Universal Display Corp (OLED) 2013 Q1 法說會逐字稿

Good day, and welcome to the Universal Display Corporation first-quarter 2013 earnings call. Today's call is being recorded.

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

Thank you, Ann. 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 written -- 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 of the date of the live webcast of this call, May 9, 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’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. the First quarter was a great start to what we believe will be another record year for Universal Display Corporation. For the first quarter, we reported revenues of $15 million in net, and in net loss of $4.8 million, or $0.10 per diluted share. Material revenue grew 21% in the quarter and fueled by an increase in the sale of commercial green phosphorescent emitter and host materials. The sale of the second commercial color material is a clear sign that our materials are being more widely adopted in the market. As such, we've achieved another milestone along our strategic growth path, further encouraging broader and wider adoption of all of the technology and materials throughout the display and lighting markets.

Since our success continues to be closely associated with the growth of the OLED market, we are certainly encouraged by recent industry reports from industry analysts' firm, DisplaySearch, which expects the AMOLED market to grow 60% in 2013 to $11.3 billion. As they note, AMOLED revenue growth is expected to primarily come from mobile phones, especially the latest Samsung Galaxy S4, which is a 5-inch, 1920 by 1080, 440ppi, AMOLED panel. They forecast that over 52 million, 5-inch AMOLED smartphone panels will be shipped in 2013.

An April 25 article on OLED-Info.com, Samsung says that orders for the Galaxy S4 have been so explosive they cannot meet demand. And that's not surprising. Because in an in-depth mobile display technology shoot-out with the iPhone 5 conducted by the scientists at DisplayMate, the S4 was judged comparable to a generally and previously recognized as the best LCD display on the market. They were impressed that the S4 has the same pixel resolution as your 50-inch living room HDTV, with a term to benchmark spec with tremendous marketing power for driving consumer sales. And the new display is 25% brighter and 20% more power efficient than its predecessor, the S3.

It's no wonder that Samsung then has high hopes for the S4, expecting to sell over 100 million units, or double the number of S3s. In fact, if they hit their target, they would sell as many S4s as the 100 million total Galaxy S series phones sold up to the beginning of the year. Many of the industry reports believe the OLED market will grow even faster if there were more volume manufacturing capacity. As we've previously noted in our calls, industry reports suggest new capacity is fast approaching.

Samsung display and LG display have both announced plans to direct an increasing proportion of their CapEx to meet with what they expect to be the growing demand for OLED technology. Samsung displays new Gen 5.5 and Gen 8 plans are reportedly on their way. LG still refers to OLED as a quote, ultimate differentiated product and says that once the new OLED TV fab produces 26,000 substrates per month, reportedly in the middle of 2014, it will, quote, positively impact profitability, end quote, and OLEDs will carry a higher margin than LCDs. LG is converting existing LCD lines to OLED panel production and in 2014, they expect over 50% of their CapEx will be spent on OLED production.

According to their April 9 press release, AUO is coming to market with a 5-inch, full high definition OLED smartphone display they claim has the world's highest resolution with a showcased at Shenzhen's CODE 2013. The AUO display features low power consumption and high picture quality. It's also equipped with high contrast, high brightness, faster response time and free viewing angle, providing the best visual experiences to viewers. If you see a 55-inch OLED TV, then you know OLED TVs have a bright future, although admittedly, the timing of broad-market introduction remains difficult to forecast.

DisplaySearch's 2015 forecast for OLED TVs is about 3 million units sold, generating about $3 billion of revenues. OLED TV manufacturers are making their initial market introductions. According to a April 29 report in OLED-Info.com, not only does LG Electronics have a 55-inch OLED TV in the market but they are now accepting pre-orders for the world's first curved OLED TV, as premium TV will stop -- start shifting in Korea in May with a promise to bring it to other markets soon. According to a recent digitized article quoting industry sources, Samsung is expected to start selling its 55-inch OLED TVs in South Korea as of June this year and the Company will release the products in Taiwan as in the third quarter of the year. Sony and Panasonic have also demonstrated their own AMOLED TVs.

