Universal Display Corp (OLED) 2012 Q4 法說會逐字稿

Good day, and welcome to the Universal Display Corporation fourth-quarter 2012 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Joe Hassett. Please go ahead sir.

Thank you, Jessica, 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 any portion 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, February 27, 2013.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include but are not limited to statements regarding Universal Display's beliefs, expectations, hopes, or intentions regarding the future. It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected.

These risks and uncertainties are discussed in the Company's periodic reports filed with the SEC, and should be referenced by anyone considering making any investments in the Company's securities. 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. The fourth quarter was a strong finish to another record year for Universal Display Corporation. For the fourth quarter, we reported revenues of $28.1 million and net income of $5.4 million, or $0.12 per diluted share. As a result, we had our best year in the Company's history, with revenue of $83.2 million, up 36% from last year, operating income of $13.7 million, up 141%, and net income of $9.7 million, up 206%. Net income per share increased to $0.21 from $0.07 per share last year.

These results show strong growth, and we are still in the early innings of the adoption of a revolutionary technology. The numerous industry developments, trends, and statistics being widely reported by a variety of sources continue to paint an increasingly rosy picture of the OLED industry and its growth potential. For one, analysts continue to project strong OLED display market growth. AMOLED has seen enormous growth through Samsung's Galaxy line of smartphones and notes. We are all anxiously awaiting details about the new Galaxy 4s scheduled to be introduced next month.

It has been widely reported that new AMOLED fabs are planned or being built, including Samsung's split corporation's new Gen 5.5 and Gen 8. It was recently been reported that Samsung has announced they plan to invest heavily in OLED technology. CNY5.6 trillion or 73% of their 2013 CapEx budget. That's a little over $5 billion.

AUO is also reportedly gearing up for AMOLED's cell phone panel mass production in the first half of this year. TV represents the next great OLED frontier. We've all read about Samsung and LG's OLED televisions plans. Both companies plan initial product introductions the first half of this year, although it is not clear how quickly they will ramp production. For our various business planning purposes we are assuming production will initially be modest with volume production more likely ramping in 2014.

LG Display recently announced it will invest the equivalent of $655 million to build a Gen 8 OLED TV production line with a monthly design capacity of 156,000 55-inch OLED TV screens. LG said it expects the plant to start mass producing panels in the first half of 2014. It was also recently reported that LG Display plans to invest CNY2.2 trillion or 54% of their 2013 CapEx budget into OLEDs, that's a little over $2 billion. Sony and Panasonic have also entered the race with recent demonstrations of their OLED television technology at CES.

And both Samsung and LG are enthusiastically talking about flexible OLEDs. With their lighter-weight, conformability, and unbreakability, flexible OLEDs can be a game changer. Even Microsoft has gotten into the game, showing a prototype Windows Phone featuring Samsung's flexible Youm display at CES this January, according to a report in the January 9, 2013 edition of AppleInsider.com. Considering these many opportunities unfolding before us, you can understand why we believe we've only scratched the surface of the market's potential.

There is little question that the OLED market will be considerably larger as the technology becomes more widely adopted through, for example, OLED TVs and flexible OLED products. And while the industry may still be in its infancy, selling smartphones, notes, and other portable electronic products, we are already experiencing phenomenal growth.

We are expanding our patent portfolio, expanding the number of products, expanding our employee headcount, expanding our customer base, expanding our commercial and research partnerships, and expanding geographically. We are engaged in a number of activities that we believe illustrate our industry leadership and growth potential.

Material sales represent our most immediate growth opportunity, so it is only natural that this part of our business receives the most attention. To date, a majority of our material revenue had been derived from red emitters, but we've gone through quite a bit of evaluation of our green materials over the past few years.

For instance, we're selling a green emissive layer comprised of a finely tuned emitter/host combination. Green phosphorescence provides the added power efficiency manufacturers need. We have received very positive feedback from our customers and have high expectations for our green emitter and host materials. As the year progresses, we'll have a better handle on the rate at which green should be adopted.

