Universal Display Corp (OLED) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Universal Display Second Quarter 2014 Earnings Conference Call. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. Now I would like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

Thank you, Matt, and good afternoon everyone. Welcome to Universal Display's 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 7, 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 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 includes but are not limited to statements regarding Universal Display 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, and welcome to everyone on today's call. We are pleased to report another record quarter of strong solid results. Revenues reach $64.1 million, operating profit was $28.8 million and earnings were $0.44 per share. Since our last call the evolution of the OLED industry continued to advance. From the launching of new OLED display and lighting products, a formation of a new OLED panel manufacturing company and the confirmation of new OLED capacity these developments in the past three months demonstrate progress and continued commercialization of OLED technology in the marketplace.

Samsung Electronics launched a 8.4-inch and 10.5-inch tablet Tap S to rave reviews about its superior AMOLED display. Samsung Display confirmed that it is proceeding with A3 its third OLED fab. SDC stated that the new A3 line will be tasked to produce flexible OLED products, with the initial phase expected to start operations in the first half of 2015.

LG-Display reaffirmed its M2 plans for OLED TV production ramping this year. This Gen 8 line has a capacity of 26,000 plates per month. LG-D also noted that it is doubling it M1 Gen 4.5 capacity of flexible displays to 12,000 plates per month this year. Additionally LG-Electronics announced in the coming months it would roll out 4K 65-inch and 77-inch OLED TV models in to the marketplace.

China is also gearing up for OLED not only from panel makers including BOE but also Chinese TV and mobile set makers. And in Japan, Japan Display, Sony, Panasonic and INCJ Innovation Network Corporation of Japan announced they are creating a new OLED company dubbed JOLED, which will launch in January 2015.

OLEDs are not only inherently simple, beautiful and vivid the technology is redefining how we design, feel and see displays. Two new growth segments materializing from the benefits of OLEDs are wearables and flexible. The light weight nature, thinness and pliability of OLED displays are paving the way for flexible consumer products. Recently curve displays with a plastic substrate were introduced into the marketplace. Some of the initial products include the LG G Flex and Samsung Round smartphone and Samsung Gear wearable watch series. In the future we expect an all plastic display enabling an unbreakable, thinner and lighter weight product. These ongoing innovative efforts are leading up to the holey grail of a fully bendable, rollable, foldable OLED display.

On the OLED solid state lighting front we continue to see the number of companies participating and overall industry efforts escalating. At June's Light Fair a number of showcased OLED luminaries products and concepts including Acuity Brands who introduced its next generation OLED product portfolio. According to this leading U.S. lighting provider there have been continuous advancements in OLED lighting technology. Quote, these advancements include OLED performance enhancements and color rendering up to 90 a 13% increase and the rated lifetime up to 40,000 hours at 3,000 candelas per meters squared, end quote. The OLED lighting industry is primarily at the R&D stage, but in the coming years we believe that OLED lighting has very bright commercial future.

As a Company we continue to fortified and expand our IP materials portfolio. As we mentioned on last quarter's earnings call or next generation red emitter and next generation green emitter were adopted for new product platforms. With respect to our host material 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-efficent, high performance and cost-effective emissive layer solutions.

Now for a review of the second quarter financials, 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 2014 guidance. We had another great quarter of profitable growth. Revenues for the second quarter of 2014 reached a record $64.1 million compared to second quarter 2013 revenues of $49.4 million.

Our second quarter 2014 royalty and license fees were $28.1 million which included Samsung's $25 million license fee. The Samsung license fee which $15 million for 2014 is recognized in the second and fourth quarter of the year.

Total material sales were $35.9 million in the second quarter of which commercial was $32.6 million. The break down of commercial material sales by color for the second quarter of 2014, the prior quarter and comparable year ago quarters are green emitter sales were $15 million in the second quarter down 13% sequentially from the first quarter 2014 $17.2 million but up year-over-year from the comparable quarters $13.1 million. While volumes were relatively flat quarter-over-quarter we did experience some pricing pressure. Green host sales were $13.2 million in the second quarter compared to last quarter's $12.4 million and up year-over-year from the comparable quarter's $9 million.

Included in this quarter revenue was a Japanese pass-through tax settlement of $3 million. I will elaborate on the pass through tax in just a moment.