Flexible OLED displays are another potentially huge market opportunity. As reported by OLED-Info.com on April 21, the OLED Association posted an article in which they say Samsung's upcoming Galaxy Note 3 Phone Phablet will use a Youm display, essentially a plastic-based, unbreakable, flexible OLED. It claims Samsung will launch this product in the fourth quarter of this year. And as reported in The Verge on April 25, in a call discussing the Company's recent financial results, LG announced it will induce -- introduce a smartphone with a flexible OLED screen in the fourth quarter of this year.

Just a few other notes worth mentioning. The US Patent and Trademark Office unveiled new patent application by Apple that describes a mobile device featuring a wrap-around flexible AMOLED display according to a March 29 report on OLED-Info.com. Media reports also claim Google might be getting interested in OLED technology while Microsoft demonstrated a prototype Windows phone featuring Samsung's flexible Youm display at CES.

The opportunities for OLED materials and technology remain unlimited. Our team is hard at work selling our existing products and technology on the market and also developing next generation of OLED materials and technology that will open new markets as well as expanding existing ones. As Sid will discuss in a minute, one of the reasons for the increase in research and development costs this quarter is a scale-up of new materials in which we were working with PPG. By continuing to improve the efficiency, lifetime and color of our red, green, yellow and blue phosphorescent material systems, we intend to help accelerate OLED market penetration. And as anticipated, the new technologies acquired with the Fujifilm OLED patent portfolio are proving to be instrumental in our new product development efforts.

On the patent opposition front, there were two decisions remaining to our patent start in the last quarter. In the first decision, two of our Japanese patents, JP 781 and JP 168 relating to our L2MX technology, were upheld as valid by the Japanese Patent Office. These two patents encompass one of our three fundamental phosphorescent patent sets. One of the patent supplies OLED devices and the other is a phosphorescent material. These patents have a long history in Japan. They were initially granted and then opposition was filed and the trial court invalidated them. Then the high court reversed the trial court and now the trial court has affirmed that the initial grant was correct. So the patents are valid. But yes, there continues to be an opportunity for the opponent to appeal.

The second decision was in Korea. This relates to a patent opposition filed in the Korean Patent Office against one of our OVJP, or organic vapor jet printing patents issued in Korea. The Korean Patent Office issued a favorable decision, which upheld our patent as valid. OVJP basically prints OLED materials using an inert gas stream rather than a liquid ink. This technique can combine the proven efficiencies and lifetimes of our vacuum deposited materials, with a potential manufacturing advantages of using a printing process. We continue to develop this technology because we believe it has great potential as a future OLED manufacturing technology.

Encapsulation technology is another area of focus to improve the performance of OLED devices. We continue to develop our single-layering encapsulation technology, which has demonstrated excellent barrier performance for OLED devices at potential cost effectiveness. Manufacturers are reportedly facing challenges of moisture and oxygen infiltration and developing flexible displays so we believe Universal Display is well-positioned to support manufacturer's barrier film development.

And in lighting, we continue to sell full phosphorus materials system for warm white light to just about all of the major OLED lighting manufacturers. Our PHOLED materials are key to the energy efficiency of future lighting products which we believe will be solid-state OLEDs and LEDs. OLEDs can provide a soft, diffused, cost-effective light source that we and many others believe will be very attractive to consumers. Many companies are currently working on various [pads] to reduce the cost and improve the manufacturing processes for OLED lighting.

This year, our growth continues at Universal Display. You should see it in our revenues, our earnings, our patent portfolio, our product portfolio, our employee headcount, our customer base, our physical plant, our commercial research partnerships and our geographic footprint. In a global economy that is looking for growth, we are very fortunate to be well-positioned in an industry that offers abundant opportunity.

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 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. Let me review our results for the first quarter of 2013 in more detail before looking more broadly at our prospects for the full year. Revenues for the first quarter of 2013 were $15 million, up 19% compared to the first quarter of 2012, which had revenues of $12.6 million. The major driver of the year-over-year first quarter 2013 revenue increase was a 21% increase in material revenues compared to the first quarter of 2012. Sequentially, material sales were also up more than 25% from the fourth quarter of last year, more indicative of the increase in demand from materials in the first quarter. Sales of commercial materials was up nearly 40% compared to a year ago.

In the first quarter, phosphorus and emitter revenues increased by over $500,000, primarily due to an increase in the sale of commercial green and emitter material. Commercial green emitter sales increased by $3.1 million due to the expanded use of our green emitter in customer products. Commercial red emitter sales decreased by approximately $1.9, mainly due to the operation of cumulative volume discounts and improved utilizations by our customers.

