Universal Display Corp (OLED) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to Universal Display's fourth quarter 2013 earnings conference call. My name is Douglas and I will be your conference moderator for today's call. During today's presentation all participants will be in a listen only mode, following the presentation the conference will be open for questions.

(Operator Instructions )

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Darice Liu, Director of Investor Relations. Please proceed.

Thank you, Douglas, and good afternoon everyone. Welcome to Universal Display's fourth 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 express written consent of Universal Display, is strictly prohibited. Further, this call is being webcast live, and will be made available for a period of time on Universal Display's website.

This call contains time sensitive information that is accurate only as of the date of the live webcast of this call, February 27, 2014. 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 Corporation's technologies, and potential applications of those technologies, the Company's expected results, as well as the growth of the OLED market, 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 report filed with the SEC and should be referenced by anyone considering making any investments in the company security. Universal Display disclaims any obligation to update any of these statements.

Now, I would like to turn the call over to Steven Abramson.

Thanks, Darice and welcome to everyone on today's call. I'm pleased to report that we ended the year with a superb fourth quarter. Revenues were $49.5 million, operating profit was $19.4 million, and earnings were $1.24 per share.

Please note, that the earnings number includes one-time items of deferred income tax expense, and release of income tax valuation allowances netting a benefit of $41.4 million. Excluding that benefit, our adjusted earnings were a record $0.35 per share.

For the year we achieved record revenues of $146.6 million, operating profit of $38.2 million, and EPS of $1.59 per share. This also includes a one-time net benefit. Excluding that, our adjusted earnings were a record $0.70 per share for the year. Sidney will provide further details in a few minutes.

Looking back at 2013, we achieved key milestones that have reinforced our foundation for future growth. Our material sales more than doubled year-over-year to $95.7 million. A large factor of this growth stemmed from the adoption of our green emitters, and green hosts at the end of the first quarter.

According to our top customer, it's latest smartphone, which included our green materials, has approximately 25% higher power efficiency versus its older models. Additionally, we have other customs evaluating our green materials.

In June, we changed our ticker signal to OLED reinforcing our brand as the top OLED materials and IP company in the world. In November, our partner, PPG, opened a second facility to support the rising demand for our phosphorescent OLED material.

In the lighting market, we recently entered into new agreements with leading companies as developmental activity intensified. In November, we signed an evaluation agreement with Philips, and just last month, we signed a license agreement with Japanese chemical conglomerate, Konica.

We are delighted to close 2013 on such an outstanding note. As we look to 2014, the OLED industry is clearly developing into an expanding growth market. In just the past two months, a number of OLED products were introduced and capacity plans reaffirmed.

At January's CES, both LG and Samsung showcased new 4K OLED TV's. Last month, LG Display reaffirmed it's 8G OLED TV commitment with it's first line slated to start ramping in the second half of this year. LGD also noted that it is looking to double it's flexible display capacity. Samsung Display reiterated it's plans to broaden its OLED portfolio to include mid-end smartphones and high-end tablets. And just this week at Mobile World Congress, Samsung Electronics unveiled the Galaxy S5 next-gen smartwatches and the Gear Fit.

Activity has not been limited to Korea as OLED discussions have heated up in China and Japan. Also generating an increased level of OLED excitement are flexible displays, wearable displays, and OLED lighting. We believe all of this sets 2014 to be another extraordinary year.

During the fourth quarter, there were three patent opposition decisions relating to our early fundamental phosphorescent patents. We issued press releases on all three. To summarize, we had two favorable decisions with European 395 and Japanese 024, but one unfavorable decision with European 238.

As we've noted in the past, any one decision, favorable or unfavorable,on any one patent, in any one jurisdiction, is not expected to impact our current or future commercial business or agreements. The bottom line, IP opposition is par for the course, for any company that has significant and important intellectual property. We, with a growing, comprehensive, global IP framework, remain confident in our upward trajectory.

Now, for a review of the fourth quarter of fiscal 2013 financials, I will turn the call over to Sid.

Thank you, Steve. And again, thank you everyone for calling joining our call today. Let me review our results for the fourth quarter and full year in more detail before commenting on our 2014 guidance.