Red emitter sales were $4.4 million in the second quarter up 13% sequentially from the first quarter's $3.9 million and up year-over-year from the comparable quarter's $3.6 million. In the quarter we saw increased sales of our new red emitter.

Let me take a moment to discuss the Japanese pass-through tax item. This is essentially a VAT tax. The Company records taxes billed to customers and remitted to various governmental entities on a gross basis in revenue and cost of material sales. In the second quarter of 2014 we recorded and recovered a pass-through tax settlement of $3 million in host material sales and cost of material sales that was owed to the Japanese tax authority relating to certain host sales in Japan. Going forward a Japanese pass-through tax will be included into quarterly revenue and cost of material sales. Note this has no impact on our gross profit.

Moving to the material cost. Material costs for the second quarter were $12 million up year-over-year from the second quarter 2013 $8.3 million. The increase was mainly due to the Japanese tax settlement of $3 million, higher material volumes and product mix. Second quarter material gross margins were approximately 67%. Exclusive of the Japanese tax settlement second quarter material gross margins were approximately 73% compared sequentially to first quarter 2014 approximately 72%.

Second quarter operating expenses excluding cost of materials were $23.3 million up from last quarter's $21.3 million and up year-over-year from the comparable quarters $19.3 million. The increase is mainly attributed to PPG developmental expenses as new materials are scaled up.

Operating income was $28.8 million for the second quarter 2014, compared to $21.7 million for the second quarter of 2013. In the second quarter of 2014 we reported net income of $20.4 million or $0.44 per share compared to the comparable quarter in 2013 of $15.4 million or $0.33 per share respectively.

As we mentioned on our last earnings call, we are in the midst of restructuring our international business activity. The ongoing evaluation of these operations has resulted in a number of outstanding planning issues that are being resolved or will be resolve in the coming quarters. The determination of some of the tax planning matters now has us expecting our 2014 effective tax rate to be around 30%.

Moving to the balance sheet we ended the second quarter with $291 million in cash and short term investments up from $267 million at the end of the first quarter. The increase was driven primarily by $32 million in cash generated from operations during the quarter. This was partially offset by the repurchase of shares. On June 2 the Board approved a $50 million stock repurchase program over the course of 12 months. During the quarter we repurchase 234,800 shares at a cost of approximately $7 million.

As noted in Steve's remarks, we believe that OLED activity remains robust. We did see some softness in the quarter similar to other suppliers in the high-end smartphone ecosystem. We're also seeing new commercial OLED product launches such as tablets, wearables and further penetration of OLED displays in mobile and TV. With the OLED product road map continuing to expand this year into next, the stage is set for manufacturers to add capacity in 2015.

Looking to our 2014 guidance we remain comfortable with reaching the high end of our 2014 revenue guidance range of $190 million to $205 million. With that, let me turn the call back to Steve.

Thank, Sid. Our customer pipeline activity is robust. In the past three months we saw an extended evaluation agreement with BOE Technology China's largest panel maker and signed a commercial material agreement with Philips one of the leading lighting players in the world. We are currently working with over 25 customers in the display and lighting segments and we expect that number to grow.

The Company remains focus on enabling the industry with our high performance proprietary phosphorescent emitters and hosts to the growing list of OLED customers. At the same time we are leveraging our 20 years of know how with the world's largest phosphorescent OLED R&D team to expand our market opportunities. From our material core competency of creating and commercializing new and next generation highly efficient and exceptional OLED material solutions to develop a new stack structures, lighting architectures, (Inaudible) design, manufacturing processes and equipment we are paving a path for increasing profitable growth. We believe that these efforts coupled with the OLED industries growth will drive the Company's trajectory top line and bottom to be exceptionally positive over the long-term.

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

Thank you. (Operator Instructions). And at this time we will take a question from Rob Stone with Cowen & Company.

Hi guys. Two part question, the pass-through of the VAT, if I understood that correctly, contributed $3 million of sales in the quarter and are you expecting something like that in the second half of as well?

The VAT tax, the pass-through tax is approximately 5% to 10% of the sale price of the product. So we do expect it in the second, third and fourth quarter. We don't expect it to be at that magnitude, but it is dependent upon how much we sell to our customer.

This is only on host sales?

The sales in Japan, to customers in Japan.

Okay. But I thought your sales in Japan were principally host or?

That is correct.

