellow, Darice, we have customers, we have multiple customers using 2 peak white, which would be yellow, as well as 3 peak white, which would be RGB.

On the material, it really depends on materials. Some materials depending on [vat] sizes vary, and it depends on whether we're -- in this period we sold host materials, which historically cost more per gram. And so we don't see a significant increase in the cost program of our emitters. But we also account for them a little differently than we did in prior years, whereas we now categorize materials that we have scaled up to commercial manufacturing volumes. That's what we include in costs. In the past, it was really just commercial materials, based upon the customer's usage.

We will go next to Carter Shoop with KeyBanc.

In regards to inventory, you are one month through the quarter right now, what is your view on inventory exiting the September quarter? Do you think that is going to be down quarter-over-quarter or will that continue to build?

I really can't comment on where we are today. We are really only commenting on the second quarter at this time.

Great. And then can you confirm that LG was not a 10% customer in the quarter?

Yes.

Great.

We will go next to Brian Lee with Goldman Sachs.

I just had another follow-up. Quickly on the inventory, how much of the incremental inventory build in the quarter was related to red versus green?

I really can't tell you what the components are.

I mean, is it heavily skewed toward one versus another? Or even that type of granularity you can't share?

It is probably not heavily skewed to one towards the other. We want to make sure we have enough of all inventory to meet the existing needs as we move forward. So, it's not skewed one way or the other way. But clearly a host would be higher volumes in terms of kilograms versus emitters. But realistically it's what we think we will need, as we move forward into the quarter and the next quarter.

We will go next to Hendi Susanto with Gabelli & Company

Hi again. In the past, you have talked that the green emitters gross margin is similar to red. How about the gross margin of the yellow emitter relative to red and green?

It is similar. The yellow is just a variation of green.

Okay. Got it. Thank you.

We will go next to Brian Lee with Goldman Sachs.

Sorry, I got cut off. I have another follow-up on the inventory. Is there a way to think about quantifying what you're inventory translates into, in terms of potential revenue dollars? I'm assuming your inventory is accounted for on a cost basis. And we know to some degree what the COGS in gross margin for your materials are. So is there -- is that math that we can run to kind of gauge what is sitting in inventory, in terms of potential revenue volume?

You are correct. Since you know what our historical margins are, you can apply that. What we have not given you real information about how much of that is host versus emitter, and those clearly have different margins. But you are correct. I mean, if you can make some assumptions, you can then determine how much that inventory would translate into, in terms of sales dollars.

All right. Thanks a lot.

We will take our final question today from Carter Shoop with KeyBanc.

Yes. Sorry, one more question on the inventory side. As we think about the Company as it ramps up and starts servicing more customers --we have gone from essentially zero dollars in inventory 2Q '11 to almost $9 million now. Is there a steady run rate on an inventory turn basis, that investors should think about going forward for the Company?

I think after another quarter or two, you maybe able to determine that. Right now what we are doing is ensuring that we have on hand, everything that a customer that we believe the customers will need. And we want to ensure we never are at a position where we are not able to ship on a daily basis when we get a PO. So we will build inventory to, as we look at it the best case scenario, to ensure we were never caught short. And there clearly, is some learning that we have to do, as we go to the next few quarters as the market accelerates to ensure we have it. But we also don't want to spend inventory dollars unnecessarily. So it is a balance that we are going through, and it's something that will -- it will change the next few quarters come by.

Great. Is there any inventory obsolescence risk that we should be thinking about, as inventory builds up a little bit here?

I don't believe so. The inventory we have is, the inventory that is being used in our products that we are selling.

And ladies and gentlemen, we would like to thank you all for your participation today. That will conclude today's conference call.

Thank you very much, everybody.