Universal Display Corp (OLED) 2012 Q3 法說會逐字稿

Good day and welcome to the Universal Display Corporation's third-quarter 2012 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over is to Mr. Joe Hassett. Please go ahead, sir.

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 expressed 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 the date of the live webcast of this call November 7, 2012.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation -- Limitation Reform Act of 1995. These include, but are not limited to, statements regarding Universal Display's beliefs, expectations 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. Steve?

Thank you, Joe, and welcome to everyone listening today.

For the third quarter, we reported revenues of $12.5 million and a loss of $5.5 million, or $0.12 per diluted share, results that were obviously disappointing. We believe revenue and earnings in the quarter represent a temporary slowdown created primarily by global economic challenges and delays in our customers commercial ramps. Over the long term, we are confident in the growth prospects for that OLED industry in general and Universal Display Corporation more specifically remains very strong and favorable.

In addition, as most of you are aware, the third-quarter results do not include any of our semi-annual license payment from Samsung Display Corp., which would equate to $7.5 million per quarter if recognized equally throughout the year. We will receive another $15 million license payment from Samsung in the fourth quarter.

The OLED industry continues to excite manufacturers and consumers alike with its promise of improved performance and lower power consumption. For instance, Samsung recently announced that they had sold over 30 million Galaxy S3 smartphones. However, in this quarter we saw announcements delaying OLED TVs and OLED zone plastic and products using our green phosphorescent emitter and host materials have not yet ramped. Consequently, our revenues in the third quarter were consistent with the first quarter.

Analysts continue to project strong OLED display market growth. According to our October article in Display Central, more than 10 new AMOLED fabs will be installed or updated in the next three years. For example, Samsung and LG are both building Gen 8 AMOLED lines.

DisplaySearch reported that OLED display revenue was approximately $3.5 billion in 2011. Their recently revised estimates are about $6.5 billion in 2012. They project $9.5 billion in 2013 as new capacity comes on line and estimate a $20 billion -- a $34 billion OLED display market by 2019.

Meanwhile, AUO continues to ship AMOLED panels to HTC Corp. for certification. S.L. Peng, general manager of AUO, says they'll be ready for mass production of AMOLED panels for cell phones in 2013.

According to a Korea Times article study industry sources, both Samsung and LG Electronics OLED televisions will not be available in stores this year. A DisplaySearch official is quoted as saying the total shipments for OLED TVs this year will be 500, down from the 50,000 they had previously expected. Despite the delays, according to a DisplaySearch, we're just one year away from $1 billion OLED TV market, 2014, at which point growth will ramp and the market will reach $16 billion before the end of the decade.

A recent OLED-info.com article, LG's [gate] chairman still plans to devote the company's main R&D resources towards the development of OLED TV. According to reports, LG Display has started to build a mass production line which will become fully operational in the first quarter of 2014 with a capacity of 32,000 substrates monthly, or about 180,000 55-inch OLED TV panels per month assuming 100% yield. In addition, LG is reportedly ready to release it's first 55-inch OLED TV in early 2013.

While it appeals unlikely we will see production of any flexible OLEDs this year, LG is planning to start mass producing plastic based flexible OLED panels by the end of 2013. Samsung is also now reportedly expected to be in the market with flexible displays in 2013.

We believe that the future success of flexible displays will be aided by the significant progress we are achieving with our encapsulation technology and that technology has applications well beyond just the flexible OLED display market such as OLED lighting and creative new hand-held designs, including bezel display concepts. As reported in October 23, OLED-info article, Korean site MK News is saying that Samsung plans to produce full HD AMOLED panels with a pixel density of at least 400-ppi in the first half of 2013, exceeding the Galaxy Nexus' current record 316-ppi. As another exciting new opportunity to see our market expand through the further adoption of AMOLED technology.

