Universal Display Corp (OLED) 2013 Q3 法說會逐字稿

Welcome to Universal Display's third quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, November 7, 2013. I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please, go ahead.

Thank you, Lara. Good afternoon, everyone. Welcome to Universal Display's third 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 beings, 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 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, November 7, 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, such as those relating to Universal Display's corporation technologies and potential applications of those technologies, the Company's expected results, as well as the growth of the OLED markets and the Company's opportunities in that market. 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.

Thanks, Darice. Good afternoon to everyone on the call today.

In our third quarter of 2013, Universal Display delivered another set of outstanding results with revenues of $32.8 million, operating profit of $4.2 million and earnings of $0.12 per share. Universal Display is not only benefiting from new OLED capacity, but also the adoption of our green emitters and green hosts. As a result of this expanded commercial material portfolio, our revenue opportunity for substrate has grown tremendously. This was evident during the quarter as material revenues achieved record levels of $30.3 million, increasing 11.6% sequentially from the second quarter of 2013.

Turning to the OLED industry, during the quarter the industry gained quite a bit of ground, including commitment toward larger generation OLED TV investments, as LG Display held a commemoration for the conversion of a Gen-8 LED line to OLED; new Taiwanese production as AUO begins to ramp up its Gen-4.5 line; the advent of commercial conformable displays. Both LG and Samsung advanced their OLED product roadmap's to now include conformable displays, which we believe are a foray into the spectacular world of flexible displays. Meaning the eventuality of a fully foldable, bendable, and roll-able commercial display which can only be created with OLED materials. The development of the wearable display market with OLED smartwatches and plans to broaden OLED displays into the mid and smartphone market. As the display market continues to ramp commercial production and the lighting industry continues to build up its development work, we believe that this is just the beginning for the OLED industry.

During the quarter, there were two patent opposition decisions. European patent, EP'395, our iridium L2MX composition of matter patent and Japanese patent, JP'024, one of our early phosphorescent patents. EP'395 and JP'024 are two of the more than 60 patents issued worldwide that cover four early fundamental phosphorescent OLED inventions, with the latter one not set to expire until late 2020. We were pleased that the European Patent Office and the Japanese IP High Court upheld the novelty and validity of the invention in our patents. For EP'395, they EPO affirmed the basic invention and broad patent coverage, but narrowed the scope of the original claim. For JP'024 the Japanese IP High Court reversed the Japanese Patent Office's prior invalidation of the patent broad claim and remanded the matter back to the JPO. More details can be found in our 10-Q.

Regarding recent questions about patent oppositions, oppositions to our patents have been ongoing for years. We expect it to continue. This is to be expected for any IP company with fundamental IP. The bottom line is that one decision favorable or unfavorable for any one patent in any one jurisdiction is not expected to impact our commercial business or existing agreements. With over 3,000 issued and pending OLED device, architecture and material patents worldwide, a number that is growing, we have built an extensive global IP framework. This is to not only fortify our licensing and materials business model for decades to come, but to ensure that the trajectory of our future is not defined by any one patent or decision.

Now, for the review of third quarter operations, I'll turn the call over to Sid.

Thank you, Steve. Again, thank you everyone for joining our call today. Let me review our results for the third quarter in more detail before commenting on our 2013 guidance.

Universal Display had another great quarter. In the third quarter, we achieved record material revenues, strong operating profit and healthy earnings. Revenues for the third quarter of 2013 were $32.8 million compared to third quarter of 2012 revenues of $12.5 million. Two major factors driving our revenue growth were increased manufacturing capacity by our customers and the adoption of our green emitter and host materials. Total material sales were $30.3 million in the third quarter of which developmental was $2 million and commercial was $28.3 million. The breakdown of commercial material sales by color for the third quarter of 2013, the prior quarter and the comparable year-ago quarter are green emitter sales were $13.6 million in the third quarter, up 4% sequentially from the second quarter's $13.1 million and up year-over-year from 2012's $1.1 million.

Due to the strong volume run rate, we did have volume pricing breaks in the quarter. This is in line with our prior commentary. We believe, though, that we are nearing the tail end of our agreed upon cumulative volume pricing breaks. Green host sales were $11.2 million in the third quarter, up 24% sequentially from the second quarter's $9 million and up year-over-year from 2012's $1.6 million. Red emitter sales were $3.4 million in the third quarter, down 4% sequentially from the second quarter's $3.6 million and down year-over-year from 2012's $3.7 million. Red volumes were up in the quarter. We believe that we have reached the tail end of our agreed upon cumulative volume pricing breaks.