Commercial host material sales increased $1.8 million in the first quarter. Host material sales rose primarily due to increased sales of green host material, which are used in conjunction with our green emitter materials to optimize PHOLED performance. Host material revenue was 29% of our total material revenue, up from 19% of total material revenue in the first quarter of 2012. Total operating expenses, which include cost of goods sold for the quarter, were $22.1 million, up 56% compared to $14.2 million from a year ago.

Without taking into account the Fujifilm amortization expense in 2013, and removing the cost of sales from both years, the increase was approximately $3.2 million, or 24% compared to the first quarter of 2012. Patent and amortization of acquired technology expenses increased $2.7 million, which primarily reflects additional amortization associated with the Fujifilm patent acquisition. Reflecting our continued commitment to developing new materials and technologies, research and development expenses was up $2.3 million in the quarter. Approximately $1 million was used to have PPG scale up a new red emitter material to commercial status.

The balance of the increase in research and development represented additional spending on compensation, sponsored research and outsourced research investments that we have made. Cost of materials in the quarter was up approximately $2 million from the first quarter of 2012 due to an increase in the quantity of materials sold, changes in product mix and increased raw material cost for certain products. Due to the increase of commercial material sales, there was a corresponding increase in the cost of these materials.

As materials enter commercial production, some of the cost to develop these materials, that had previously been recognized as research and development expense, were not included in the cost of goods sold in 2012. In addition, the increase was partially due to an increase -- to increase host material sales, which increased to 29% of our material sales from 19% in the first quarter of 2012 and have a lower gross margin than our emitters. We expect total material sales to yield extremely attractive margins in the 70% to 75% range.

Selling, general, and administrative expenses for the quarter were up approximately $835,000, or 19% from a year ago, primarily due to increased salaries, costs associated to retirement benefits and stock-based compensation for certain executive officers. Total employee headcount from the end of 2000 to the end of 2012 increased by approximately 29%.

In the first quarter, we recorded a tax benefit of $2.2 million, which represents our estimated annual effective income tax rate applied to this quarter's loss before tax. The loss recognized in the first quarter is expected to be offset by income over the balance of this year so the tax benefit is expected to be realized. For the first quarter, we reported a net loss of $4.8 million, or $0.10 per share, compared to a net loss of $1.2 million, or $0.03 per share in the year-ago quarter. Our balance sheet remains strong with cash, cash equivalents and short-term investments of approximately $221 million as of March 31. Cash used in operations for the quarter was $10.9 million, mainly due to an over $7 million reduction in current liabilities as well as an increase in pre-tax net loss of $2.1 million which excludes non-cash items. During the first quarter, we used cash of $5.5 million to repurchase shares of our stock under our outstanding Board authorization. We will continue to utilize our share repurchase authorization strategically.

With fiscal 2012 as a base line, outside normal considerations, as disclosed on our various public filings, we expect fiscal 2013 results to be primarily affected by the following factors -- the rate of the OLED market growth; the rate at which Samsung adds capacity and introduces new OLED products; the rate at which those products adopt our green technology; the speed of the OLED television growth; and the speed at which additional companies enter the market for portable displays and lighting. We anticipate that operating expenses, other than cost of sales, to increase approximately 15% on an annual basis over 2012.

Looking at current operating levels as well as major variables, we are reiterating our expectations for the full year 2013 revenue to be between $110 million and $125 million. This includes a Samsung license fee for 2013 of $40 million. Based on the trends and the adoption of the OLED technology and handheld devices and research efforts underway on larger format displays, we believe that there's good reason to remain optimistic concerning significant long-term market growth.

With that, Steve and I will 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 with Goldman Sachs.

First one I had was, Sid, can you quantify your -- you guys spent a good amount of time at the beginning of the call talking about the Galaxy S4. Can you quantify your revenue opportunity for that device in dollar terms and how it compares to other Galaxy devices?

It's really difficult for us to do that at this time because it's really in the very early stages of its production. So to be honest, I mean, we saw it in March, the increase in green. We don't really know how many units were produced. We don't know how many units were actually shipped. So it's really difficult for us to predict.

Since we don't really get that information from the customer, all we can do is, over some period of time, take a look at what we have sold in terms of material dollar versus what they've produced that is reported either by DisplaySearch or others and come up with an estimate. But at this time, it's really too early to do that.