Of course, a primary focus of our R&D team is to continue to push the envelope of PHOLED emissive layer material systems to improve the efficiency, lifetime, and color of our red, green, yellow, and blue phosphorescent materials. Our acquisition of the Fujifilm IP portfolio is beginning to fulfil the promise we saw when we purchased it. This creates some exciting opportunities in our design and development of new OLED materials, as well as strengthening our device licensing business.

Independent of PHOLED materials, there are other markets that represent additional growth opportunities. Encapsulation technology for one, is a separate market where we have strong competitive technology. As we've previously discussed, encapsulation technology is the key to workable, flexible displays. Encapsulation is a similarly critical success factor in the lighting industry, where we are already selling a full phosphorescent material system for warm, white light. Currently we're discussing potential commercialization road maps with a number of partners are in the process of developing our encapsulation technology business model.

Lighting is another separate OLED opportunity. We are working with just about all the major lighting manufacturers with a stake in the OLED game. It's been recently reported by OLED-Info that one of our partners, LG Chem has announced they will be launching 80 lumens per watt OLED lighting panels this summer as well as plastic OLED light panels. They are also discussing the timing of a new Gen 5 lighting fab, which reportedly can reduce production costs by about 95%.

Each of these growth markets is supported by our strong patent portfolio where we are actively expanding, extending our position as the leading OLED patent licensor. Over the past year, we have significantly enhanced the value of our intellectual property through the Fujifilm patent portfolio acquisition and the successful defense of challenges in Asia and Europe. This has served to more firmly establish the importance and strength of our core IP as critical to the emerging OLED market.

The key to the success of our strategy is to make sure we invest in our technology by attracting the best and the brightest the industry has to offer. At our headquarters in Ewing, New Jersey, we are expanding our facilities to accommodate the talented new scientists, engineers, and associates who have been joining Universal Display.

We're also expanding our organization around the world. In Korea we've partnered with Duksan to initially provide a finishing step in the phosphorescent green host manufacturing process. This 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.

While the OLED industry has achieved a level of maturity, with several products in commercial production, it continues to grow at a high rate, and is expected to continue to do so for the next several years. For example, DisplaySearch projects the industry will grow 60% this year to $10.9 billion. It is very rare to find an industry with this degree of proven technology that is expanding at such a rapid rate of growth.

As the OLED industry evolves, so does our Company. We are transitioning from a New Jersey Company that does business in foreign markets to an international Company that's 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. Let me review our results for the fourth quarter in more detail before looking more broadly at our results for 2012 and our 2013 guidance. Revenues for the fourth quarter of 2012 were $28.1 million, up 51% compared to the fourth quarter of 2011 revenues of $18.7 million. The major driver of the year-over-year increase in fourth-quarter 2012 revenues was the $10 million increase in the royalty and license fees compared to the fourth quarter of 2011.

In the fourth quarter of 2012 emitter revenue was $9.7 million, compared to $9.4 million in the same quarter a year ago. On a sequential basis, emitter materials increased from $9 million from the third quarter of this year.

Total operating expenses for the quarter were $19.8 million, up 31% from a year ago. The increase was primarily due to a $3.6 million increase in patent costs and amortization of acquired technology as a result of our Fujifilm patent portfolio acquisition and a $2 million increase in research and development expenses, primarily reflecting increased funding of sponsored research and development contracts as we continue to invest in the future.

For the fourth quarter we reported net income of $5.4 million, or $0.12 per share. Net income this quarter is net of $3.2 million in taxes, mainly reflecting the 16.5% withholding taxes due on our South Korean license revenues. Our model has significant operating leverage with a 51% increase in revenues, driving 135% increase in operating income to $8.4 million, or 30% of revenues.

Our balance sheet remains strong with cash, cash equivalent, and short-term investments of approximately $244 million as of December 31, 2012. The decrease in cash over the past 12 months was mainly due to the $109 million used this year to purchase Fujifilm's worldwide patent portfolio of more than 1,200 OLED patents and patent applications.

For fiscal 2012, cash provided by operating activities was from approximately $17.8 million. As of December 31, 2012, inventory was $11 million, consisting largely of finished goods with a small quantity of raw material, and up about $7 million over the past 12 months. As we have stated on other calls, we consider the buildup of inventory an excellent investment of our cash because it improves our ability to quickly fill customer orders and significantly [lance] our customer good will. During the fourth quarter we used $5.2 million of our $50 million authorization to repurchase roughly 206,000 shares. We will continue to utilize our share repurchase authorization strategically.