We had another exemplary quarter. Revenues for the quarter -- revenues for the fourth quarter of 2013 were $49.5 million compared to fourth quarter 2012 revenues of $28.1 million. Total material sales were $25.5 million in the fourth quarter, of which commercial was $23.7 million. The breakdown of commercial material sales, by color, for the fourth quarter of 2013, the prior quarter, and comparable year-ago quarters are green emitter sales were $11.6 million in the fourth quarter, down 14% sequentially from the third quarter's $13.6 million, but year-over-year from 2012 $2.3 million. As expected, seasonality and year-end inventory corrections impacted our material volumes.

Green host sales were $9.3 million in the fourth quarter, down 17% sequentially from the third quarter's $11.2 million. In fourth quarter 2012, we did not have any green wholesale. Red emitter sales were $2.8 million in the fourth quarter, down 19% sequentially from the third quarter's $3.4 million, and down year-over-year from 2012, to $3.1 million.

Our fourth quarter 2013 royalty and license fees were $23.1 million, which includes -- included Samsung's bi-annual license fee of $20 million. For 2014, Samsung's license revenues are expected to be $50 million.

Material costs for the fourth quarter were $7.7 million, sequentially down from third quarter's $9.8 million, the decrease was due to lower material volumes from Q4 seasonality. Fourth quarter material gross margins were approximately 70%, up sequentially from third-quarter's approximately 68%.

Fourth quarter operating expenses including cost -- excluding costs of materials were $22.3 million, up from last year's $18.8 million, and up year-over-year from 2012, $19 million. Sequential increases at OpEx stem from bonus accruals, accrual adjustments, and increased PPG R&D expenses. Operating income was $19.4 million for the fourth quarter of 2013, compared to $8.4 million for the fourth quarter of 2012.

Turning to taxes. Due to our year-over-year profitability for the past three years, and positive expectations regarding future profitability, we released some of our income tax valuation allowance in the amount of $59.4 million in the fourth quarter of 2013. Netting this release, and one-time deferred income tax expenses of $17.9 million, we incurred a benefit of $41.4 million in the December quarter.

Beginning in the first quarter of 2014, we will begin reporting an effective tax rate. We are currently modeling a quarterly tax rate of 30%, but results may vary. Note that outside of our Korean withholding tax of 16.5% on license fees, and 1% on US alternative minimum taxes, we do not expect pay cash taxes for 2014, due to our NOLs of $99.7 million.

For the fourth quarter of 2013, we reported net income of $57.9 million, $1.24 per share in net income. Excluding the earlier discussed net benefit of $41.4 million, our net income would have been a record $16.5 million or $0.35 per share, up 200% from the fourth quarter of 2012's $5.4 million or $0.12 per share.

Turning now to our results for the fiscal year ended December 31, 2013. As Steve mentioned earlier, we achieved record revenues of $146.6 million, a 76% increase from the $83.2 million generated in 2012. Material sales for 2013 were at $95.7 million, a 115% increase from $44.5 million in 2012.

Operating expenses, excluding costs of materials and the amortization expense related to acquired technology, was $68.5 million, up 14% from $60 million in 2012, and in line with our outlook of 10% to 15% year-over-year increase. We expect 2014's operating expenses, excluding material costs, to increase approximately 10% to 15% year-over-year. Operating income was $38.2 million for 2013, up 180% from $13.7 million in 2012.

The Company reported net income of $74.1 million, or $1.59 per share for the full year 2013. This included the earlier mentioned one-time net benefit of $41.4 million. Excluding that net benefit, adjusted net income was $32.6 million or $0.70 per share for 2013, up over 230% to 2012's $9.7 million or $0.21 per share for 2012.

Moving to the balance sheet. We exited 2013 with $273 million in cash and short-term investments, up nicely from $244 million in 2012. The increase was driven primarily by the $45 million cash generated from operations during the year.

Now, to our 2014 guidance. Based on our current outlook, we expect revenues for 2014 to be in the range of $190 million to $205 million, reflecting strong double-digit growth of 30% to 40% over the prior year, based primarily on growth in the second half of the year. Excluding the $50 million in Samsung license fees, our material sales are forecasted to grow robustly to over 50% year-over-year.

We are proud of the fantastic progress we achieved in 2013, and we expect 2014 to be another exceptional year of growth. With that, let me turn the discussion back to Steve.

Thanks, Sid. We had a record 2013, which included a number of milestones for us in the industry. The commercial adoption of our green emitters and hosts, three consecutive quarters of profitability, the introduction of conformable displays as in plastic substrates, wearable displays started to take off, and 4K OLED TV prototypes.

