Universal Display Corp (OLED) 2013 Q2 法說會逐字稿

Good day. Welcome to the Universal Display Corporation second quarter 2013 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Darice Liu, Director of Investor Relations. Please go ahead.

Thank you Jessica, and good afternoon, everyone. Welcome to Universal Display second quarter earnings conference call.

Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer. Before Steve begins, let me remind you that today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion 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 of the date of the live webcast of this call, August 8, 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 the statements are subject to the 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.

Thanks Darice, and good afternoon to everyone on the call today. In our second quarter of 2013, Universal Display delivered a tremendous quarter. With record revenues of $49.4 million, record operating margin of 44% and record earnings of $0.33 per share. We believe this was a pivotal quarter for us as the quarter provided an excellent preview of the Company's growth potential.

It's an exciting time for the OLED market. We are encouraged by the growing customer discussions and pipeline activity that we're seeing in the display and lighting markets. We continue to work with top display manufacturers who have OLED investment plans to scale up production as well as develop new products.

With the introduction of the first commercial mobile product utilizing both our red and green materials in the second quarter of 2013, we have seen our green emitter sales almost triple quarter-over-quarter and our green host sales more than double quarter-over-quarter, both contributing significantly to earnings.

I would like to take a moment to thank our employees for all of their hard work. Across the Company, we are building momentum for continued profitable growth. Over the past few years, we have made great strides in improving our materials and technology. We now have both red and green emitters as well as a green hosts in commercial volume production.

Looking forward, we're working to expand Universal Display's growth profile. We are mining our core Phosphorescent and Fujifilm's OLED intellectual property for next generation materials and technology, which will support our customer's product roadmaps, including flexible displays, TVs and lighting.

Augmenting our expanded material portfolio, we are also pursuing new avenues of growth, through projects such as single layer barrier encapsulation and organic vapor jet printing. Encapsulation and OVJP are long-term projects that are still in the early stages of development but look quite promising.

In summary, we believe we are building a business that can sustain attractive growth rates over the long term, consisting of new materials and technology, new customer agreements and new commercial OLED products, all of which we believe will contribute to our growth in the coming years.

Now for the review of second quarter operations, I'll 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 second quarter in more detail before commenting on our 2013 guidance.

Universal Display had an outstanding second quarter, achieving record revenues, operating margins, operating cash flows and earnings. Revenues for the second quarter of 2013 were $49.4 million compared to second quarter of 2012's revenues of $30 million. Two major factors driving our revenue growth were royalty and license fees and material sales, roughly a 45% to 55% split.

Our second quarter 2013 royalty and license fees were $21.2 million. $20 million stemmed from our Samsung license agreement, which is up from the second quarter of 2012 bi-annual license payment of $15 million. Our total material sales were $27.1 million in the second quarter, of which developmental was $1.4 million and commercial was $25.7 million.

Breakdown of commercial material sales by color. For the second quarter of 2013, the prior quarter and comparable year-ago quarter are green emitter sales were $13.1 million in the second quarter, up 186% sequentially from the first quarter's $4.6 million, and up year-over-year from 2012's $1.5 million.

Green host sales were $9 million in the second quarter, up 192% sequentially from the first quarter's $3.1 million and up year-over-year from 2012's $1.4 million. The substantial rise in green emitters and host is attributed to the first smartphone utilizing both our red and green materials, ramping volume production. Red emitter sales were $3.6 million in the second quarter, up 25% sequentially from the first quarter's $2.8 million but down year-over-year from 2012's $5.1 million. As we noted during last quarter's earning conference call, our red emitter sales have been impacted by material efficiency as volume by -- as well as volume price breaks. We believe we are near the tail end of these pricing breaks.

Material costs in the second quarter were $8.3 million, sequentially up from the first quarter's $3.1 million. Most of this increase is related to more than 110% increase in volumes; the remainder is related to gross margins. This translates into second quarter material gross margins of approximately 7%, down sequentially from the first quarter's approximately 76%. This decline is attributable to a product mix and price reduction.