Okay. And this year, when you think about thus far the green materials, both on emitters and host and how they compare there, you talked about some year-over-year trends. And I think you specifically called out commercial material sales as opposed to last year having a good amount of still development-driven sales. Is it reasonable to assume that, that's tied to some of these new Samsung devices that are making their way into the market that maybe weren't using the green materials last year?

I think that's reasonable to assume.

And the -- just wanted to drill down on a few modeling things. You mentioned the cost of materials had a one raw material cost which seemed to be up, I think in the Q you said 30% for a particular input on green emitters. Can you elaborate on what drove that higher cost and if you expect that to persist in future quarters?

It's iridium chloride that goes into all of our emitters. And in the quarter, it went up. We've actually seen a decrease now.

It does fluctuate. We did see an increase this year over last year, but we have actually seen a decline in the last month of production. So that's really the component that we've seen the increase in.

Okay. And last one for me and I'll jump back in the queue. The royalty and licensing revenue line saw little bit of a bump here. And this obviously is not a Samsung licensing quarter.

Can you talk about whether that was driven by customers in the display market or if it was in the lighting market? And then any geographical commentary around where that customer exposure may have been? Thank you.

It is in customers that we -- when we sell we included license fee into the material price. So it would not be related to Samsung, but we're related to most of our other customers.

And would it be display or general lighting?

It's mostly display. The lighting material sales that we sell are really very small portion of our material sales. We sell to a number of different customers, but the quantities are very small. There are really, very small R&D quantities for all of the lighting companies.

Jim Ricchiuti from Needham & Company.

Sid, I wonder if you can comment a little bit more about the decline in red emitter sales in the quarter. You cited some volume-based discounts and also just better utilization by the customers. Can you elaborate a little bit more about -- on that, please?

Well, we do know that our customers over time are more efficient with the design of their source sales and they're more efficient with the material utilization. And we've talked about this in red material a few years ago was the quantity that we were buying was significantly higher. As they continued to tweak their manufacturing process, they're always looking for reductions.

In addition to the utilization efficiencies, the contract that we have has cumulative volume breaks in price and their volumes have increased; and therefore, they are going into the next price break level from last year to this year. So there is a reduction in the cost -- or what we sell our sale price per gram and they're being much more efficient in the way that they use the emitters.

We also expect the utilization of our green materials over the next year, the utilization to be -- to go down. So it's difficult to predict what the remainder of the year will look like just based upon the on month that we have.

Okay, but just in terms of this decline, was utilization the bigger factor or was the contractor arrangement the bigger factor in the decline?

Pricing was probably more than utilization.

Okay and just a -- one final question for me. It looks like you show some a pretty strong growth in Japan. I wonder if you could talk a little big about what you're seeing, some of your -- customers here (multiple speakers) working with --?

I'm sorry. The sales to Japan are host materials. We actually sell our host materials to NSCC. They then blend it with one of their materials and then sell it to their customers in Korea.

So we report the sale because we sell it to NSCC. It all ends up as host material, with that goes with our green emitter material. But we do sell it to our customer in Japan; that's why you see that increase.

Rob Stone from Cowen and Company.

I wanted to ask about the new red. You've been doing red for a long time. What's the expected benefit?

Rob, it basically has higher efficiency and a longer lifetime.

A question on -- you talked about the ramp-up of materials that were previously not commercial in moving some costs from R&D to COGS. Other than the fluctuation in raw material costs, are there expectations that, just like your customers getting price breaks on higher volume, that you will on the input side be able to gain some efficiencies as volumes go up?

We do expect to gain some efficiencies as volumes go up, particularly as we make larger and larger batches. It -- because of our margin profile, our material cost is still fairly low. So the incremental amounts that we get in terms of efficiencies may not be as dramatic as they are because our costs are so low.

But -- so pricing I guess is really the bigger driver. That was my final question.

You mentioned that there's a cumulative volume price break. Is that strictly on hitting some volume threshold or is that something that happens once a year? Is it a calendar schedule or a unit schedule, I guess is what I'm asking?

It's cumulative volume schedule, not on a calendar year.

John Bright from Avondale Partners.

Steve, in your prepared text, you cited LG CapEx for capacity. Do you expect to switch from a short term contract with them to a long-term contract in 2013?