Okay. With respect to your comment about seeing some softness even excluding the $3 million, the quarter seemed a little bit better than we were expecting are you suggesting since you had higher revenue but you kept the same upper end of the range guidance that maybe there will be a little bit of an adjustment in Q3 along the lines of inventory balancing?

Based upon our revenue guidance which calls for approximately 35% to 40% year-over-year growth, we believe the second half revenues will be similar to the first half of the year.

Okay. I'll jump back into queue. Thanks.

At this time we will take a question from Vishal Shah with Deutsche Bank.

Hi, this is Chad on the line for Vishal. Thank you for taking my question. Can you talk about the operating margin differentials between the red and green emitters?

We actually talk about our emitter and our hosts with gross margins in total. We don't really break them down between the different colors.

Got it. Do you see -- another way to ask the question is are you seeing any margin pressure and can you talk about the specific environment there?

We all not seeing it. What we historically talk about is we believe our gross margins on our emitters are between 70% and 80%, our margins on the host materials are between 40% and 50%.

Got it. And then maybe more of a bigger picture question. Can you talk about you outlook for OLED TV sales for the second half of the year and perhaps touch on 2015?

As I said, we have reiterated our guidance for the high end. We expect the second half of the year for revenues to look like the first half, and we really don't go beyond that. We really can't say anything. We do believe that there is great potential for growth in 2015. We will give guidance at the end of the year -- I'm sorry. When we file our 10-K. In 2014 we have not baked a lot of TV revenue.

Got it. Thank you. That's it for me. I will jump back in queue.

Moving forward we will here from Jim Ricchiuti with Needham & Company.

Thank you. Sid, good afternoon. Did you elude to some pricing action in green? Was there some pricing pressure did you say?

That is correct.

Can you elaborate on that?

There is always negotiations in business and there is always purchasing, folks trying to negotiate price. So there is some pricing pressure.

And how do you see that going forward near term second half?

It is going to continue. I can tell you that.

Okay. Should we anticipate any -- you gave some good color on how we should think about revenues in the second half. Anything that we should be aware of in terms OpEx? How we should think about OpEx in the second half of the year?

No, I think our guidance of 10% to 15% of OpEx increase for the year is still good. I don't see anything that is unusual.

Okay. Thanks a lot.

Thank you.

At this time we will take a question from Alex Guana with JMP Securities.

Thanks for taking my question. Congratulations on another powerful result. I was wondering Steve, if you can talk about how it is you are able to maintain your guidance at the high end of the annual range when Samsung , who I would assume your largest customer here, with talking about some shortfall for its own OLED business, where did you make this up? Because by their own admission they missed their own play on OLED in the last quarter? Thanks.

The has been some softness in the smartphone market, but we also have other customers that are growing. And we believe that there is a number of variables that do affect us but we still believe we can achieve the high end of our guidance by diversifying our customer base.

All right. That answers it I think. Is there still any risk at all that there is more overhang from that, or do you are real-time working with your large customer to keep things balance and there isn't inventory risk out there?

There are always variables that may be out of our control.

Okay. And then going back to that pricing pressure question. If my understanding is correct, your exclusive provider of phosphorescent green material I would think that if there are pricing negotiations you are doing it collaboratively so together you can hit new price points; is that fair to say? Or has some dynamic changed that has given them to some leverage over you in pricing?

There is no dynamic has change. I think we try to work with our customers so that each of us can have a win-win.

And you mentioned JOLED in your prepared remarks. I'm wondering is there any reason with this consortium to expect that they will be more successful than Japan Inc. has been in the past, and if they are successful, does this represent a new potential licensing customer or would some of the standing agreements with those partners fall into place?

Japan has been working in OLED for a few decades now, and I think they are really trying to figure out what is the best form to compete into this business. So we are hopefully that this new consortium is going to become very active and become a major player on the OLED stage.

Thanks again, and congratulations again.

Thank you.

And we will move to Hendi Susanto with Gabelli.

Hi, Steve. Hi, Sid.

Hi, Hendi.

First question may I know the term and pricing for BOE, is it similar to LG?

We don't really talk about pricing the customer.

Okay. But can you say what it is similar to LG where like license fees is embedded in the material price?

Yes. That is a material supply agreement which has the same result. That is correct.

Okay. Given the maturity of green emitter accruals is it reasonable to assume that the fab rate of green to red (Inaudible) now is approaching one to one?