We have never taken a short-term focus. We believe more strongly than ever, that despite this near-term slowdown, the road to greater OLED adoption continues to stretch far and wide before us. And we continue to work hard to make that vision a reality.

Our sights have always been set on the longer term opportunities in the market. Since the beginning, our strategy has been to strengthen the Universal Display franchise on a global basis. And you have seen us take action to add new materials to our portfolio, develop new technologies to aid in the manufacturing process, strengthen our intellectual property and create partnerships that provide a faster more efficient path to greater market leadership.

In order to expand and extend our strong position as the leading OLED patent licensor, this summer we purchased Fujifilms with approximately 1200 OLED issued and pending patents through our Irish subsidiary, UDC Ireland Limited. This portfolio will add to our ability to expand our OLED materials offerings and continue our comprehensive OLED patent licensing strategy well into the next decade.

We are also moving forward on solution-based OLED technology development. Our material systems demonstrate industry-leading results and the partnership we recently signed with Plextronics will enable the acceleration of solution-based OLED material systems using our emissive layer of materials and Plextronics hole injection and transport materials.

We continue to enhance our local presence and expansion in Korea by expanding our personnel there and signing an agreement with Duksan Hi-Metal Company Limited. Under this agreement, Duksan will initially provide a finishing step in the phosphorescent green host manufacturing process. Duksan has built a very impressive team and a state of the art OLED manufacturing facility to produce cost effective OLED products using high-quality manufacturing standards.

This new relationship helps support the growth of Universal Display's high-performance products, expands our OLED manufacturing infrastructure in Korea and brings us closer to our customer base, improving our ability to support their current and future needs. In addition, all pending patent and validation proceedings involving the two companies in Korea have been dismissed.

We would also like to add an additional update on the patent opposition front. Earlier today, we received notice from our Japanese counsel that a panel of Japanese IP high court announced that it would reverse the Japanese Patent Office's opposition board's prior decision to invalidate all the claims in the Japanese 781 and 168 patents, these are the [L2 IMX] patents. Although we are waiting to receive further information from our Japanese counsel with respect to the substance of this decision, it is our understanding that the matter will be remanded to the Japanese Patent Office for further consideration of the arguments that were not previously addressed by the JPL.

We're obviously pleased with the decision. Although we note that no one patent or patent family in any one jurisdiction is critical to our operations, we look forward to addressing the remaining issues relating to this patent with the Japanese Patent Office. At this time, based on our current knowledge, we believe that all the claims in our JP 781 and 168 patents should be upheld by the JPL on remand. Of course, we cannot make any assurances of this result.

In connection with OLED white lighting, we are working with about a dozen companies to help develop this market and are selling a full phosphorescent material system for warm white light. While the quantities and revenues are small at this time, we expect OLED lighting to be a growth area in the future.

In a world were growth is at a premium, we are still in early stages of the growth of the industry many believe will expand dramatically over the next few years. We are very thankful we are helping to shape and develop a vibrant and dynamic market. As the OLED industry evolved, so does our Company. We are transitioning from a New Jersey Company that does business in foreign markets to an international Company that is headquartered in Ewing, New Jersey USA.

We appreciate your long-term support of our Company and we believe the growth has only just begun. With that I will turn the call over to Sid.

Thank you, Steve, and again thank you everyone for joining our call today. Revenues for the third quarter of 2012 were $12.5 million compared to third quarter 2011 revenues of $21.8 million.

A quick review of the third quarter compared to last year can be summarized in four parts. One, overall royalty and license fees decreased to $396,000 from $4.6 million in Q3 2011 mainly as a result of our new license agreement we entered into with Samsung Display Corporation under which do we not -- under which we do not report any license fees in this quarter. Two, our host revenue was down by approximately $5.9 million compared to Q3 2011. Three, green emitted revenue was down by $2 million from Q3 2011. And on the positive side, our red emitter revenue was up by approximately $3.3 million compared to Q3 2011 and where we saw a volume increase in excess of 89%.