Our royalty and license fees gross margins remain at a robust 97%. This brings our total gross margin for the second quarter and the first half of 2013 to approximately 80%.

It has only been 3.5 months since our first commercial smartphone -- since the first commercial smartphone, utilizing our red and green materials, was launched into the worldwide consumer market. While we have seen a surge in green emitter and host shipments due to the short timeframe since the new material recipe was adopted, hard data and predictability on the run rates and product mix, major factors in the material cost is rather limited.

Operating expenses, excluding cost of materials sold for the quarter, were $19.3 million, essentially flat from last quarter's $19 million but up year-over-year from 2012's $15.5 million. The increase is mainly attributable to an increase in patent and amortization of acquired technology expenses, primarily due to higher amortization, associated with the Fuji Corporation OLED patent portfolio acquired during the third quarter of 2012. Regarding the year's full OpEx, we still believe 2013's operating expenses, excluding material costs, will increase approximately 15% year-over-year.

Our operating margins remained robust and increased 100 basis points year over year. Second quarter 2013 operating margins were 44%, up from the comparable year-ago quarter which was 43%.

Taxes were $6.5 million in the second quarter, in line with our effective tax rate of approximately 30% for the year. We would suggest that the Street use this quarterly tax rate for the second half of 2013.

For the second quarter of 2013, we earned a record $0.33 per share in net income compared to second quarter 2012's $0.23 with each of our revenue streams contributing to our healthy profit.

Moving to the balance sheet, we ended the second quarter with $245 million in cash and short-term investments, up from March's quarter of $220 million. Operating cash flow for the quarter was a positive $26.4 million, the best we've ever had.

Regarding our patent oppositions, there have been no material or significant new challenges or decisions since our last quarter's conference call. In the second half of this year, we are expecting a decision on one patent hearing and a couple of oral hearings are scheduled. More details can be found in our 10-Q.

Now to our 2013 guidance. Based on customer discussions, current operating levels, product mix as well as other major variables, we now expect our 2013 revenues to reach the high-end of our $110 million to $125 million guidance range for revenue, which includes Samsung's license fee of $40 million.

Looking at the quarter, we are proud of our results. Not only did we achieve record revenues, operating margins, earnings and operating cash flow, but we continue to demonstrate that Universal Display's growth opportunities are just beginning. Let me turn the call back to Steve for some closing remarks.

Thanks, Sid. As you can see, we are well-positioned in this growing market to increase revenues and earnings year-over-year for the foreseeable future, based on growing customer list and expanding product portfolio of new materials and technology and a ramp of new OLED products in the commercial market including TVs, flexible displays and lighting. We believe that all of these factors will drive the Company's trajectory, top line and bottom, to be exceptionally positive over the long term.

On that note, Jessica, let's start the Q&A.

Thank you, Mr. Abramson.

(Operator Instructions)

Brian Lee, Goldman Sachs.

First, on your comments around 2013 guidance, I'm just trying to couch how you're viewing the high end of guidance. There's still five months left in the year; you sound confident in doing the high-end. So is the right midpoint now something like $120 million? And then just on that point, how much wiggle room is there around that on either side given we've got almost two more quarters to go?

Well, there -- what we've said is at the high-end, there's a number of major factors that affect our guidance, which includes green emitters and green hosts. We've been in commercial production for only about six months, so it's -- it really is still difficult for us to give you a really narrow range. It's as good as anything, to be honest.

Okay, fair enough. Well, maybe on that point, it does sound like visibility has improved. You mentioned specifically the first phone to use both red and green has been the driver of growth this quarter and it's been out for 3.5 months. Can you provide any color on the second half, how many other devices you might be expecting to use both red and green?

Well, it's difficult for us to talk for our customer. We believe that Samsung, Display Corporation, our customer, will continue to buy these materials for their devices. We don't really have visibility into what the end product is that Samsung Electronics puts them in, But we've -- right now, based upon, as I said, the discussions with our customer, we're comfortable at the top end.