Given our long-term focus and the early stage of the industry, we believe our performance can best be evaluated on an annual perspective. Consequently, let me highlight our results for the year. Revenues of $83.2 million were up 36% over fiscal 2011, with commercial material gross margins of approximately 85%. Material revenues were up 19%, primarily a function of strong growth in the first half of the year, followed by flattish material sales over the second half of the year. Material revenues increased to $44.5 million in 2012, compared to $37.4 million in 2011.

Emitter revenue was $38 million in 2012 compared to $26 million in 2011. Host material revenue was $6 million in 2012, compared to $11.3 million in 2011. As previously mentioned we had the largest host material revenue quarter in the Company's history, $7.7 million, in the third quarter of 2011. A one-time event that significantly increased our 2011 host revenues.

Samsung their minimum material purchase requirements for 2012. Research and development expenses increased to $30 million in 2012, from $24.1 million in 2011. The increase was mainly due to increased research costs incurred at PPG Industries, outsourced research and development, and increase in sponsored research contracts.

Patent costs and amortization of acquired technology increased to $13.4 million in 2012, compared to $7.4 million in 2011. The increase was mainly due to increased amortization costs associated with the Fujifilm IP acquisition in July of 2012. Additionally, we had increased costs associated with the defense of certain ongoing and new challenges of our issued patents, as well as the timing of prosecution and maintenance costs with our patents and patent applications.

The combination of attractive gross margin and significant operating leverage generated 141% increase in operating income. With fiscal 2012 as the baseline, outside normal consideration as disclosed in our various public fillings, we expect our fiscal 2013 results to be primarily affected by the following factors -- the rate of OLED market growth, the rate of at which Samsung adds capacity and introduces new OLED products, the rate at which those products adopt our green technology, the speed of OLED television growth, and the speed at which additional companies enter the market for portable displays and lighting.

Looking at current operating levels as well as these major variables, our expectation is for full-year 2013 revenue to be between $110 million and $125 million. This includes a Samsung licensee for 2013 of $40 million. Based on the trends in the adoption of the OLED technology in hand-held devices, and the research efforts underway on larger-format displays, we believe there's a 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 question-and-answer portion of our call?

(Operator Instructions)

Brian Lee, Goldman Sachs.

Maybe on the guidance first, I'm having some trouble with how you get to the low end of your guidance. At $110 million, that's what your high end was for last year, and you thought that number was doable, even late into the year. So in 2013, your low end implies no growth over red from last year, no growth in licensing from Samsung, and then just the green that you had been thinking you were going to be able to do in the back half of last year. So can you help reconcile how that's feasible, that low end?

Well as you know, we reduced the guidance when we realized that green was not going to be adopted in 2012, and that green host was not going to be adopted, and capacity that we anticipated in the beginning of the year did not come on board during the year. And when we went through our normal process for developing what we think the guidance should be, we went customer by customer, and we used our best estimates, and we then come up with a range. And so the $110 million guidance number for last year was one at the beginning of the year we felt was achievable, but there were a lot of things that have occurred that still are questionable when they will occur, which is how we get to the low end of the guidance.

Okay, that's helpful. I guess one more thing on the guidance. There's uncertainty around a few of the moving pieces, but is green adoption one of those moving pieces? I guess green adoption in a commercial product for your largest customer.

It is part of it. It is the speed at which it is adopted. We expect to sell green material and green hosts this year, but it is how quickly it is adopted and how quickly it grows.

Okay. So green in 2013, you would anticipate not only a shift, but is designed into a commercial volume product?

Correct.

Last one if I could squeeze in. You said in prior calls, and I think it is in your K, that you collaborate with Nippon Steel for green host materials. Are there any changes to that relationship anticipated in 2013 as green materials get adopted? Thank you.

No, there is no change in what we do. We work with them. We actually mix our hosts with their hosts, and that mixed host is then sold to customer in Korea. So they are not a competitor of ours. They are somebody that we actually work with and we report our sales when they buy it from us. So next question, please.