Our third quarter 2013 royalty and license fees were $1.5 million, which does not include the Samsung license fee. The Samsung license fee, which is expected to be $40 million in 2013, is recognized in the second and fourth quarter of the year. Material costs in the third quarter were $9.8 million, sequentially up from the second quarter's $8.3 million. The increase is related to higher volumes in product mix. Third quarter material gross margins were approximately 67%, down sequentially from the second quarter's approximate 70%. This is attributable to product mix and volume price reductions. Third quarter operating expenses, excluding costs of materials, were $18.8 million, slightly down from last quarter's $19.3 million, but up year-over-year from 2012's $17.5 million.

We expect the full year's operating expenses to increase approximately 10% year-over-year. This excludes material cost and amortization of $11.6 million associated with the Fujifilm Corporation OLED patent portfolio, which we acquired in the third quarter of 2012. Operating income was $4.2 million for the third quarter of 2013, compared to an operating loss of $6.1 million in the third quarter of 2012. We incurred a tax benefit of $1.1 million in the third quarter. This was primarily due to an increase in the projected estimated income not subject to Korean withholding taxes.

As a result, it reduces the estimated annual effective tax rate for the year-to-date. Our fourth quarter 2013 taxes will include a reversal of the reserve of our NOLs, which will translate into a one-time tax benefit. For the third quarter of 2013, we earned $0.12 per share in net income compared to a third quarter 2012 loss of $0.12 per share. Sales of both our host and emitters contributed to this quarter's healthy profits.

Moving to the balance sheet. We ended the third quarter with $248 million in cash and short-term investments, up from June quarter's $245 million. Operating cash flows for the quarter was a positive $7 million and for the first nine months of the year $22.6 million.

Now to our 2013 guidance. Based upon the healthy growth of the OLED market and adoption of our green emitter and host materials, we are raising our full year's guidance. We now expect our 2013 revenues to be in the range of $142 million to $144 million versus our prior guidance of the high end of our $110 million to $125 million range. We are near the end of 2013. The Company has achieved extraordinary growth. We believe that the growth will continue as new manufacturing capacity ramps, new players enter the commercial market.

Now, let me turn the discussion back to Steve.

Thanks, Sid.

The growth of the OLED market in just the past three months since our last quarterly conference call has been remarkable. We have seen a debut of conformable displays utilizing new substrates, the introduction of wearable displays, [namely] smartwatches and new 4K OLED TV prototypes. We believe this is indicative of the commitment towards investing in and expanding the product roadmap to transition OLED technology into the mainstream. It is, indeed, an exciting time for the OLED industry and for Universal Display.

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

(Operator Instructions)

Brian Lee, Goldman Sachs.

I guess, first off, it seems like there has been some Q4 seasonality in your materials revenue the past few years. That's also impacting this Q4, based on the guidance. I'm wondering if there are any other factors at play impacting the materials revenue view here for Q4?

No. We expect Q4 material sales to be principally impacted by lower fab production rates due to the seasonality, year-end inventory levels being managed and pricing breaks. We expect the volumes to pick up in 2014.

Okay. When you guys talk about these cumulative pricing breaks, can you remind us again, are there separate pricing breaks for red emitters and green emitters? Or, based on your commentary, it sounds like they are cumulative across both material types? Just wanted to clarify there.

That is correct.

Okay.

So it's for each independent material has its own cumulative pricing break.

Okay.

But that's our threshold.

Okay. Great. Then I guess my last question, if I can squeeze this in, is just wondering if you can comment a bit on the extent of the relationship and interaction you have with Apple. I know you don't talk about customers that much.

But the reason I ask is, it seems like they recently become a lot more aggressive in funding their supply chain. If you look at their CapEx plans for next year, it's moving up quite significantly and all for supply chain purposes. So, just wanted to hear any takes you might have there? Thanks, guys.

Brian, we really can't comment on Apple.

Fair enough.

I mean, you really have to talk to Apple.

Fair enough. Thanks, guys.

