Universal Display Corp (OLED) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thankyou for standing by. Welcome to Universal Display's first quarter 2014 earnings conference call. My name is Lorenzo, and I'll be your conference moderator for today's call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, the 8th of May, 2014.

I would now like to turn the to Darice Liu. Please go ahead, ma'am.

Thank you, Lorenzo, and good afternoon, everyone. Welcome to Universal Display's first 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 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, May 8, 2014. All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995, such as thoserelating to Universal Display's [corporation] of technologies and potential applications of those technologies, theCompany's expected results as well as the growth of the OLED market and the Company's opportunities in that market. This includes but are not limited to statements regarding Universal Display's beliefs, expectations, hopes or intensions regarding the future.

It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actually 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 welcome to everyone on today's call. I'm pleased to report that we are kicking the year off on a strong note, with excellent first quarter results. Revenues from $37.8 million, operating profit was $6.6 million, and earnings were $0.09 per share.

Our solid results were driven by the continued growth of the OLED industry, notably the recent launch of a flagship OLED smartphone and our customers' new production activities. This drove our portfolio of commercial emitter and host material sales up quarter-over-quarter and year-over-year.

Since the inception of the Company almost 20 years ago there have been persistent proclamations about the OLED industry's potential, and while that potential has been reaffirmed through the best two decades, the commencement of the growth really only started a few years ago. We are still in the very early stages of the huge and incredible opportunity of OLED.

In displays the leading panel manufacturers, Samsung and LG Display, are investing in additional OLED capacity to deliver bright, thin, beautiful, high resolution displays to consumers. Chinese panel manufacturers have announced OLED fab plans, while Taiwanese and Japanese activity remains strong. Chinese brand names are reportedly sampling OLED panels for possible mobile and TV product launches in the coming quarters, addingto the global OLED pipeline.

All of this activity supports the broadening of the OLED product road map. Some of the new OLED products we expect to see in the near-term include smartphones for the high-end and mid-end markets, tablets, wearables, conformable displays and TVs.

In regards to TVs, as we have discussed in prior calls and conferences, the current OLED TV production is being manufactured off of [poly one]. As a result, quantities are limited. Over the next couple of years we expect this market to evolve as initial commercial production ramps. LG recently reaffirmed plans to ramp its newly converted 8G OLED line in the second half of this year, with initial capacity set to be around 20,000 plates per month.

It is a promising step towards commercial OLED TV volume production. As the OLED TV market begins to establish itself, we expect the landscape of global players to significantly expand.

Regarding OLED solid state lighting, while we were still in the research and development stage, the number of companies participating and overall industry efforts has escalated in the past year. At this stage it seems like the past OLED lighting commercialization is accelerating. The benefits of OLED lighting, which include high power efficiency, novel and innovative form factors, beautiful natural colors and cool operating temperatures, are all quite compelling.

Just the other month Kanica Minolta, one of our customers, announced plans to construct the world's first mass production plant for plastic substrate flexible OLED lighting panels. This is another important step for the burgeoning future of OLED lighting.

We continue to build ourcomprehensive global IP framework to fortify our long-term business model. Since our February conference call there have been two patent opposition decisions relating to our early fundamental phosphorescent patent. The respective Japanese and European panels issued decisions that affirmed the basic invention and patent cover but narrowed the scope of the original claim.

As we have noted in the past, any one decision favorable or unfavorable for any one patent in any one jurisdiction is not expected to impact our current or future commercial business or agreements.

We continue to develop and create new and next-generation high performance OLED material solutions to enable our customers expanding product road maps. Recently our next-generation red emitter and next generation green emitter were adopted for new product platform.

With respect to our host materials, it is a competitive business, and there may be recipes or models that may not include our hosts, but we are committed to aggressively pursue high performance, cost-effective host solutions. We believe that we have the ability to develop the best host materials that complement our proprietary phosphorescent emitters to deliver the most energy efficient, high performance, cost-effective emissive layer solution.

Now for a review of our first quarter financials 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 in more detail before commenting on our 2014 guidance.

We had another great quarter. Revenues for the first quarter of 2014 were $37.8 million, compared to first quarter 2013 revenues of $15 million. Total material sales from $35.3 million in the first quarter, of which commercial was $33.5 million.

The breakdown of commercial material sales by color for the first quarter of 2014, prior quarter, and the comparable year ago quarter are green emitters sales were $17.2 million in the first quarter, up 48% sequentially from fourth quarter 2013's $111.6 million and up year-over-year from the comparable quarter's $4.6 million. Green host sales were $12.4 million in the first quarter, up 33% sequentially from the fourth quarter's $9.3 million and up year-over-year from the comparable quarter's $3.1 million. Red emitter sales were $3.9 million in the first quarter, up 39% sequentially from the fourth quarter's $2.8 million and up year-over-year from the comparable quarter's $2.8 million.