Well, when you look at the dollars it is clearly not. The dollars of green are 4 to 5 times what they are for red, so I think that is really in the appropriate range. Green emitters -- you put more green emitters in a device than you do red.

Got it. Let me get back to queue. Thank you.

(Operator Instructions). Take a question from Osten Bernardez with Cross Research.

Good afternoon. Thanks for taking my question. To begin with respect to your red emitter sales was the June quarter a peak for this year from a red emitter sales stand point?

It was the highest quarter from this quarter to last quarter. We don't really talk about components of our guidance so it is hard to tell whether it is the peak. The clearly is more capacity out there.

Okay. And then with respect to the some of the announcements the more recent ones from BOE and Philips what is the timing to see that activity flow-through to your revenue line?

These are the beginning stages. Each of them are doing development work. To be honest I don't see much impact from either one of them this year neither one has announced capacity. They are working on it, and we do expect it to grow over time. We think that Samsung and LG will be our biggest customer as we move forward into next year, but there are a number of developments in different jurisdiction which includes Japan, China and Taiwan.

And then lastly before I head back into queue, with respect to the tax pass-through in Japan is this only a 2014 event?

No, it will continue. It is a VAT tax that relates to our wholesales in Japan. There was a period that the dollar values were so low that we were exempt form the tax. But they have now kicked in and we are not.

Okay. Thank you.

And at this time we will take a question from Brian Lee with Goldman Sachs.

Thanks for taking my question, and I apologize if some of these have already been asked. I jumped on a little late. First off, can you comment on JOLED the recent OLED company that JDI, Sony and Panasonic formed recently? Do you have any visibility into what technology process they might plan to use materials, and then what the timing might be for them to become a customer for you guys.

We know they just started to put it together. Japan, as I mentioned, Brian, has been working on OLEDs for a couple of decades now, and we are hopeful that JOLED is going to become a big player in the OLED business.

Okay. Fair enough. Switching gears a little bit. Market share in green phosphorescent hosts have you seen any share loss that you can comment on there given new product launches from Samsung in recent months? Or are you hearing or seeing any feedback that would suggest that that might be the case?

As we have said a number of times this is a price and performance business. We don't expect our materials to be in every product. But we believe we have the best host that works with our phosphorescent and emitters. And will be in everything, probably not. But there has been nothing specific that we can talk about.

Okay. Last one from me and I will jump back in queue. But if I look at your customer break out in the queue, it looks like LG Display bought about $10 million or just under that of materials both this quarter and last quarter. Is this an inventory build ahead of the expected ramp in the back half of the year in there TV facility based on the feedback you get from them or maybe you can specifically comment on whether you would expect LG contribution to be flat up or down in the second half of versus what they bought in the first half of the year?

Not to not answer your questions but to talk about specifics by customer is difficult. They clearly have been growing as a customer, and we are very glad that our customer base is diversifying and we expect it to grow as their production line grows. The specifics of the material that they purchase are difficult for us to tell what the actual uses are. But as you have read they have introduce a number of new products and we would expect this business to grow as their production continues to grow.

Okay. Thank as lot guys.

Thanks, Brian.

At this time we will take a follow up from Rob Stone with Cowen & Company.

Hi, Sid. I just wanted to ask for a little more color on the license and royalty revenue that was not from Samsung. I assume LG is in there. Can you say how many customers contributed to that?

I can't say specifically how many customers but based upon the increase in sales to LG you would assume that that is most it.

Okay. Is that helpful. Thanks.

Thank you.

(Operator Instructions). And at this time we will move to Andrew Abrams with JG Capital.

Hi guys. Just two questions. First, can you give us some perspective on red and green 2. I know both are out. Has either been a bigger than other competitor or grower let's put it that way in second quarter, and do they represent some or are they still relatively small compared to older red and green materials?

These were just introduced in the quarter and they are higher performance materials, but to break down between we don't really do that.

Okay. And were there any blue or yellow sales in the quarter outside of red and green either in commercial or development?

There is always a little bit of those in development.

Got it. Thank you.

Thank you.

This concludes the question-and-answer session. I would like to turn the program back to Sid Rosenblatt for additional or closing remarks.

Thank you again for your time today. We appreciate your interest and support. And wish you all have a goodnight. Thank you.

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