Thanks, Brian.

Vishal Shah, Deutsche Bank.

I just wanted to clarify your comments on pricing breaks. When you think about going forward in 2013, the rest of this year, and on to 2014, what kind of price reductions are we looking at for your customers? Also, can you just talk about your assumptions in the fourth quarter, in terms of the mix of green and red emitter sales, as well as hosts in your guidance? Thank you.

Well, as we said in the script, both of the materials are at the end. The green material and our red materials are at the end of the price breaks. So we don't expect to see much more in terms of erosion of pricing.

In terms of the mix, we really don't talk about that. We do think that there will be some seasonality, but we really don't break out one color versus the other color. I suspect they'll be in line -- we have gone through the red materials and the green materials and the host materials in the quarter. I see no reason to expect that to change.

Okay. That's helpful. And then, you are going to recognize $40 million of license revenue this year, from Samsung. So can you talk a little bit about how that agreement is going to -- how that agreement is evolving? How should we think about licensing revenues in 2014 from Samsung as well as from some of the other key customers out there?

Well, I mean, with Samsung we believe the current trend will continue. With other ones, we're still in the process of negotiating. We really can't talk about them until we complete the negotiations.

So as far as Samsung goes, I mean, you're seeing 30%, 40% growth in license revenues year over year. Is that the kind of run rate we should be looking at in 2014?

Well, 2012 was $30 million and this year it's $40 million. I mean, I think just look at the trend. That's what we expect from Samsung. We'll talk about it on the next call.

Okay. Thank you.

Osten Bernardez, Cross Research.

I guess, to begin, I wanted to get a feel for your take on the -- when you say you're at the end of these price breaks, are you saying that there is potential for incremental but yet not as significant price breaks going forward? Because I am not sure whether you are just being careful with your wording, or you're actually at the end of some of these price breaks.

I am sorry, Osten, your phone is breaking up. Can you repeat your question, please?

Sorry. With respect to the future price-downs of your products based on volume, you stated that you're near the end or approaching the end. I wanted to know, what is the room for future price-downs and how significant -- rather, are we at a point where future price-downs are not going to be as significant as they've been? Or are you truly at the end of future volume discounts?

We're pretty close to the end of the volume discounts.

Okay. And then, thinking of 2014, if you can, what's your take on where the split -- especially for your host materials, can be given that the green host material is still relatively early in its life, but there is potential for competitive adoption?

Right now, we believe that our materials will be used for the foreseeable future. Obviously there is competition in lots of different things. But we intend to stay in the host business and be competitive.

All right. Thank you very much.

Hendi Susanto, Gabelli & Company.

Congrats on strong sales in the quarter. My first question is on flexible organic LED display opportunity. So when you sell red emitter materials, green and then green host for flexible displays, will they be new materials? Will they fall under new pricing structure, or the current pricing breaks? Additionally, would you indicate how much sales went into development of materials for flexible displays, roughly?

Well, Hendi, we really can't comment on what specific materials are going to be used by our customers in the future.

But theoretically, making a flexible display is the same as making a glass-based display.

Okay.

From the emissive layer.

So theoretically, customers will use similar materials and they will fall under the current pricing?

That's correct.

Okay.

They are the same materials.

And then, you had strong sales of green host materials and green emitter materials in the quarter. In the past, there were some fluctuation in green host materials. I'm wondering whether, based on Q3 results, you are at the point where the green materials sales, both host and emitters reflect stabilized [advance] rates going forward?

This is the second full quarter. There has been growth in each. I think we still need an additional couple of quarters to really be able to predict. Then if there is increased volume, obviously, that has to play into it. But just because one is up over the other it really -- realistically, look at the average of these.

Got it. Thank you.

Thank you.

James Medvedeff, Cowen & Company.

Let me add my congratulations on a very nice quarter. So, the other licensees that are obviously much smaller at this point. Is there a -- the Samsung contract is Q2, Q4 heavy. Is there any terms like that in the other licensees?

There is not terms like that in any -- we have a number of lighting licenses. There is no terms like that. It really is a result of the Samsung negotiations.

Okay. And then, a few quarters ago, you mentioned a red host material. You're not apparently selling any of that yet. What is the status of that material and the likelihood for sales?

Well, we are working on red hosts. We have them in development, but none are in sale commercially.