Our first quarter 2014 royalty and license fees were $1.8 million, which does not include the Samsung license. The Samsung license fee, which is $50 million in 2014, will be recognized in the second and fourth quarter of this year.

Material costs for the first quarter were $9.9 million, sequentially up from fourth quarter 2013's $7.7 million. The increase was due to a higher material volumes and product (inaudible). First quarter material gross margins were approximately 72%, up sequentially from the fourth quarter's approximately 70%.

First quarter operating expenses excluding costs of materials were $21.3 million, slightly down from last quarter's $22.3 million but up year-over-year from the comparable quarter's $19 million. Operating income was $6.6 million for the first quarter of 2014, compared to an operating loss of $7.2 million for the first quarter of 2013. For the first quarter of 2014 we reported net income of $4 million or $0.09 per share, compared to a comparable quarter of 2013 of a loss of $4.8 million or a loss of $0.10 per share.

Our effective tax rates was higher than anticipated as a result of the inclusion of 7.3% from US Subpar F income. In transferring the Company's foreign operations to Ireland, UDC Ireland Limited sold US inventory, which resulted in an additional US tax. We believe this is a 2014 event and expect our global corporate reorganization to have positive financial implications in the future.

The other factor impacting our effective tax rate is the expiration of the R&D credit, which occurred at the end of 2013. While we wait for its renewal, our effective tax rate is impacted by 2%. As a result of these factors our effective tax rate for the year for GAAP purposes is now expected to be approximately 41%.

Moving to the balance sheet, we ended the first quarter with $267 million of cash and short-term investments, slightly down were $273 million at the end of 2013. The slight decrease was mainly due to an increase in accounts receivable and inventories while accrued expenses were reduced. This resulted in working capital increasing to $318 million at the end of December -- at the end of the first quarter from $304 million as of December 31, 2013.

Now to our 2014 guidance. Based on our current visibility and outlook, we now believe that we can reach the high-end of our 2014 revenue guidance of $190 million to $205 million.

Looking to our future, it is extremely bright. Today the OLED market is mainly driven by high-end smartphones, but looking to tomorrow there is a tremendous -- there is tremendous activity to expand OLED displays into mid-end smartphones, tablets, wearables and TVs. New form factors driven by OLED innovation, such as transport, flexible, plastic-based products are ushering further opportunity in the display and lighting industry. The OLED market's growth story and our growth story have just started.

With that let me turn the call back to Steve.

Thanks, Sid. To recap we are confident of our upward trajectory in this exciting growth industry. With two large end-markets, displays and lighting, markets that are just beginning to develop for OLEDs, the magnitude of our growth opportunity is tremendous. Industry momentum as well as our customer pipeline activity is growing.

In just the last six month we have signed new customer agreements, including DOE technology in China, Kaneka Corporation in Japan, and Philips on in European. And we expect more. At Universal Display we believe we have the largest, deepest and strongest team in the world focused on phosphorescent OLED emissive layer technology.

We are expanding and broadening our team to fuel our long-term growth and increase our competitive edge. Building on the depth of our experience, we are continually innovating and creating the best OLED emissive layer materials while also expanding our global IP matrix. Be it mobile, TVs or lighting, companies and consumers want eco-friendly energy efficient high-performing products, and that is what you get with our proprietary Universal FOLED materials.

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

Thank you, sir. (Operator Instructions). Our first question comes from the line of Jim Ricchiuti with Needham & Company. Please go ahead.

Hi. Thank you. Congratulations on the quarter. The question I was , given your earlier guidance in terms of the way the year was expect to play out, you seem to be suggesting more of a back-end loaded year in terms of growth. Can you talk a little bit about how you see the year now, just given how strong the materials revenue was in the quarter?

Well, we clearly are pleased with the first quarter. And the back end we talked about, because as Steve had mentioned, LG TV production is scheduled for the second half of the year. So when we did our original guidance we factored those in. We still -- it's very early in the year. It's only four months into the year. I would still think that we need to get a few more months under our belt to see what the year is really going to look like, but clearly we are encouraged by the first part of the year.

Okay. So I guess it's fair to say that the materials revenue in the quarter was above your internal plans?

I really can't talk about internal plans. All I can say is that we were very pleased with the quarter.