Well, John, we've been talking to them about a long-term strategic partnership for a long time. But we have a long-term strategic partnership with them for a long time and we're continuing to work with them to discuss the future. But I can't really predict when something like that may occur.

Sid, a couple of financial questions. One, in your prepared text, you talked about 15% OpEx for 2013. If my numbers are correct, that's going to be sequentially down in the back half is -- from what we're seeing. Is that right?

Well, it's -- if I look at the numbers, it's pretty much, if I take the expenses, R&D, G&A and the others, it pretty much is in line with what we expect in any other four -- any other three quarters for the year. So, if I look at what my total expenses were for 2012, and say there's going to be a 15% increase this year -- I think this year, there will be some things that will go up, some things that will go down. But I don't see dramatic increases in any of the categories.

And two final questions. One, do you think that, that level of increase might taper off as we look forward just, if you will -- ?

I think clearly it will taper off in terms of Q2 versus Q2 of 2012. Q1 2012 was a little bit low when you look at all of the other quarters. So there's things in the first quarter and the fourth quarter of the year that are always either accounting adjustments or year-end things that affect those two quarters. So they tend to be a little bit more volatile than Q2 and Q3 in terms of the expenses.

Hendi Susanto from Gabelli & Company.

First question, how should we think of the ratio between green emitter and green host consumption or sales going forward?

Well, we've seen an increase on -- it's hard to tell specifically how much one versus the other because the pricing is very different per gram and then the volumes are very different. And it's new. I mean, you did see like almost a $3.1 million increase in emitters but only a $1.9 million increase in host over the prior quarter.

So Hendi, we'd probably be able to get better color on that in the next quarter. Next quarter call, we have more experience.

A little more history on it in terms of volumes.

Okay. And then second question, I would like to clarify your previous statement that the lower pricing was driven by cumulative volume. Is it reasonable to assume that cumulative volume expands across multi-years?

That's correct.

Okay. And then last question for bookkeeping purpose. I would like to check my numbers for green emitter and green host materials in Q1 2013. Would you share those numbers, Sid?

Total?

Green emitters sales and then green host materials sales in Q1.

In Q1, the green emitter sales, $4.6 million, and host was $3.1 million.

Vishal Shah from Deutsche Bank.

Sid, just wanted to understand the utilization comments you made on red. Are we getting close to that point with green as well, I mean in terms of utilization rate? I assume it's pretty high. Where do you think -- how do you think the utilization trends for green consumption as the year progresses?

Then I'm assuming that the guidance, at the time you provided guidance, you had a view on for S4 sales, but since then, I think the outlook has improved quite a bit yet your revenue guidance is pretty much unchanged for the year. So I'm just wondering if it's conservatism or if there's something else that's going on. Thank you.

Well, in terms of revenue guidance, it's still very early. We only have four months behind us and we just started, as we said, shipping green and green host and commercial quantities. So it's really difficult for us to predict. There's a lot of uncertainty and so we will continually monitor this, but it is way too early in the year for us to make any real predictions of what the year is going to look like.

And regarding the utilization, we know that over time, they have redesigned source cells; they continually to tweak the recipe in terms of layer thicknesses, and doping concentrations and lots of different things that they do in order to be more efficient and I think they will continue to do that. We believe that they're very efficient in terms of the red materials today. And they probably have a ways to go on the green but we're not in their factory and to give you an answer for this, we do expect to see some efficiency though as we move forward.

Craig Irwin from Wedbush.

Congratulations on the ramp in green. Most of my questions have been asked already,

But the one thing that I'm -- I'd really like to learn more about is, what you are doing on blue now? What's the update there?

And then the other layers that you are potentially looking to explore these commercial opportunities with the Fuji patent portfolio. Where that stands and what we can potentially look at over the course of the next year or so?

Well, with blue, we're continuing our investigation in how to stabilize the molecule at that -- the appropriate wavelength. We've made some very good progress on a scientific level but we've not gotten to the phase where it is commercially viable. And one of the things that we 're looking at is the whole emissive layer system and how that will effect the performance of the blue.

So we're really looking at how the emissive layer system and the corresponding other material layers in the stack will affect the performance of the blue. Some of that has been very helpful. Some of the patents we acquired from Fuji have been very helpful in that technology exploration.