Vishal Shah, Deutsche Bank.

This is Susie Min in for Vishal. Thanks for taking my question. Congrats on a great quarter.

I wanted to understand a little bit more about what you're seeing in terms of utilization and views on the red? And how we should be thinking about the mix between red and green going forward just given if utilization yields is improving for some of your customers. How that may impact the way we should think about the mix of your material sales?

Well, it is still very early stage and if we're -- red -- for green, for commercial production; our product mix is shifting. We continue to change, as -- continues to change as we add new materials. It's -- even though we've seen, they've been using red for about four years so we've pretty much have seen the efficiencies in red. They're at the early -- they're at the beginning of the ramp in terms of efficiencies for green.

We really don't know, as we've said, it's only been a few months that we've been selling it. We probably will have a better feel for what the efficiency ramp is over the next two quarters whether they continue, whether the efficiency ramp is steep or not steep; we really don't know. There are different materials, or they're deposited differently. They have different results so I don't think you can take from one and translate it directly to the other.

Okay, okay. How should we think about margins going forward? Obviously the host materials have a lower margins relative to the emitters. But what sort of leverage can you pull to maybe offset some of that pressure as maybe the mix between the emitters and the host change and you've got a little bit more host sales? Thank you.

Well, the -- it is really difficult for us to predict. As long as both of them continue to grow, if host materials proportionately grow faster than emitters, then there may be some pressure on our margins. And regarding that, if that's the case, if it moves that way, we can see margins dip a few percentage points per quarter in the second half of the year, but it really depends upon the products mix and pricing.

(Operator Instructions)

Alex Gauna, JMP Securities.

Nice quarter. I was wondering, you mentioned on getting towards the end of your price breaks on volume shipment of the red and you just touched a little bit on efficiency with the red. Have we squeezed out most of the efficiency gain such that red should now attract more end device consumption. And can you maybe give us a ballpark on what that end type of consumption growth rate looks like to you right now?

Well, we think we've seen a lot of the efficiency gains. We can't predict exactly what our end customer is going to do in terms of their manufacturing systems. But we also believe that we're near the end of the volume pricing breaks as well.

Any comment in terms of what kind of growth rate you see in terms of consumption or is that too much into the crystal ball?

That's probably too much in the crystal ball. It's going to grow commensurate with the volume growth exactly what the two slopes are going to look like is really a little bit too much on the crystal ball.

In terms of green, should we, in terms of setting our expectations, remember that there are going to be those efficiency gain headwinds? And can you remind me, green is not involved in your current licensing to Samsung; is that correct? That's something that could also factor in going forward?

Green is included in our current license agreement with Samsung. Blue is not included with our current license agreement with Samsung.

In terms of green, we are seeing robust volume shipments, which will likely lead to some volume pricing breaks in the current quarter. But we're just at the beginning, we've just got about 3.5 months - 4 months of green materials and they're just beginning to introduce them into their products. So we really do need a couple of quarters to be able to do some trend analysis.

Jim Ricchiuti, Needham and Company.

Steve, I just wanted to follow up on that. So you -- it seems like you're suggesting that second half, your materials revenue, at least based on the upper end of your guidance, could be down. It sounded to me as if green was the wild card here and yet you're suggesting I think that green is still going to be -- you're anticipating pretty good volumes for green. So maybe you could just help me understand what some of that dynamics are in the second half in terms of the materials revenue?

Well, as you noted accurately Jim, one of the major factors is green emitters and hosts, which have only been in commercial production for a short period of time. We need a few more months and quarters to be able to assess the types of run rate and product mix trend, if any, with those new materials. So for the time being, we prefer to stick to our current guidance range which we've narrowed to the high end. Once we get more information we'll be able to provide updates on our next earnings conference call.