Entering 2014, we are excited for the continuing growth journey of OLEDs. I would like to thank our dedicated employees around the globe who helped make 2013 a success. I would also like to recognize our customers, partners, and valued shareholders for your continued support. On that note, operator, let's begin the Q&A session.

Thank you, Mr. Abramson.

(Operator Instructions )

Brian Lee, Goldman Sachs

Hi guys, thanks for taking the question.

Quick one on the fourth-quarter to start off. Did the revenue beat come from materials or non-Samsung licensing sales? And I guess what drove that, since you had a pretty tight range when you updated the guide last November?

I'm sorry, Brian. Could just repeat the very first part of your question?

Yes, just for the fourth-quarter revenue, Sid, you guys came in above the revenue range that you had given last November, and that range was pretty tight, a $2 million range so I was wondering if it was driven by upside in materials, or non-Samsung licensing revenue relative to what you guys internally expecting? And then what might have driven that?

It was actually up pretty much across the board. It wasn't one thing driving it versus another. It just ended up being a better quarter than we had anticipated. It's not anything specific.

Okay, that's fair enough.

And then, sorry if I missed this, but I know you got into some of the granularity on the revenue outlook for 2014. How much are you expecting your non-Samsung licensing revenue to grow here this year? Because it looks like it's been on a pretty healthy upward trajectory, and took another step up in Q4, so just wondering what type of trends we might be expecting here over the next 12 months?

We actually -- we gave our guidance of $190 million to $205 million. It's a fairly broad range, and we do know that the Samsung amount is $50 million, all we essentially did is just pull that out. We haven't really given guidance on each segment of our revenues between materials, and licensing fees, but we do believe that our materials will be up about 50%.

Okay, last one for me and then I will jump back into the queue. Another one on guidance. I know, Sid, you said in the past you are not quite yet comfortable giving out earnings guidance. But can you at least walk us a high-level through how we should think about operating leverage in the model?

If I look at your 2013 numbers, earnings tripled on 70% plus top-line growth, so clearly there is a lot of leverage here, but a number of moving pieces. I was wondering if there is some way to bracket the earnings potential with your 35% top-line growth guide this year? Thank you.

Brian, I think the best way that I can do that without going into details is, I think we have given a range of 10% to 15% increases in OpEx, we told you we expect our margins to be approximately 60% to 70% across the board, 40% to 50% on post, and 70% to 80% on emitters, and then if you put an effective tax rate in there of approximately 30%, essentially that gives you the answer that you are looking for.

Vishal Shah, Deutsche Bank

Hi, this is Susie Min in for Vishal Shah, thanks for taking my questions. I wanted to get a little bit more detail on the Konica license agreement that you guys spoke about earlier. And how can we think about the revenue as it relates to that, or any similarities between what we're seeing on Samsung?

The Konica license agreement is what we are considering to be our standard model, certainly for licensing companies that has upfront component, a royalty component as well, for lighting, it's solely for lighting.

Okay, and great. My second question is, on the gross margin front, I think you said 40% to 50% on the host, and that seems quite a bit lower than what -- I think a couple years ago it was something closer to 65%. So is it mostly because of volumes and the pricing agreements that you have? If you could just provide a little more detail that would be helpful.

Host materials, commercially just really started in 2013, and we have been pretty consistent for the last, I believe, year or two in 40% to 50% for host, may have been very early when we were selling just developmental quantities that may have been higher, but realistically these are the numbers that we have talked about almost all year, 70% to 80% for the emitters it's pretty much consistently what we have said all of 2013. The host business is a competitive business.

Okay, great. I know you mentioned last quarter that these margins probably aren't going to change that much.

We do not expect them to.

Okay, great, thank you.

Hendi Susanto, Gabelli & Company

Hi Steve. Hi, Sid. I think the smartwatch opportunity is an exciting one, and would you be also to confirm whether or not Samsung's smartwatch use all the three major materials; the RiT and green emittable materials, and then green host materials?

I don't think we can confirm that, but we do know that all of their Galaxy products and Notes have our materials in them. I don't know specifically about this, it's a brand-new product.

Okay. And then -- okay, and second question, now that we have green host materials for one year, would you be able to share, let's say the consumption ratio between green host material and green emittable materials?