The results in the third quarter of this year do not include the recognition of any license fees under our license agreement with Samsung Display Corporation under which SDC is obligated to make payments to the Company of $15 million in each of the second and fourth quarters of this year. Accordingly, had the Company recognized these payments on a pro rata quarterly basis over the year, it would have resulted in an additional $7.5 million in royalty and license fees in the third quarter of this year. We will receive another $15 million license payment from Samsung in the fourth quarter.

In the third quarter 2012 revenues from material sales were $11 million compared to $15.4 million for the third quarter of 2011. Material sales in the third quarter of 2012 include the sale of red, green, yellow and light blue phosphorescent emitters as well as green and yellow host material. The number of customers purchasing OLED materials in the third quarter increased by approximately 15% from the third quarter of 2011.

Red phosphorescent emitter sales in the third quarter increased by 89% compared to September 30, 2011 quarter. On a sequential or a linked-quarter basis, volume of red phosphorescent emitter material shifts in the third quarter were a little change from the second quarter of this year. Therefore as industry capacity increases we will see increased red phosphorescent emitter material revenues.

As previously discussed, the terms of our material supply agreement with our largest customer contain provisions for pricing concessions once their orders reach specified volumes. Green emitter sales were down in the quarter ending September 30 compared to both a year ago and the proceeding second quarter. Green host material sales were relatively stable over the first three quarters of 2012. Sales of green emitter and host materials spiked in the third quarter of 2011.

Revenues from outside North America represented 93% of our total revenues for the third quarter of both 2012 and 2011. This year 62% of total revenues were from South Korea and 27% from Japan, whereas 52% were from South Korea and 41% from Japan last year.

Total operating expense for the quarter were $18.6 million, up 17% from a year ago. The increase was primarily due to a $2.1 million increase in amortization expense as a result of the Fujifilm patent portfolio acquisition. In addition, research and development expenses increased by approximately $2.1 million mainly due to an increase of approximately $1 million incurred under our PCP industries agreement for development and scale up of new materials and a $500,000 increase in sponsored research and development contracts as we continue to invest in the future.

For the third quarter, reported a net loss of $5.5 million or $0.12 per share. Our balance sheet remains strong with cash, cash equivalents and short-term investments of approximately $239 million as of September 30. The decrease in our cash at September 30, 2012 from December 31, 2011 was mainly due to the $105 million used this year to purchase Fujifilm's entire worldwide patent portfolio of more than1200 OLED patents and patent applications. For the nine months ended September 30, 2012, cash provided by operating activities was approximately $7.2 million.

Given our long-term focus and early stage of the industry, comparing our financial results from quarter to quarter was not appropriate. We believe our performance can be best evaluated on an annual perspective. We expect the full-year revenue to be between $80 million and $82 million, which would be a 30% to 34% increase over 2011. This is down from our previous estimates of $90 million to $110 million for 2012. Based on the trends and the adoption of OLED technology in hand-held devices, and research efforts underway on larger format displays, we believe there is good reason to continue to expect significant market growth over the next few years.

With that, Steve and I would now be happy to take your questions. Operator could you please provide instructions for the questions-and-answer portion of our call?

(Operator Instructions) Brian Lee with Goldman Sachs.

Question, first off, can you help me think through the inventory build last quarter and also a little bit this quarter? I'm just -- I'm struggling with why you have built inventory and if there was any unexpected changes with respect to your large customer giving you visibility that they were going to take some of that inventory off your hands and that having been delayed for whatever reason.

Well we did-- as we said, we built inventory because we expected green and host materials to be adopted in the second half of this year. And we built some additional inventory in this quarter expecting that to occur. We believe that it will occur but we don't believe it will occur probably until early next year.

We expect the fourth quarter to look somewhat like the third quarter as based upon our guidance of $80 million to $82 million. It really is a day to day, we've gone through quite a bit of customer evaluation over the past few years with our customer and we still expect them to purchase green emitters and host materials from us. I think it's just a timing issue.