Okay. Just a follow up, a separate matter, can you talk a little bit about whether you feel you're closer to any new commercial license fees versus, say, a few months ago?

Well, we are working with all the major players under various agreements, whether it's license agreement or material supplier agreements, and we continue to push those negotiations forward. And when the appropriate time comes, we'll evolve into a different business relationship as appropriate.

Osten Bernardez, Cross Research.

Real quickly, just to clarify, on the price breaks that you expect to see for green emitters, did you say in the current quarter or in the first quarter? And then in addition to that, or rather tied into that, is this just an initial price break for green? And will it not be to the same magnitude that we saw in the first quarter for the red?

In terms of price break, because the volume of green is at a high level, they will probably get to price break points faster than red did. Now in terms of red for the first quarter compared to last year, there was a decline over the year from 2012 to 2013 and the price, but as we said, we think we're close to the end of the price breaks for red. Green, we're really at the -- just pretty much at the beginning of the volume price breaks, but again, we could see a few percentage points reductions in our margins, really depending upon the mix.

Okay, and then secondly, would you -- I know it's still -- green is just in the market and ramping but how do we think about future material launches? And when do you expect to really monetize some of the IP that came out of Fujitsu?

For the Fujifilm OLED patent portfolio, we've already integrated a number of those material technologies into our current development programs. And it's been able -- we've been able to really broaden the scope of our development programs.

In terms of new materials going into the marketplace, that really depends on our customers, what materials they are interested in terms of what products they will adopt and all of that is a work-in-progress. We are working very closely with our customers as -- to help them develop the products and the materials that would go into those products.

Hendi Susanto, Gabelli & Company.

Congrats on the quite strong sales in the second quarter. If I analyze commercial sales and then look at the ratio of sales between green hosts and green emitters, they are all over the place. I'm wondering whether you could share some insight on those patterns for the last four quarters. I'm wondering, once the adoption of green emitter and green hosts stabilize, whether you have some idea on what the ratio of material sales between emitter hosts and emitter -- between the hosts materials and then the green emitter materials may look like?

I think your question is what's the ratio between green and green host materials? It is still a little bit early for us to predict in terms of what the specific ratio is. You can see in terms of dollars, green emitters were higher dollars than the host materials.

And the host materials, as you're well aware, that we do sell them to DuPont Chemical, who then sells it to -- they actually do somewhat -- they blend it with some of their materials and they sell it to Samsung themselves. So the ratio has been a little bit -- it fluctuates and I think we'll probably have to have at least two more quarters of high volume manufacturing, including red and green before I could really give you an answer to that question.

Okay, and then as a follow up, I'm wondering whether you have any updates on the blue material development and your encapsulation technology?

We are continuing to work very hard on blue. We have not yet gotten to commercial lifetime levels, but once we have something to announce, we will certainly do that.

We have a very tight focused team that's working on blue, both from an evolutionary process of our existing material sets as well as looking at some revolutionary ways of creating blue. The encapsulation technology, as you know, the display is using plastic as the substrate need to be encapsulated. That's because exposure to oxygen, water deteriorates the materials and plastic, while graded, being bendable and conformable, is very porous. There have been a few encapsulation ideas for plastic, most of which center on multiple barrier layers.

We've been working on a single-barrier layer encapsulation. Compared to a kernel tervis, a single layer means less materials, less weight and less tack time for manufacturing. We're still at the early stages of this long-term project but it looks quite promising.

Thank you and great jobs on the first half of the year.

James Medvedeff, Cowen and Company.

Let me add my congratulations to all the others. Great quarter and great outlook.

I want to touch on the green versus red questions as well. If there's about $22 million of green sales and $3.5 million of red, does that imply that there's 7 times as much green material being delivered than the red?

No, there's a couple of things. First, in red, we're selling just emitters, and green, we're selling emitters and hosts.

Okay.

The actual green emitter sales were $13 million and the host sales were --

About $9 million.

About $9 million.