Okay. I will jump back in the queue. Thank you.

Thanks, Jim.

Thank you. Our next question is from the line of Osten Bernardez with Cross Research. Please go ahead.

Yes, good afternoon. Thanks for taking my questions.

You're welcome.

To begin, I think I caught that you mentioned that you now have your next-generation red emitter commercially shipping into a customer, and if is that -- at least one customer, I believe -- and if that is correct, can you confirm that may be why no [red hosts] attached to that?

Well, as Steve mentioned in his comments, we're shipping our new red and green high performance materials today. We historically have been working on green emitters and host material to work with it. The red host materials that have been in the marketplace are very good, and I believe that they are probably competitively priced. We have not really worked specifically on red, but we are continuing to work on all new host materials [for them]. But historically we have not sold any red host materials.

Got it. And then with respect to green host, can you provide some color in terms of what you're expecting for your green host business for the remainder of the year?

We continue to expect to sell our green host materials. It maybe in some products, and it may not be in some others, but we still expect our host business to be strong this year.

And is it -- final question for me. Is it the red emitter business that you see driving the increased confidence in your full year guidance?

Our red emitter business is really small, because the material is very, very efficient. The strength is really across-the-board in green emitters and green hosts, and increases in red. And in addition our license fee from Samsung grows this year. So we actually see it across-the-board.

Thank you.

Thank you. Our next question is from the line of Rob Stone with Cowen and Company. Please go ahead.

Hey, guys. I wanted to follow up on the outlook for materials a little bit as well. Given the strength in the materials for Q1 and yet your inventories were up sequentially, can you comment at all on the run rate of materials so far into the second quarter? And were you building up inventory for some specific purpose?

We are -- to some extent we are building inventory. We also have some -- because the second quarter is -- and the rest of the year, we still have significant sales that we expect, we do build up inventory, and we are continuing to build inventory. Because we don't really know specifically customers' needs, and we want to make sure that we always have everything that we could possibly need on hand. So we have built up some inventory. That is correct.

And the materials margin was a little bit higher than we were expected -- expecting, and up sequentially. Can you comment on what may have driven that and whether you think this level is sustainable?

It really is the product mix. As we said, we sold new emitters into the market and sometimes that skews it a little bit. We still expect our margins for emitters to be between 70% and 80% and our margins for host to between 40% and 50%.

Finally, Sid, on the tax rate, so I guess you have done some international tax planning. Can you say how much that might improve your tax rate from next year?

It should -- the piece that's Subpart F and the R&D credits hopefully will be renewed, and there should be some slight decline. It's difficult to [predict], mainly because as you do this there are a lot of things that as you transfer inventory an asset to international companies, how much still gets counted in US income and how much ends up as foreign income. In the long run we expect it to have a pretty significant change in our tax rate.

So -- but the long run would take longer than next year?

I would say so. I mean, as you move to -- the companies operations to Ireland, you still have other things that affect the US tax rate even though they're done in Ireland. So the Subpart F piece, the 7.3%, will not impact next year, and hopefully the R&D credit will be renewed. And there will be some shifts in income to Ireland, but it won't be a dramatic drop next year.

Okay. When you say a dramatic drop, relative to the rate you were expecting this year, or to this unusually high rate that you're paying now?

The expected.

Okay. Great. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Jon Dorsheimer with Canaccord. Please go ahead.

Hi. Thanks. It's Jed Dorsheimer, but congratulations on the quarter, guys. A couple questions if I could. I guess first, Sid or Steve, I guess in terms of -- did I hear correctly that in terms of the renewed confidence in this year, that's largely -- could you maybe parcel out how much you're attributing to the LG TV for the back half of this year? It sounded like that's a material impact in terms of that raising the estimates towards the higher end.

No, we have said in the past that we don't have a lot of TV baked into this year.

Okay. And I know in the green host you have a relationship with Duksan, so I'm curious, do you have -- are you setting up relationships with other companies? And the reason that I ask is specific with Samsung's Cheil Industries, whether or not you will be selling that host material -- green host material to them or any portion of that similar to the Duksan arrangements?

We speak to a lot of the other companies in the industry, but we haven't disclosed anything with respect to what you're talking about.

[That said], we don't sell our host material to Duksan. Duksan is actually doing a process step for us, which we then sell to [NSDT].

Got you. Sorry, I was confusing that. So I guess just to confirm, will you have a similar relationship with any other companies with respect to green host material?

We'll have to see how the environment plays out in the future. We -- our object is to grow our business and to grow the entire OLED industry.

And from what you are seeing at this point, you are a sole-source provider to your largest customer for green host, correct?