Thanks guys.

Jim Ricchiuti, Needham & Company.

I think I heard you say that Samsung met its minimum requirements for the year.

That is correct.

And does that minimum change each year, so does that -- presumably that increases in 2013?

That is correct also.

Okay. And then looking at your OpEx, Steve, you alluded to a lot expansion plans. How should we think about your OpEx this year, R&D, and any major changes there, and just in general, SG&A, to the extent you can comment about that? Thanks.

I don't -- take away amortization, because that clearly will grow, because the amortization of Fujifilms will be almost $11 million on an annual basis. I expect my R&D and G&A combined to not -- to go up somewhere in the 10% to 15% range. Right now it's budgeted at the lower end of that.

Okay.

Expansion will be with our customers in Asia, but we're not going to double our number of people. Expansion is adding people in Asia.

Got it. Do you see any Fuji related revenue this year or is that more next year?

Right now we're still working with the IP and it will get into our revenue stream. Exactly when, I can't say. I can't say specifically in my 2013 guidance I have revenue that is allocated as Fuji revenue.

Okay, thank you.

Vishal Shah, Deutsche Bank.

Steve, I just wanted to get your thoughts on what you think about the OLED TV adoption and then assumptions in your guidance for the year. And also how should we think about some other customers and license revenues, any major contracts that you guys are working on for this year, and what it takes for them to sign any of those contracts? Thank you.

Sure. It looks like -- as we see it, OLED TVs are probably going to start slowly in 2013, both LG and Samsung have talked about initial product introductions first half of this year. We would expect the volume production to be in 2014. Other people, such as Sony and Panasonic demonstrated TVs at CES, but they have not yet announced commercialization plans. And we are working with all of the major players in the industry, either on long-term contracts or a series of shorter-term contracts, and as things evolve, some of those may change from shorter-term contracts to longer-term contracts.

John Bright, Avondale Partners.

First question is on the quarter. Steve and Sid, on the patent cost, can you walk through again what were the reasons for the increase in the patent cost and where the normalized aspect of that is. And then also on the quarter, talk about the inventory ramp that we seem to continue to see. We would think that maybe that would come down.

The patent costs include the amortization of the Fuji patent. So that is $11 million divided -- it's almost $1 million a month. So the second half of the year would have had the increase from Fuji. The other parts of it is there are more patents. We acquired the Fuji patent, the basic prosecution costs of getting patents, and the annuities on patents will grow, because our number of patents have grown. But the biggest increase in that is the fact that it is now patent expense, which includes e-comertization of Fuji. So that's really where you see the increase there.

Got it. And on the inventory?

Inventory, we're continuing to build inventory. We expect -- obviously we expect material sales to grow in 2013, and we believe that investing in our inventory is the best possible use of our cash at this time. We want to ensure that our customers get their product within a really short period of time. We ship essentially materials the next day, and we are obviously want to make sure that we are -- we have inventory on hand that if things do accelerate and things go faster than our anticipated growth, that we have material here to meet that demand. We never want to be in a situation where customer requests material and we don't have it.

Is it safe that we assume that the majority of the material is green-related material, number one? And then number two, do you have any better sense today of whether that might be used than you did three months ago? Or when that might be used than you did three months ago?

As we've said, we've increased our inventory, green and green host, which is probably the majority of the increase, in anticipation of green be adopted in second quarter or third quarter of last year. So we have continued to do that. As we said in our guidance, we expect revenues to grow, and we expect green and green hosts to be into commercial products this year.

Craig Irwin, Wedbush Securities.

So that dovetails into something I wanted to ask about. Obviously it sounds like your confidence level now on green adoption is even materially higher than where you were last year at the same time. But there's been some back and forth in the press on the commitment of Samsung to adopt phosphorescent green in the S4 product. Can you comment on whether or not any individual product could have any significant impact on the potential cut-in rate for the phosphorescent green, and whether or not you believe that that's important for you? And I don't know if you might be able to comment whether or not you think that that press assertion has any accuracy.