Great. Then next question I wanted to ask was around the volume thresholds for new pricing tiers for your major customer. Can we expect that there would be additional pricing tiers that they could hit during the course of the agreement?

And would they be structured with similar volume milestones? Or will the milestones for volume probably be structured a little bit differently than the total volume delivered to date?

Well, we would expect that there are still some threshholds that they would have to meet and the cumulative from the beginning through the contract. So they're not going to be restructured. They are built into the contract today.

(multiple speakers) The volume that was necessary for them to reach the new pricing threshold that they met in the first quarter. Are we looking at some similar volume increase before they meet their next pricing threshold or is it structured differently than that?

Are you talking about in terms of the break points, are they equal?

Yes.

Honestly, I don't know specifically the answer. I know that they are built in and it's based upon when we negotiated the contract. I believe that they're fairly close to equal but I couldn't answer that question specifically for you.

Andrew Abrams from SCR.

A little clarification on the royalty and license. The increase there, it -- could you attribute this to what you would have called developmental chemicals in the old days? And if so, would this convert into commercial chemicals sometime in second or third quarter according to what you expect?

Well, this is -- these are materials that are being sold that were -- they could be commercial materials. It depends on the -- whether or not they've signed a long-term license agreement or not.

Okay. And --

They could be the development and/or commercial.

Got you, okay. So they wouldn't fall into the old only development. They could be both.

No, that's correct.

Okay. The inventory levels that are down in this quarter, your overall inventory, is most of that coming out of the NSCC green host material or have those stayed roughly the same?

I'd say it's come out a little bit of every -- green emitter and green host have come out.

Got it. And --

And the red.

Lastly, just on the Samsung's minimums. I know it's very early in the year. According to what you would have expected in terms of those minimums for the full year of 2013, are we close -- I'm assuming we're close but just if you could confirm that --

We expect them to meet their minimums for 2013.

Alex Gauna from JPM Securities.

I was wondering if you could give us some color around how your customers are doing with yields and specifically, the newer product lines and newer back planes both at Samsung and beyond? I'm wondering as those yields improve, do you stand more benefit from those companies getting the price points and getting volume up than you do for maybe hitting efficiency improvements that would actually decrease your materials demand? Thank you.

We -- the yields at our customers are something that they keep very, very secret. So they don't share them with us. But generally speaking to your question, the larger the markets or the higher the yields, the lower they can get their products, the better that will be for us and the industry.

So it's fair to say you're not expecting any near-term gap down in your material sales because yields are improving?

That is correct.

And then you went on quite a bit about the success Samsung is seeing and expects to continue seeing this year. But I'm wondering if you can give us an update on the productization beyond Samsung. I know you talked about AUO Electronics and, but really, where are they in terms of letting you know they're ready for primetime volume ramp?

Well, AUO has announced a smartphone display for this summer. I think their volumes will be much smaller than Samsung.

LG is talking about a flexible display in the fourth quarter. Again, compared to Samsung, volumes will be much smaller.

And you have the two TVs, LG and Samsung, again, they're starting out small. So I think the major driver from a commercial revenue standpoint is going to be Samsung and smartphones.

(Operator Instructions)

Jagadish Iyer from Piper Jaffray.

Two questions. First, how should we be thinking about these ASP declines that we are -- that you're seeing in the first quarter as we progress through the year? Is there going to be like a nominal -- what kind of modeling should we be thinking about this ASP decline? And then I have a follow-up, please.

Well, we won't disclose the pricing of our materials. We've seen some declines, obviously, as we said on volume breaks. We do expect though, in terms of the overall increase, we expect material sales to increase as we've said with our guidance that green and green host materials should go up. So I don't expect the impact to be that significant on the ASP reductions that we've had.

Yes, okay. (multiple speakers) Is there a qualitative perspective that you could give, that's a single-digit or a double-digit decline?

I really don't want to talk -- we don't really disclose our prices.

Okay. Fair enough. Fair enough. That's fair.

And I just wanted to understand on -- you had talked about optimization of the emitter materials, so I was just wondering, . is there a similar scenario that is likely to play out on the host side as well? Thank you.

I -- in terms of the emitters, it's really doping concentration and which -- and layer thickness which would impact, which has some impact on lithium. I don't really believe that the host layer would have the same efficiencies associated with it in terms of utilization. The host layer is a much thicker layer.