Okay, that's helpful. So it's still about a 3.5 or so to 1 ratio of green to red and I guess that would be because red is so far down the learning curve at the OEM; is that --

That's certainly one of the reasons red is down the learning curve; another reason is red is in a certain volume price break that green has not yet hit.

That's actually what I meant, thanks. For my follow-up, I'd like to just ask again about the guidance.

I just did a little number crunching and it looks as though you're leaving the Samsung out, the -- that the second half would have to be actually slightly below the first half to even to make $125 million for the full year, the highest end of the range. So I'm wondering, why it would be that if Samsung, if the Galaxy S4 drove a good bit of the sales, the material sales this quarter, why that would be going down in Q3 and Q4?

Well, there's a number of variables in our forecast. One of the major factors obviously is green emitters and hosts, which have only been commercial for six months. As I said, we need a couple more quarters to assess the run rate and the product mix.

Other major factors is the introduction or the ramp of commercial such as the new OLED products such as flexible displays and TVs and these may mean more volume purchases. But to be honest, for the time being, we prefer to stick where our current range that we've narrowed and we will update it on the next call. As you're aware, things just change.

Thank you. I appreciate it, and again, congratulations.

John Bright, Avondale Partners.

Is there a way to look at this quarter and the strong performance in material sales similar to the third quarter of last year at where it looked like they were building up the inventory, particularly on the green side, both emitter and host. You're not necessarily sure about the forecast associated with the exact products primarily associated with the smartphone. Is that a fair way to look at it at the moment?

I'm not so sure that this is the exact same as Q3 2012 and that today, we know that there are commercial products with red and green material in it. Then, there was a push to buy materials and there were in some specific products. But we are now in the Galaxy 4 and a number of other products and use red and green material so we are -- I think it is a little bit different today than it was then.

But and just -- but inventory in general related in your hesitancy to get more aggressive on your guidance is probably because they're picking up, they're building their inventory and you don't want to get ahead of them on -- ?

(multiple speakers) They could be buying materials for their pipeline, too. We just don't know.

My second question is related to the tail end of the pricing as it relates to red. That is contract related, that's why you know that's coming to the end where there's not price breaks beyond that; is that accurate?

Correct.

Craig Irwin, Wedbush Securities.

(technical difficulty) on the solid quarter.

Can you repeat to us? It's hard to hear you.

Sorry. Congratulations on the solid quarter. So one of the things you discussed previously is the potential for a new red, maybe to help with pricing at your major customer. Can you update us on the status of that product and whether or not we'd see differences similar, sort of step up in price as far as what we see for red in the past?

Well, we have -- we are constantly working on new materials and we work with our customers side-by-side to meet their new specifications, and work with them on their roadmap. We are constantly developing new materials and we have developed some new materials that we've talked about being new reds being sampled. The question is, what is the application for those reds and that's something that we work closely with the customers with. Right now, the red that's in the products that they're making is really the red that we expect them to continue using for the foreseeable future in the mobile products.

Thank you. The next question I had was about the deposition rates on green. Is this something you expect to be highly variable over the course of the initial adoption at Samsung or do you expect the green deposition rates to flatten out relatively quickly?

When you say deposition rates, are you talking about the manufacturing efficiency that the customers would be using?

Exactly, yes.

Each molecule is different at the customer's plant, so -- and that's really within the purview of the customer, one of the reasons why we do need a couple more quarters to really understand what the run rate is going to look like.

Jed Dorsheimer, Canaccord.

Congrats on the quarter. So just two questions, first on the -- Sid if I look at the price break from Q4 to Q1 that occurred in the red, it was about a 40% decline and I know that you had mentioned that there was also a tick down in volume. So as it relates to the green, would the price break be similar in range if volumes are hit? And then is that on both green emitter and green host or would that just occur in green emitter? And then I have a separate follow-up.

The specifics of the 40% drop, I don't exactly know what that number is. We did see a decline in pricing. I don't think there's any 40% declines. The declines in our pricing is based upon our contract with Samsung and that relates only to red and green emissive material.