Okay. Finally, as the customer improves their recipe, we know that, for example, they use a lot more green. We don't know how much more, quantitatively, but they are still using a lot more green than red, which may be related to the way their pixels are organized or may be related to the learning curve. How should we think about volumes of green emitter and green host, say, in the sense of an improving recipe by the customer?

Well, obviously, our customers are always trying to improve their recipe. But we also know that we believe that for the long run you have to put more greens [open] into the device in order to get the proper performance. So we do believe that our green emitter sales will always be more in volume than our red.

Okay. Thanks.

Thank you.

Jed Dorsheimer, Canaccord.

Congratulations on a really strong quarter here. I guess just, first, it was kicked around I think a few different ways. I just wanted to clarify though. As we look at green, it's been ramping faster than overall market capacity over the past two quarters here, and I realize that it's only two quarters. But, should I read into the comments that the price breaks nearing an end are suggestive that market penetration is -- or adoption of green is also getting close to 100%?

Jed, clearly they are adoptive. There is more of it. Whether it's 100%, that's something that we don't know the answer. We don't know specifically, which products -- which lines it goes into. So we don't know the answer to that. But it has grown.

Okay. Then it sounds like you're looking at introducing a red host material, which -- any update on blue? I have seen some market commentary of one of your competitors out there talking about building a facility for phosphorescent blue. But I am just curious if you could give an update?

Sure, Jed. Commercial deep blue for displays is a priority work in progress in the Company. We have been making progress, but we do not yet have a commercial deep blue. But I would like to note that we do have a light blue for lighting. So we are able to offer a commercial RGB all PHOLED white lighting system for warm light.

Great. Thanks, guys, and congratulations again.

Thanks.

Jim Ricchiuti, Needham & Company.

The question I have is, with respect to materials revenue in the quarter, I wonder if you could discuss the linearity of this. I am trying to get a better idea of how much visibility you have into what the customers' needs are as -- at any given point in the quarter.

Well, I mean, we do talk to our customers all the time and have folks on the ground. We get projections and we always have inventory to meet their needs. Not sure how else I could answer that.

Well, Sid -- I mean, if you -- I mean, is in a given quarter, are you seeing more demand early in the quarter? Is it spread evenly? Just in this past quarter where you clearly had very strong materials revenue, I'd say probably stronger than people were anticipating, how did the revenue flow during the quarter?

It's somewhat flat. I mean, it's gotten larger. But it's not -- I mean, it's pretty spread out. I mean, there is not one big jump.

Okay. So it's not a case where potentially there could be some inventory build? I mean, clearly there is some seasonality in Q4?

Correct.

I wonder, just on the OpEx, Steve, it might have been you who said there was some guidance or some indication of how we should think about OpEx. Could you just go over what we should be thinking about in terms of Q4 R&D and SG&A?

Well, what I said is that we expect year over year to be about 10%. That's excluding the Fuji license and excluding materials -- cost of materials. So, if you just look at the expenses, we expect it from year over year to be about 10% growth.

Okay. Thanks a lot.

Thanks, Jim.

Jagadish Iyer, Piper Jaffray.

Very strong quarter on the third quarter. I wanted to understand two things. One is, on the green, given that it was strength, was it attributable to only one customer? Or there were more than one customer, on the green?

Essentially it was one customer.

Okay. And then, just as a follow-up, what is your early read on 2014? Is it going to be still driven by mobile devices? Is it going to be one customer? Is it going to be TV? Any color that you can have on 2014 would be greatly appreciated. Thank you.

We really can't talk about 2014 at this time. The capacity today is in mobile. Steve mentioned a number of companies working on TVs and flexibles. But we really can't talk about 2014 at this time.

Thank you.

Thank you.

Craig Irwin, Wedbush Securities.

Congratulations on the solid quarter. First question I wanted to ask is about the number of unique shipments to Japan and Korea in the quarter. If you could comment whether or not there were multiple shipments to make up the demand? Or if this was in one or two pretty large deliveries made to your key customers?

The shipments to Japan you're talking about are our host materials. It's not one or two shipments. It's pretty steady throughout the quarter.

So, roughly weekly?

We really can't go through a daily operations of when we get these orders --

Yes, I understand.

It's when the customer wants it.