Okay. And maybe to dig into that a little bit more, what were some of the indications that you are basing your expectations of second half ramp that now sound like they're more like early 2013 ramp?

Brian, we're in fairly constant communication with our customers and we operate off of the best information that we have from them at the time and we're constantly updating that information. The ramp was continuing to be pushed out fairly slowly.

Okay. Two quick ones-- two last quick ones from me and I'll jump back in the queue. Any sense for how many products, I know the visibility seems like it's moving around here on you, but how many products you think you could be supplying green emitters and hosts for next year for your largest customers, for your largest customer?

To be honest, the products that it goes into is up to our customer. We would expect that once they adopt it to adopt it slowly and then scale up to more and more of their production. But specific products we really can't -- we don't really know, to be honest.

Andrew Abrams with Avian Securities.

Question about red being roughly flat in the quarter, if I understood that correctly. Samsung's volumes have been particularly strong on a unit basis. Is there an inventory issue, do you believe, where Samsung had built inventory of red and was not matching up their red purchases with their unit volumes, or is there some other factor there?

It's interesting DisplaySearch has the second and third quarter and the fourth quarter pretty flat for mobile devices. Their purchases really are on a bi-weekly or quarterly basis and they may have purchased a little bit more at the end of one quarter. We literally shipped, as we said, in 24 hours, so there could have been some purchases in Q2, at the end of Q2 that would have normally fallen into Q3. But I don't believe that there's any specific inventory build, I think it matches what DisplaySearch is looking at the market and what production quantity is.

You mean on a unit basis on it overall?

On an overall dollar basis, they literally have Q2, Q3 and Q4 fairly flat.

Got it. And in terms of Samsung's minimums with you, based on your new guidance, would you say that Samsung is still going to meet those set minimums and obviously do the increment again of that for next year?

It's not clear whether they'll meet it, but they do have the ability to roll them over into next year.

We really are looking at it day to day in terms of purchases.

Darice Liu with National Securities.

Good afternoon. Following up on the prior question on materials. Based on your customers revised forecast on what their planning for capacity extensions, as well as product roll back-- rollouts, can you provide some color what type of material sales trajectory we should be expecting in the coming quarters, notably from the host side which has been relatively flat for a few quarters now?

Well as we said, we expect the fourth quarter right now to look like the third quarter. We do expect the market to grow by about 50% as Steve said next year, and we would expect our material sales, particularly red emitters obviously to follow that. But as green and green host gets put into commercial production, those will increase obviously faster than just the market does because we haven't sold very much this year. But we do -- we are in constant contact, as Steve said, with our customer, and we do the best we can with the information that we get.

Have there been any shifts in terms of the host market share or is it more of a factor of them deploying the new recipes?

Really, it's not been a shift, it's really been they have not yet ramped green phosphorescence.

Vishal Shah with Deutsche Bank.

Hi, this is Susie Min on behalf of Vishal Shah. I had a question on the inventory and makeup we you could give a little bit more detail. Should we think about the makeup of the inventory similar to this breakup of your material sales, about 60% of it being red emitter and 30% being green emitter, 10% being host as we think about 2013?

Well, we don't give the breakdown of it. But we really built up host inventory and green emitter inventory in anticipation of host and green adoption. And the host volumes are much higher than the emitter volumes. We have red emitter material in our inventory because we want to make sure that we always have enough. But it is predominately host and green emitters that we have built up inventory in anticipation of them adopting green and green hosts.

Okay, great. And then I have just one more question as it relates to the Fujifilm acquisition. I know there was some talk a while back that you weren't interested in getting into the commodity layers, transporters and holes and stuff. And I was wondering if you guys had had time to evaluate the patent portfolio and if that view has changed?

Well we are looking at embedding materials all throughout the stack. And so between our existing patent portfolio and the Fujifilm acquisition, it does give us some broad freedoms to operate within those layers.