There's been a number of reports. I haven't seen that they're not adopting it. There's been a number of reports that I have read that talk about the S4 power consumption and the assumption -- reduction in power consumption in the S4, which then needless to say they're using green phosphorescence. I have not seen anything that does not say that, so I haven't seen the real up and back on that. We believe that green will get adopted. Just depends how quickly the ramp of green is, how quickly -- how successful the products are, a lot of those things are out of our hands. We are not the ones that make the end product.

Excellent. When we do a little bit of math with some of the numbers in your K, it looks like your Korean customers outside of Samsung had a pretty nice uptick in demand in the quarter. Looks like they might be at the highest level now in a couple of years. Can you comment as far as to whether or not you are seeing other customers outside of Samsung pick up fairly significantly, and what you think about the potential for the trajectory there? I know you are being conservative on OLED TVs, but would you see the most recent order trends as far as being sustainable over the next couple of quarters?

Obviously the other customer is the other big guy in Korea. And that is still lumpy. There's the fact that they have ticked up is the fact that they are working on OLED TVs. We see lumpiness in the way they order because they're not in a production mode yet. Do we believe that this trend will continue? Yes, we believe they will get into the market. As they've said, they've committed CapEx and they are committed to OLED TVs. So we do see our other customer in Korea growing in 2013.

Excellent. Last question if I may. Kind of an open-ended question. But there's a lot of enthusiasm out there for technologies in the general illumination or white lighting market. Can you update us on the breadth of customers that you are doing business with? Have there been any material changes among your customers? Are there any specific milestones or industry developments that you find exciting for this market?

Well, we have a number of signed royalty-bearing license agreements with lighting customers, and we're working with a number of others. The exciting thing that Steve mentioned in his script is that LG Chem is talking about committing to build a Gen 5 sized facility for OLED lighting, which is what the industry needs. It needs somebody to build a high-volume capacity facility to get the costs down so that you can start seeing OLED light sources in the marketplace. Essentially Samsung did it with displays a number of years ago, and they were in the forefront and are the leaders today. You need someone in the lighting industry to do the same thing. And if the reports are true we're very excited about LG Chem moving into OLED lighting.

Rob Stone, Cowen and Company.

Was there anything episodic in your patent-related or G&A costs in the fourth quarter in terms of thinking about the run rate being the steady trajectory up or some modulation up and down?

No, I don't think so. I think it was pretty much in line with what we thought.

Okay. And do you have any view on the tax situation for 2013? In the past you have sold some tax credits. I know you have the license fees trigger taxes in Korea twice a year when the cash comes in. Any color you can provide on taxes, if they might look different this year from last year?

The license fees from Korea is 16.5% of the licenses fees. There is a 3% alternative minimum tax that we have to pay, even though we have NOLs. The sale of our New Jersey tax credits did not occur because Governor Christie eliminated that program. So we're not able to do that. So that will not continue. So tax-wise, if there's anything we can do strategically, we will, but that's the picture today.

Okay. And finally on technology development, that was a bit more in Q4 than we were thinking, and up quite a bit sequentially. Any comments there, outlook for this year?

Yes, I think the outlook for this year should be more in line with the other quarters. I don't see that as a big growth area, particularly as the industry moves more towards production. There isn't a lot that we will see in terms of customers paying us to work with them, and the government programs have been going -- have been decreasing over the past three years, and with what we see going on in Washington today, I don't expect it to the really grow.

So is that government or commercial mainly in the fourth quarter?

Everything in there. It's both. It's government programs and commercial.

Okay. Thank you.

Hendi Susanto, Gabelli and Company.

First, with regard to OLED TV, would you be able to share whether or not you expect green emitter materials to be designed in the 55-inch OLED TV launches by Samsung and LG?

Hendi, we really can't comment on what our customers are going to design in. Clearly we're trying to get as many of our materials into the TVs as we can.

Okay. And then you also mentioned a number of growth drivers for 2013. I'm curious to know what your expectation about the adoption of AMOLED display in larger size tablets? Are there still technical hurdles that display manufacturers are still working on?

Specifically for tablets, the DisplaySearch's numbers don't have a large amount of growth in that. The growth that you see is based upon market projections is in mobile and in TVs. So I don't see a lot of traction in the tablet sizes. It's in the Note, but that's not a large -- it's not a tablet size, I think it's only like six inches in diagonal.