Okay. And then, as far as Korea is concerned, have you seen a similar increase in the tempo of deliveries to Korea? Or is this still -- what I understand previously, where there were a couple of large shipments at limited points in the quarter?

We're basically shipping on a regular basis to our customers at a steady pace.

That's very good to hear. The next thing I wanted to ask was -- your guidance actually has a very narrow spread, $142 million to $144 million. I know that we're 40 days in -- or almost 40 days in on the quarter. But that suggests that you have a little bit more visibility than maybe where we've been over the last several quarters.

Can you comment about whether or not this is a degree of confidence that you can understand your customers' short-term demands? Or is this something that's built more off a short-term forecasts? Or -- can you maybe give us an explanation about the narrow spread for your fourth quarter guidance?

Well, I mean, you asked a lot of questions. The answer is fairly simple is that we're very comfortable with the $142 million to $144 million range at this time.

Excellent. And then last question, if I may. The new red that was being tried by a couple of your key customers for TVs. Do you have an update there as far as what the feedback has been from the customer? Whether or not this is allowing them to get the saturation rates they need? If this is something that you think will probably start making commercial deliveries in the next few quarters?

Those types of questions are really customer confidential. We really can't talk about them on the call.

Understood. Thanks.

(Operator Instructions)

Brian Lee, Goldman Sachs.

I had a quick housekeeping question. Sid, you mentioned that, in Q4, a reversal of NOLs will have you get another one-time tax benefit in the quarter. Did I hear that correctly?

That is correct.

Okay. Can you quantify what the -- what a percentage rate or dollar amount that could be?

No, I really can't at this time. It's something that is still being calculated, to be honest. We will know when we do our K.

Okay. And then, on the same lines, I guess, the tax line has been a bit lumpy all year long. You were a full taxpayer in June. Then it's kind of reversed here. What's the kind of state of the state as we move into 2014? Will you be paying the full tax rate? Or will it still just be the withholding on the Korean licensing payments? Thanks.

Well, from a cash standpoint, we clearly will be using up our NOLs. So from an actual cash payment standpoint, it will be still the alternative minimum tax that we pay, plus the Korean withholding tax. For our GAAP purposes, we will determine what our effective tax rate is. When we give guidance for next year, we will then deal with it at that time.

Okay.

Craig Irwin, Wedbush Securities.

Just one follow-up. So if there was a company, maybe company A, that was possibly considering making an investment in OLED manufacturing capacity, would it be logical to expect them to have negotiations with you early on about a potential licensing agreement? Or would you expect something to maybe mature further out off onto the horizon?

To be honest, each of our customers are different. If somebody is going to invest in a OLED manufacturing facility, they would have probably had some R&D efforts. We would be discussing those with them today. But each customer is different.

Thank you.

Thank you.

Alex Gauna, JMP Securities.

It's Michael Wu for Alex calling. Congratulations. Returning to the question about green emitter rolling faster than green host material for the quarter. Is there a fundamental relationship or attach rate, per se, between the two that puts down one from getting too far ahead of the other? Or is that usually just dependent on the customer's [reading]?

I am sorry. We couldn't really hear you. Can you repeat the question?

Yes, we didn't -- you were breaking up.

I am sorry about that. So what I was trying to ask you was about green emitter material going faster than green host material. Is there an attach rate between the two that we should think about going forward?

No, I don't think there is any significant difference going forward. But it depends on the customer and when they order things. To some extent, it just has to do with -- one we sell to NSCC who resells it. One we sell directly to the customer. I don't think there is any real difference. I think it may just be order pattern.

I see. Okay. Great. Ad then, for my follow-up, I was wondering if you can remind us if there is a long-term target gross margin?

Well, I mean, we have talked about gross margins on materials being in the 60% to 70% range and our emitter range materials being 70% to 80%.

Okay. Excellent. Thank you.

Jagadish Iyer, Piper Jaffray.

One follow-up. I just wanted to find out when will your agreement with Duksan start to kick in? What could be the impact to your host margins from that? Thank you.

We are working with Duksan. Their materials are -- they are not in commercial form at this time. I don't expect them to have a significant impact on our margins.

Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn the call over to Sid Rosenblatt for any closing remarks.

Thank you for your time today. We appreciate your interest and support and wish you and your families a wonderful holiday season. Thank you and good night.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.