Jed Dorsheimer with Canaccord Genuity.

Thanks for taking my question. Just a couple -- the first, the timing and the miss and the timing delays or push outs, if you will, can you comment, is that primarily a function of the flexible line and the delays that Samsung is experiencing there? Or is there anything that you were factoring in before that you are expecting that's been shifted in addition to that?

I think it's a lot of the things that we had expected have been pushed out. There's a green ramp is pushed out, so that's the green hosted emitter. EV for both LG and Samsung has pushed out, as well as flexible. A lot of the emerging growth that we expected in the second half of the year has not materialized because it's been pushed out, and what we're seeing is a continuation of the red emitter sales.

And Steve, how would you weight those three? Is it equal on all three in terms of the expectations as you were coming into this year versus the push outs? It equally weighted or is any one of those three or two of the three have greater weighting?

It's always tough to say, I'd probably push more towards the green.

Okay. That's helpful. And then was wondering if you could provide a little bit more color on the relationship with Duksan, in particular on the green host materials, how that will basically float through the model? If we say that a gram of whatever the number, let's call it 100 to make the math easy, $100 per gram. Will you receive that full $100 from your customer? And the-- you will pay Duksan for a portion of manufacturing that material, so that the COGS would be higher on that product? Or will you receive say $10 or $20 of that $100 in terms of revenues that the margins will be commensurate with the rest of your material sales?

We are selling-- we are continuing to sell the materials. Duksan is simply taking the place of one of the manufacturers in the manufacturing sequence. And frankly, I do not expect there to be any additional costs from that process.

Rob Stone with Cowen and Company.

I want to follow up on Duksan a little bit too. You mentioned that initially you're going to be doing the finishing step, can you provide any more color on where you and they would like to go with that relationship?

Rob, we're having those conversations. We do realize that as we grow into a global organization, and Korea being such a key element in the OLED industry to have a more localized presence in Korea is important, and we're having those conversations.

Do you find yourself though with issues either on one side of exclusivity in current parts of your supply chain or strong indications from customers about wanting dual sourcing on things?

No, we've really not seen those issues as of now.

Okay, and then, Sid in your prepared remarks you said something about the Samsung agreement having volume driven price breaks, but it wasn't clear exactly whether that was an impact in Q3 or a prospective impact in Q4? Could you just go over that, please.

It had some impact in Q3 in terms of the price per gram as they reach certain thresholds and we would see a little bit more in Q4. But pretty much they're-- I believe that they are at the threshold probably for what we expect them to buy for the fourth quarter of this year. So I don't expect to see it, but I have seen it throughout this year.

Jim Ricchiuti with Needham & Company.

Yes, hi, thanks. Question regarding the license payment from Samsung. I'm wondering at what point you might be able to give us some guidance as we look out to 2013? Is the plan to talk about that after you report Q4?

I think we will talk about that when we report Q4 or when we report Q1. We're going through that right now, we're trying to figure out what-- specifically what we will be able to say and when we can say it.

Okay, but if we think about that, it's still probably helpful for us to think that in terms of what the current market forecast are for the OLED market next year?

I mean they're fixed, so it doesn't really matter what the OLED market forecasts are, their payments is a fixed amount.

But isn't that fixed amount pegged into the expectations of the market? Wasn't that the structure initially?

It's basically, Jim, the expectation when we negotiated the deal.

Right.

So we fixed it.

That's correct.

And one other question, I'll jump back in the queue, I was wondering if you can say whether the -- there was any meaningful legal expense associated with the IP litigation that has now been terminated with Duksan in the quarter in the sense where that expense may go away in the current quarter?

Well, we're no longer paying the lawyers in Korea, (multiple speakers).

It was not a significant amount in the quarterly patent legal costs. The bulk of the patent legal costs are applications and obtaining patents, as opposed to litigation.