If I may clarify my questions, are there things that need to take place in order for AMOLED display to be adopted in eight to nine inch tablets?

No, I think it's more what the manufacturers -- where they want to put their capacity that they have, where they will get the highest return. So I mean, that's really out of our control. That's something that Samsung and other ones that are moving into the marketplace would have to make a decision on, whether it's AUO, or even Chimei.

Alex Gauna, JMP Securities.

I was wondering if you could comment on your expectations for material growth in this coming year? Is it faster or slower than the overall guidance that you have? And maybe give us a ballpark about how significant a percentage green might be in overall material expectations?

The second part, I can't really say, but if you look at the revenue growth, we projected at the low end $110 million, of which $40 million is a license fee, and $6 million or $7 million is technology development. That brings our material revenues to $65 million to $70 million. And it's going from $45 million up to $65 million to $70 million, so that's almost 50% growth, and at the upper end, it's all in the material side.

Okay. Thank you. And then with regard to the $2 billion in CapEx, you said LG has outlined, if you think about only one-third of that being towards the TVs, is the remainder of that $2 million that remaining two-thirds -- $2 billion, I'm sorry -- is that targeted at lighting, or can you give any color on their expectations or ability to move into the mobile display market?

We haven't really seen the breakdown of what it is. We just saw the aggregate number.

One more, if I could. I'm wondering what you think that the industry can achieve, the OLED, at reasonable yields, in terms of pixel density this year, DPI targets your customers are talking about.

Well, unfortunately, you have to speak with our customers on those issues. The resolution issue is something the customers are focusing on particularly.

I guess I'm wondering if you feel like it's moving in the right direction, if you're hearing positive feedback on that.

We think AMOLED has the ability to compete with LCDs on all of the relevant factors.

Okay, thank you very much.

Jed Dorsheimer, Canaccord.

Just two questions. I guess first one regarding LG. That's still a development agreement, and should we look at that? If you do sign -- as their volumes pick up and they commercialize the TV, if you do sign a longer-term agreement, should we basically view that as the Samsung agreement? Because I know there's fairly different pricing schemes there.

Well, we have a short-term material supply agreement with LG. It's not a development agreement. It is where we sell them materials and build a license fee in. We're negotiating with them. We said we expect negotiations to continue. What the end result will look like, we have said we're looking to get royalties, but beyond that, there really isn't much I could say about ongoing negotiations.

Would you expect to have something signed by the end of the year? And then as my follow-up or second question, I was wondering if you might be able to comment on the update on your solution processible materials just with respect to what was shown at CES in terms of some of the TVs being printed. Thanks.

Jed, as you know, we don't predict when any specific agreements will be signed or what goes in them. We've been fairly consistent on that.

But I guess that would not be in your guidance, then.

We just don't predict when we're going sign something.

We've made some assumptions internally in our guidance obviously, about certain things, but we can't go through all of them.

Okay.

Our solution processing materials, from what we've seen in the industry, are at least competitive with the results from everybody else.

Were the materials that were shown at CES using a small molecule? I thought that they were a polymer. I just wanted to clarify.

You have to actually ask Panasonic. I don't think they disclosed the nature of the materials.

Thank you.

Jagadish Iyer, Piper Jaffray.

Two questions, please. First, on the -- what is baked in terms of the green adoption, do you think that it would come to the level of red emitter, because if I strip that $65 million and try to pass it out between the red and green host and green emitter, how should we be thinking about it, and what is baked in? And then I have a follow-up, please.

We don't give all the separate components. We literally go through customer by customer and they give us what they think they're going to need, what their needs are, and forecasts, and with that we then go through and do our percentages of likelihood. So I can't tell you what all the components of our guidance are, but clearly that's a lower end and a higher end, so things happen faster at the higher end, but the pieces of it I really can't discuss.

Fair enough. Second, on the question on your 10-K, there are two things on the patent that I would like to have some clarification, please. One is on the EP 803 patent and EP 898 piece. Can you elaborate what is going on? Because there is something that says that the patent was -- the broadest claim was upheld, but you chose not to file an appeal. So can you walk us through those puts and takes of those two patents, please? Thank you.