We have given estimates that it's about 3 to 1, 2 to 3 to 1. But it really depends on the recipe and it does vary a little bit. We don't sell the host directly, so we don't have -- we can't tie the two of them completely together all the time, because, as you know, we sell our host to NFCC and then they sell it to Samsung, and I don't really know when those sales really occur, but we've always talked about it 2 to 3 times the quantity.

Okay, and in terms of the dollar?

The dollar amounts, we can give you all the details in a separate call, we will breakdown our red and green emitters and host dollars to you.

Okay, thank you.

Jim Ricchiuti, Needham & Company.

Thank you, good afternoon. Quick question just on the R&D, really jumped sequentially, how should we think about R&D going forward? I know gave some guidance on OpEx.

Some things go up and down as fourth-quarter adjustments, it depends on when we're doing certain things, it depends -- within R&D, is our internal R&D, there's external R&D, there's a number of factors. I think if you take the full year and apply to 10% to 15% to it, you should be in the right range.

Okay. And Sid, if I heard you correctly, you're saying you think your materials revenue is going to be up 50%?

Approximately 50%.

Approximately 50%, just given that kind of an increase, is there anything that we should be mindful of in terms of volume driven price breaks when you get into those kind of levels?

No. As we said before, the contractual price breaks, cumulative volume price breaks, we felt that we've reached that. There are obviously continuing dealings with customers that are always are in small amounts, but we don't expect any step-function price breaks.

Okay, thank you

Osten Bernardez, Cross Research

Hi, good afternoon, thanks for taking my questions. Can you provide an update on the rate of involvement with new customers? We know you work with all the major companies, evaluating different ways of using all this, but could you sort of comment on what you're seeing, -- whether you're seeing any relative change in R&D interest on a per customer basis?

We can't specifically, obviously talk about anything that any one customer does. We are continuing to work with our customers across the board. We haven't seen any change in excitement or interest or R&D efforts that we know of that are going on as customers, and we obviously, with our guidance going up to 190 to 205, we expect this year to continue to grow significantly.

Got it. And then is there a way of thinking about -- over the past year you have earned a lot from the green material ramp, over the past 9 to 12 months, I guess, how do we think about usage going forward for 2014, and how you approach the business as you consider commercializing the future materials?

We expect our green to continue to be used obviously, and as capacity increases, and we have said we expect capacity to increase in the second half of the year, we expect our material sales to grow as capacity grows. There may be other materials, and other things that we introduced during the year, but this is really looking at what we have sold in 2013, should be most of what we sell in 2014.

And then lastly for me, could you just quickly comment -- I know we've discussed this before, but to what extent has the dialogue changed with your customers following some of the rulings in late 2013, from an IP standpoint?

There's been no change, and has no impact on our Samsung paid us December 31, just like they were supposed to. There has been no discussions about this with our customers. It has no impact on it.

Thank you.

Craig Irwin, Wedbush.

Hi, this is Min Xu for Craig, thanks for taking my question. The first quick question, can you provide more color on assumptions behind the 2014 guidance? How much do expect green material price to decline?

We can't. We've mentioned before that our revenue guidance is $190 million to $205 million, with the Samsung licensing, $50 million, and that's really as much granularity as we can give at this time.

Okay, so that guidance, can I ask if the guidance include any expected sales of new materials or new customers in 2014?

We have, --we deal with every major display manufacturer. We have 15 to 20 customers today in varying volumes. Any company who is going to move into, or talks about doing R&D, or production of [AM-OLEDs], we will be talking to, and selling materials to.

Great and any update on your blue emitter and the red host development?

Our blue emitter is, as you know, is an ongoing project, there have been no major breakthroughs that we can announce, we have a number of new materials that we are constantly introducing to our customers. There's really been no change, as of today, in the materials that our customers are using.

Got it, thanks for the color.

You are welcome.

Rob Stone, Cowen & Company

Hi, Guys. You mentioned in the prepared remarks that some other customers were looking at green. Given the commentary that the green material had such a positive effect on power consumption for your biggest customer, what is it that a new customer would need to evaluate before using that material?

A number of them. There's a process you go through in selling small quantities and larger quantities that we have, and go up and back with them. Really, what you need to have any impact on us, is customers having commercial volume capacity, and that's the only way you're going to see any real impact on what we do. You just need new capacity to come online, and new players to come online. The green is the green, and it gives them-- obviously it is a very power efficient.