Craig Irwin with Wedbush Securities.

Good evening Jim and Sid. Can you talk a little bit about the linearity of demand for your emitter during the quarter?

Can you repeat that, that didn't come through, Craig?

Thanks. Can you talk a little bit about the linearity of demand for your emitter host materials during the quarter?

It is literally we get orders each month. As we said, the red emitter material in Q2 and Q3 were pretty much the same. And we get-- we literally ship as we get orders, it just depends when we get it. So it is difficult for us to predict even though we do get some estimates from the customer, it's difficult for us to predict exactly when things will occur.

Okay. And then my follow-up question relates to one of your previous comments in this call. You seem to suggest that Samsung can roll their minimum purchase requirements from one quarter to another. Could you clarify for us whether or not they can actually roll their minimum purchase requirements from one fiscal year to another? Or if this is something that maybe anniversaries at a specific date of the agreement or at another predetermined rate?

They did not have quarterly minimums. They have an annual minimum that they purchase from us and it can be rolled into the subsequent year if they don't meet that minimum.

Hendi Susanto with Gabelli & Company.

Good evening, Sid and Steve. I want to understand what drives the push out and what will determine the timing of the ramp up on the customer side? Considering that AMOLED display manufacturers are moving into different stack of AMOLED platforms let's say every 6 to 12 months, is there any indication that these type of transitions was the reason or the one that will determine the timing of the ramp up? Furthermore, are there other variables that we should think of when it comes to seeing the ramp up early next year?

I'm not sure that we can-- that we know specifically that is based upon specific changes out in product structures. We expect them to use our green and green host materials as they design devices that need to be more power efficient and it may tie into what you said. I do not think there's anything else that we can look at, it really is capacity-driven and the product that they are making and what the requirements of those of specific products are. And we believe as they add functionality and make new devices, that they're going to need to be more power efficient because they're putting more and more functionality into the devices.

My follow up, Sid, you mentioned that you can roll out the minimum annual purchase into next year, how does that effect the pricing?

Their pricing is based upon purchase quantities in any given year, and then it resets in the subsequent year

John Bright with Avondale Partners.

Thank you, good afternoon. Follow up on that question quickly, Sid, can-- if you roll it over to next year, can they then roll it over again the same amount or an increasing amount to the following year for the minimums?

Yes.

Okay. And to Sid or Steve I think to you a question regarding the license payout next year. What was the market growth forecast for calendar '13 when you negotiated the deal for '13?

John, off the top of my head, I do not remember that.

Okay. And then Sid, how much of the miss was related to-- or how much did you have baked into this quarter for TVs, materials for TVs?

We don't really break it down in terms of TVs. When we do our estimates for the quarter, we look at material purchases, what we expect, there is clearly some that we would have expected to be TVs. But to give you specifics, I mean, the green and green host material is in TVs, really were the differences in our ranges for the year and it really was how quickly some of these were adopted and it ends up that these had been each pushed out.

Final question, on the R&D expense you mentioned $1.5 million of expenses $1 million for PPG and another $500,000, is that recurring?

As we continue to develop new materials, I expect those cost to be recurring costs.

Alex Gauna with JMP Securities.

Thanks so much for taking my question. I was wondering, is there is a connection between the TV adoption and the green, meaning that those are one in the same in terms of when we start to see the ramp? Thank you.

We're actually-- not really, we're looking for green adoption on the mobile products and then TV adoption is a different set.

Okay. It's my understanding some of your customers are sampling flexible display now. Wonder if you can comment on that and how that plays in? Again is there a connection between the green and the flexible display, as well, and how confident you are on the outlook on that in 2013? Thank you.

We are selling-- obviously we are selling red and green materials to a number of our customers who are using them in their various products. And we do believe that there is a trend to go from red through to green and that will become a mass-used product.

And then with regard to the flexible display, is that indeed sampling now to end market customers from your customers?