Jagadish, why don't you call us off-line, and we can talk specifically about those patents. What we've disclosed in the 10-K is really the disclosure, but give me a call offline, and we can talk about those specific patents.

Okay.

Andrew Abrams, SCR, LLC.

I wonder if you could guide a little bit on margins? As green is adopted, green and green host is adopted, and that goes into commercial production, would we expect to see margins decline a bit as the host material becomes the larger portion of the total mix of materials?

Yes, we still are in the 60% gross margin range for host materials, and in the 85% to 90% for emitters. But obviously as the mix -- as there are more host materials in it, the overall margin will come down.

Okay. And if we look at the end selling price of green host material, when it's sold to a Korean customer, what percent of that price would be yours in terms of the mix between you and NSCC?

I mean, that's -- we sell our materials to NSCC, and then they in turn resell -- they do their process and mix in their host, and then they sell it to the customer in Korea. I really can't tell you what the mix is.

Okay. And lastly, would you expect any of the longer-term contracts that you sign over the next year or two to be non-unit based, or would you expect them all to be unit-based contracts, or at least have some component of unit-based contracts?

We would like them all to have some component, obviously, of unit base or royalty based upon the ASP of the module. That is our goal to do that.

Got it. Thanks very much.

Jim Rischiutti, Needham & Company.

Just with respect to the guidance on the material side, you cited several, a number of variables, in terms of the OLED market growth, Samsung capacity, green adoption. What are the biggest, if you were to look at those four or five items, what are the big items in terms of the range of estimates that you're giving for materials?

I mean, to be honest, there's a number of them. Clearly capacity, increases in capacity will increase our volumes. Adoption of green and how fast it gets adopted and in how many different lines or products it gets adopted is a very important factor.

I guess what I'm getting to is if I look at what happened last year, where you started out the year in terms of your guidance, and then the reset we saw after Q3, I think it's fair to say that a big component of that was green adoption. And so I'm just wondering is that still the big factor in the range of -- given for materials?

That was a big component, but capacity was another component, because the capacity during the year ended up fairly flat for the second half of the year, in that a couple of the lines, which we thought in the beginning of the year were going to be glass based, were designated as flexible lines, which never really came online. So overall capacity is important. Obviously green and green host materials is adoption and the rate of adoption and when it is adopted is probably clearly a bigger part of it.

Okay, thank you.

Brian Lee, Goldman Sachs.

Just two quick follow-ups. First on the inventory, should we be modeling that to be up in Q1 as well?

I really can't talk about Q1. We will continue to build inventory, based upon estimates from customers that we need. Whether or not it will be up is something I really can't say.

Okay. And then thinking about the guidance one more time, in terms of linearity, is it fair to assume you will be shipping green in the first half of this year, or are you assuming all second half green revenue in that guidance range?

We hope it's sooner than later. I mean, to be honest, we expect it to be sooner.

Hendi Susanto, Gabelli and Company.

One follow-up question. May I know what the red emitter material sales in Q4?

I'm sorry, repeat.

What is the red emitter material sales in Q4?

Red emitter.

Red and green if possible.

Red emitter sales were almost $7 million, and green emitter sales were about $2.3 million.

Okay. Thank you.

Alex Gauna, JMP Securities.

Yes, I was just curious if you could give some color in terms of what kind of lead times your customers are typically giving you right now. Is it a four-week or an eight-week, or what kind of range are we looking at?

We give multiple forecasts, and we go one month, two months, three months, six months, so we try to get as much information as possible so that we can plan our inventory, so we do get multiple ones. I will tell you that they always change. I mean, it's still in the early stage, so it is, the industry is early, the production ramps, things change quickly. But we do get -- we do get quite a bit of information, or as much as we can.

I'm somewhat curious with that answer, the much information as you can. You said earlier that you are anxiously awaiting the Galaxy S4. Do you feel like you know what the composition is and can't say, or do you feel like your customers are going to keep you somewhat guessing as well?

I'm not so sure I could even answer that question.

All right. Fair enough. I thought I'd try.

Good question. It was a good question. Thank you all.

And that is all the time we have for today. Thank you all for joining, and have a pleasant day.