With respect to the comments about lighting, there certainly seems to be an uptick in the amount of activity. I think you've always characterized lighting as not being that big a contributor to the overall, historically. How are you thinking about that market these days though, in terms of this year, next year, some number of years over the horizon before it would begin to make a material contribution, let's say 10% or more of your business?

I think, obviously, there's been a lot more excitement in this area. A lot more samples and prototypes, and a lot more discussion, and we signed another lighting agreement. I still, this year, it will be less than 10%, I think it will be a few more years before it makes a significant impact on our revenues.

Okay. A question on materials with respect to the two main markets, our mobile displays and TVs, maybe with slightly different requirements, and of course a different recipe between a couple of the big players there, is there any meaningful impact on the materials from your point of view between TV and mobile, or is it just going to be more of the same?

To be honest, all of the TVs that have been made are really been made on prototype lines, and they are being made in very limited quantities. I don't think we can really judge whether the recipes and built-in concentrations are higher or lower in any real meaningful way until there is some real production, and we know what the production quantities we're selling versus what production quantities they are making or how many substrates they start. At this point, it really is -- we really can't tell anything from what we have sold so far.

Okay, and my final question is, as you continue to accumulate a nice cash balance, any potential plans for that, or comments you can make?

No. We, obviously we like to maintain a significant cash balance. I think it's important a company --an IP company needs to have a strong balance sheet. If there are opportunities that come up, the Fuji portfolio came up about 1.5 years ago, if anything comes up, we would be interested in looking at it, and we want to be able to maintain flexibility at this time.

Thank you.

Thanks, Rob.

(Operator Instructions )

Andrew Abrams, JG Capital.

Hi guys, just a question on where you think line conversions are at Samsung in terms of moving from old back-planes to new back-planes, essentially the adoption of green as part of the new back-plane. Do you have any feel for where they are in terms of those conversions?

A, we can't talk about what our customer is doing or how they are doing it. I do believe though, to be honest, I mean, there's a lot more Galaxy 4's and 5's being produced than there are some of the older models and Notes, so it seems that all the capacity seems to be moving in that direction, but specifically about how many lines, even earlier, in earlier gen-equipment. I really don't have an answer for you, that I can say.

Okay, and in the license and royalties for the fourth quarter, there was -- I guess the increment above Samsung was three-point some odd, $3.1 million. Was it concentrated with anyone in particular, or was it just across the board higher on the commercial side?

Is that also being generated on a unit basis, or is that, because I know the normal would be built into the materials for most, but on the commercial side, is that a unit volume oriented dollar amount?

It's actually, a piece of it is Seiko Epson license fee that we had a deferred revenue from Epson of $1.5 million that we've disclosed, and that was taken into revenue because they're really not going to move forward on OLED's at this time, so that was a non-refundable up-front fee that was creditable towards a license agreement if they entered into one. So $1.5 million of that, the remainder really is, when we sell materials with the built-in license fee in it, that's what the remainder of that is. It's a license fee portion of material sales.

Got It. Okay. And just lastly, you were talking about a focus on the second half, I guess, if we are talking about way the quarters, or at least the perception of the way the quarters breakout, is that based on capacity increases, or is there anything else in there, new materials, or anything like that you're building into that?

It's predominantly based upon capacity.

Got it. Thanks very much, I appreciate it.

You're welcome.

Hendi Susanto, Gabelli & Company.

Hi again, Steve and Sid. Would you be able to share more information on the single and encapsulation technology and organic [vapor jet] printing technology, such as, at what stage they are now, and what application you are targeting, whether it's for TV?

These are long-term projects that we have in our lab, and we're looking at them -- we don't specifically look for any one application, whether it's mobile or TV, we're looking, at this point, to ensure that the processes work, and that they are scalable to equipment -- larger scale equipment. As we have said before, we have a number of initiatives that we're looking at for the future, and this is one of them, but it's not specifically geared towards one versus the other.

Thank you.

Again, I'd like --

Thank you, this concludes the question-and-answer session, and I would like to turn the call back over to Sid Rosenblatt for any additional closing remarks.

Again, I'd like to thank you all for joining us today, and if you have any specific or follow-up questions that -- myself and Darice are always available for your questions, and thank you very much for your time tonight.

This concludes today's conference call. You may now disconnect.