So I don't really see that. I don't think they're apples and -- I think they're apples and oranges.

Okay. But is there a milestone like what you talked about in terms of volumes and ASPs on the host?

There is not. The host material business is essentially a price and performance business. There's not -- there's no long-term contract involved in our host business.

Jim Ricchiuti from Needham & Company.

Can you say whether, as you introduce new red materials, new red emitter, does that change the arrangement at all with your largest customer in terms of pricing, if there's a significant improvement?

The short answer is, yes, but we really can't get into what's in it. I mean, there are different things in the contract that will allow us to do certain things but I really can't get into all the details.

Okay, fair enough. And Sid, can you remind us, as we look at your guidance for the full year, at the upper end of the guidance, would you remind us what you're assuming or -- if anything, in terms of the TV market?

The TV market, we have looked at and we always expected TV mark -- TV not to be a significant part of our business. We've always anticipated TVs just taking longer. There is some TV in our projections for the yea, but we expect the -- really the -- most of our business to be mobile devices this year.

Okay. And is it potentially a greater mix of mobile, just given what we're hearing from Samsung? It versus what you were saying -- versus your earlier expectations albeit very small for TV. Just trying to get a sense if there's been any kind of a mix shift in your assumptions.

No. There has not been; not in our assumptions.

(Operator Instructions)

Brian Lee from Goldman Sachs.

One follow-up from me. If I take your comments at the beginning of the call, Steve, you mentioned Samsung is expected to double their OLED smartphones based on analyst reports, around 200 million this year; they did 100 million last. And based on those same analyst reports, they're talking about 100 million potential units for the S4. So if we just use that math, 100 million units of S4 and the same 100 million non-S4 Galaxy devices that was shipped last year, basically staying flat, Knowing what you know about the content of the various devices, how should we think about, at least directionally, what your material revenue mix would look like?

I'm not looking for a number per se, but is it fair to assume that, in that context, green host is the biggest and then green emitter is second and red emitter would actually be the smallest revenue number this year? Or can you give us any sense of how those three would rank in that context?

It's hard to specifically go through because when we do actually some projections. Just to give you an idea, in this quarter, green emitter was the largest portion of our material sales. And then it was on a commercial side and then it was host and then red.

So, I mean, if that helps. (multiple speakers) It's really too early to try to really diagram exactly what the results are going to be.

Hendi Susanto from Gabelli & Company.

Steve, I would like to follow-up, is it reasonable to assume that the gross margin between green emitter materials and red emitter materials are comparable?

It's -- the margins for emitters are normally comparable. However, as you introduce new products, there are different pricing schemes for new products and different volumes. So right now, there's probably more margins than green than in red but it's still very early. The host margins are the ones that are significantly lower than the emitter margins.

And then on the cost side for green host materials, are there anything in place that may change the margins going forward?

It is still early in that scale up process. So our costs are, as you scale up each batch, depending on how large the batches are. Some are a little bit less costly than others; some are more. There is still this scale up of our host that's still in very early stages.

So we are seeing cost that, like I said, are really not stable at this time. We expect them to be over the year as the volumes grow. But right now, they are not.

Josh Baribeau from Canaccord.

It's Josh for Jed. Just wanted to clarify some of comments you made earlier. Sid, I think you had mentioned that gross margins going forward on the materials side were 70% to 75%. And, A, I wanted to make sure I heard that correctly. And B, I wanted to see if that was just for a near-term perspective or if that's more of a long-term outlook?

Well, as I said, the gross margins on total material sales, we expect to be in the 70%s, 70% to 75% range. That would be for 2013.

Okay. And then so if I'm looking more historically, they probably averaged around 90% so that extra 15%, can you help us out with how much of that comes out of the R&D versus how much was the pricing effect?

Well, there is on green, there is last year, a lot of the green costs were in R&D. In -- not in last year even, in the prior quarter. So our green cost per gram last year was significantly lower than cost per gram this year because it is in full commercial production.

And other thing that would impact margin, as we said, is the percentage of host this quarter versus last year. Our host margins are lower than they are on the emitters. So those two things impact our margin in this quarter and would have some impact as we move forward.

And with no further questions in the phone queue, this does conclude our question-and-answer session as well as our call for today. We thank you for your participation.