You have to really talk to our largest customer.

Okay.

About that.

All right. Thank you guys and congratulations again.

Thanks.

Thank you.

Thank you. Line of Hendi Susanto with Gabelli & Co.

Sid and Steve, thank you for taking my questions. And first of all, congratulations on stellar results.

Thank you.

Yes. So following the previous question, there is speculation that Samsung might choose or has used green host materials from Cheil Industries. I am wondering whether you could comment on that. And if not, perhaps you can share how much intellectual property qualitatively acts as a barrier for entry for green host materials?

Well, in general we can't comment on that specific question. You have to -- we can't speak for our customers.

In general we believe that we have a very strong host business, and we're aggressively pursuing high performance, cost-effective host solutions. And we're implementing cost-down strategies as well as increasing our technological edge.

Okay. And do you foresee like significant barrier for entry?

We think that the stronger we get, we're continuing to increase the barriers to entry generally in our businesses.

Okay. And then with regard to the expectation of LG TV, may I verify what materials you are expecting to sell? Are you planning to sell both yellow emitters and then yellow host materials?

We have historically talked about the emitter side. We are aggressively pursuing the host business with all of our customers and developing hosts. But it's really very early in their development stage, and they are really working on prototype lines. So historically we have only really talked about the emitter side.

Okay. And last question for me before getting back to the queue. May I know what the state is of the secondary PPG facility?

That facility is pretty much just about up and running.

Okay. Thank you.

Thanks, Hendi.

Thank you next question is from the line of Andrew Abrams with JG Capital. Please go ahead.

Hi, guys. Congratulations.

Thank you.

On PPG, are you going to be able to do concurrent different runs at the two facilities, or is the second facility going to be used kind of more as a backup than anything else? So can you run red two at one facility and red one or green at another facility.

We are operating both -- we are going to be using both facilities as parts of our supply chain. I guess [that would be it].

Okay. And what the run rate now? Are you beginning to get more comfortable with the run rate for green and the run rate for host material? We've got four quarters essentially. Have you kind of gotten to the point where you're getting more comfortable that the acceleration rate is as it should be, and the red numbers are kind of being as consistent as they can be?

Yes. We believe -- clearly every quarter that goes by and things are easier to predict and getting better information from the customer as productions continue to grow, we're getting more comfortable. That's one of the reasons why we talked about our guidance and being comfortable at the upper end of it.

Right. And lastly just on BOE particularly. Is that a license only, or is that materials and license?

At this point it's an evaluation agreement.

Got it. Okay. Thanks very much. I appreciate it.

You're welcome.

Thank you. (Operator Instructions). Our next question comes from the line of Rob Stone with Cowen and Company. Please go ahead.

Hi. Sid, can you say how many customers contributed to other license revenue?

Other license -- I can't really specifically talk about. What we do say is that we have customers that we report license revenue when we sell them what we consider to be commercial materials, andit's through a material supply agreement. And it's a couple customers. It's not a lot.

Yes, okay. So low single digit number. All right. And then my other question was just on the timing of revenues in the first quarter. The receivables and DSO were up. Were shipments relatively back end weighted in the first quarter?

Specifically I think March was better than the other two months.

Okay. Thank you.

Thank you. We have a follow-up question from the line of Hendi Susanto with Gabelli & Co. please go ahead.

Okay. Steve and Sid, could you remind us like when LG's supply agreement will expire? Additionally, like do you have any update on your talk, and the possibly the revise or new supply agreement with LG Display to TV production?

LG agreement continually renews itself. So it won't really expire. It's just a actually renewal unless either party decides to cancel it.

And do you have any update on talk with LG?

We are continuing to talk to them as part of our strategic partnership.

Got it. Okay. Thank you.

Thanks, Hendi.

Thank you. We have a follow-up question from the line of Jim Ricchiuti with Needham & Company. Please go ahead.

I was wondering if there's any change to your operating expense assumptions for this year? I think previously you had talked about OpEx being up 10% to 15%, with the shift more toward the higher end of your revenue forecast. How should --

At this point -- I'm sorry. At this point I don't believe so. I still think that knows numbers are pretty good.

Okay. Great. Thanks, Sid.

With that --

Thank you. This concludes the Q&A session. I would like to turn the program back over to Sid Rosenblatt for any closing remarks.

Thank you for your time today everyone. We appreciate your interest and support, and I wish you all a good night.

Ladies and gentlemen, this does conclude Universal Display's first quarter 2014 earnings conference call. Thank you for your participation. You may now disconnect.