You have to talk to our customers for that.

Okay. Thank you.

Jiwon Lee with Sidoti & Company

Yes, hi, thanks. A quick question back on the Duksan side. Whatever Duksan sells as part of the agreement, that would be part of the minimum purchasing with your biggest customer, correct?

No, Duksan is simply doing-- performing some manufacturing services for us in connection with the fabrication of one of our materials. That's not related to the minimum purchase of our largest customer.

Okay well that's helpful. And you alluded to some other efforts with the Duksan, could you elaborate a little bit?

Well the question was asked, this is just the initial-- we've talked about this being the initial [talk] with Duksan and as the industry grows and as it grows significantly in Korea, it is our intention to continue our localization efforts in Korea, and we are talking to Duksan about that.

Okay, helpful. Thank you.

Jagadish Iyer with Piper Jaffray.

Thanks for taking my question. Two questions, first on the-- can you give us the puts and takes of the Duksan agreement? Was PPG given an option to do this? And what is the incentive for Duksan to be a part of this, can you elaborate more on that? And I have a follow up, please.

Well I can't speak to the former question. But to the latter question, we're generally viewed in the industry as having e-materials and technology essential for the growth of the industry, and anybody that can partner with us, should be able to benefit as this industry moves forward.

Then on the follow up, a quick one. You talked about the push out by one of your key customers here, I was wondering why are they not adopting the green emitters for their existing lines which are A1 and A2? What is the challenge and what are they currently using, is it still fluorescent green?

I would imagine they'd use fluorescent green, and I don't think it'd be appropriate for me to speculate.

Darice Liu with National Securities.

Thanks. Steve you had mentioned the encapsulation technology, I'm wondering if you can talk about the revenue opportunities from that technology and if you're baiting that product with anyone yet?

We're actually in the process of developing our business model for that encapsulation technology. We are talking to a number of our partners about how to proceed to commercialize that technology.

Vishal Shah with Deutsche Bank.

Hi, it's Susie Min again. I had a quick question on the lighting side. I know couple quarters back you said your exposure was about 10%, and since then you signed up additional agreement with customers on the lighting side. Has that changed at all meaningfully?

No, it has been somewhere between 5% and 7% of our material sales pretty much all year. There's a number of different customers but they're very small quantities because they really are just working on very small pilot lines.

Hendi Susanto with Gabelli & Company.

Hi, Sid and Steve. I want to understand how much material flexibility you have with regard to your inventories? Let's say if you pile up your certain inventories, and then your customers want a later version of your emitter materials, let's say in February or March, can you use the inventory build that you have? Or -- and then I also want to see whether there's any risk of inventory write down if some how the materials are no longer purchased by customers?

At this point, once the material is designed into a product, we do generally understand the length of that ramp. We don't think there's an inventory obsolescence issue.

Okay, thanks.

Rob Stone with Cowen and Company.

A follow up on one of your smaller segments. Technology development was quite a bit higher in the first half, any color you can give there?

We have a number of agreements with customers and some of our government programs. And they're starting -- they are going down (inaudible) to joint development, technology development agreements, customers are moving more towards commercialization. And on the government side, some of those programs are starting to wind down.

Andrew Abrams, Avian Securities.

Just a follow up on the Japanese court issue. What's your next step, and what do you think the timing would be on getting a final release on this? Or is this another step back to the patent office for their review again?

Well the patent-- the patent is valid now, it was remanded back to the trial court to-- we haven't seen the whole opinion, but generally the way that would work, you remand it back to the trial court for proceedings consistent with the appeal, with the appellate courts version. Or the person on the other side can appeal to the Supreme Court. We're still talking about a many month process. These opposition proceeding have different levels of proceedings and take a while. The good news is, that we did get this trial court issue reversed on appeal, which is very important, especially in Japan.

And that concludes our question-and-answer session for today. And that also concludes our conference call. Thank you all for your participation and have a great day.