Got you. Great, thank you.

And then just wanted to move over -- most of the call has been spent on handsets. So during the quarter, LG did launch the TV. All of the upside though really was Samsung related not LG related; is that correct? And do have any thoughts on the TV market?

On what?

On TVs, OLED TVs.

Okay, most of the upside in this quarter was smartphone related; that is correct. Currently, OLED TVs are manufacturing in pilot lines, as you know. We believe as production transitions from pilot to volume production, costs are going to decline. Most importantly, we highly doubt that the display makers who have entered and are planning to enter the OLED TV world would do so without believing that they could eventually be competitive with today's products.

Andrew Abrams, JG Capital.

Congratulations guys. One or two quick questions. How close was Samsung's actual order rate versus your rolling guidance that they give you? Have they been getting more accurate or are we in outer space again because of green?

It's difficult for us to answer that question, mainly because we do get estimates and sometimes they need them and sometimes they don't. This quarter was a very good quarter for us whether these will continue is something we really have to see.

Are they getting better than they were? Probably. Are they real, real accurate? Probably not.

Got it. Okay. And last, do you have any understanding of the actual sellthrough of host material from NFCC? Or is it basically you just see what is sold to them and do you have no idea what their inventory levels are before they're sold to Samsung?

We have a sense of that but we don't have specific numbers on that.

Jagadish Iyer, Piper Jaffray.

First, y question is, why wasn't red revenue volume lower (technical difficulty) and green emitter given that red is likely in three devices versus a single device for green?

The red, they use red more -- Jagadish, if I understand your question, they simply use red more efficiently. And they've been using it for a lot longer than they have been using green. We don't know all the end products that the materials go into.

Okay. Then how would you characterize the red volumes versus green volumes for the second half of 2013 versus the first half? Thank you.

We're really not making any predictions, we've given guidance on the top revenue line. Do we think it will be in proportion? I think that it should be fairly close. They clearly are using more green than they are red in the devices.

Hendi Susanto, Gabelli & Company.

Steve, in the annual meeting, you talk about PPG building and new secondary facility. How do you plan to utilize the secondary facility and how much capacity it will have relative to your current capacity?

I don't have the specific numbers but -- of the capacity, but basically, we're going to be using it because our production volumes are expanding and we needed that second facility. So we're going to be using that for additional red and green materials at this point in time.

James Medvedeff, Cowen and Company.

Just a quick one, on the R&D spending which appears like it's ticked down a little bit from the first quarter and I'm just wondering if that's a -- what's behind that downtick and whether that's a sustainable number?

There are a number of things in our R&D number that includes -- that are somewhat fluctuating. Just to give you an idea, sponsored research with our partners, there are certain quarters and times where they do more work than others depending on the load. So from our standpoint, our basic number at UDC is fairly steady but some of the other ones that get built into R&D number can fluctuate at times.

And we are continuing to grow our R&D team. So those numbers may fluctuate quarter to quarter. Overall, we are continuing to grow and --

We're adding to our -- we're adding to the UDC team here but like I said, there are a number of variables that go into R&D.

Are you able to say what the UDC level is, that would not be fluctuating?

I can probably give you a little color maybe later on. I don't have the specifics right in front of me right now.

Okay, then just in general, should we think of this as a lower than average number?

No, I think what we said is we expect the numbers for the year to be year-over-year, up about 15% in OpEx and those will fluctuate a little bit, whether SG&A or R&D, they all do fluctuate a little bit.

Great, thanks again.

There's a number of non-cash items in there that somewhat fluctuate, too.

(Operator Instructions)

Andrew Abrams, JG Capital.

Just a quick one. Was there any yellow or blue sales in the quarter or at least numbers that are appreciable?

There were some but they were very small and we didn't really discuss them because they were so small compared to the others.

There are no further questions. That does conclude our presentation for today. Thank you for your participation and have a wonderful day.