Universal Display Corp (OLED) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Universal Display's fourth quarter 2014 earnings conference call. My name is Catherine, I'll be your Operator today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Darice Lu, Director of Investor Relations. Please proceed.

Thank you, Catherine, 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 today's call is a product of (inaudible). Any redistribution, retransmission, or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is 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 26, 2015.

All statements in that conference call that are not historical, are forward-looking statements within the meanings the Private Securities Litigation Reform Act of 1995. Such as those relating to Universal Display Corporation technologies, and potential application of those technologies, the Company's expected results, as well as the growth of the OLED market and the Company's opportunity in that market. These include but are not limited to, statements regarding Universal Display beliefs, expectations, hopes or intentions regarding the future.

It's important to note that these statements are subject to risks and uncertainties that could cause Universal Displays 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 security. Universal Display disclaims any obligations to update any of these statements. Now, I would like to turn the call over to Steve Abramson.

Welcome to everyone on today's call. Overall, 2014 was a solid year. We continued to execute at a high level, delivering growth and financial performance in an emerging and evolving industry. We achieved record revenues, record operating profit and record earnings. Revenues grow 30% to $191 million. Operating profit was up 53% to $58.6 million, and earnings increased 29% to $41.9 million, or $0.90 per diluted share year-over-year.

We secured growth in a year when the overall OLED market declined about 5%. In fact, if you look back over the last three years, while the OLED market had a Compounded Annual Growth Rate, or CAGR, of 38%, we saw a revenue growth rate of 46% and operating profit growth rate of 118% and earnings growth rate of 134%. 2014 was also another year of Company accomplishments, including new customer agreements, the introduction of a new red and green commercial omitters, and an impressive set of new granted patents. It was also an exciting year for the OLED industry, but challenging at times.

With the introduction of new OLED wearables, smartphones, tablets and TVs, the expanding breadth of OLED products is captivating audiences and driving adoption by new OEMs and consumers. Since inception, our innovation strategy has centered around building a robust foundation of best in class technology for superior growth. Beyond our core competency of (inaudible) technology and materials we have been investing in manufacturing and process initiatives including encapsulation of OVJP, Organic Vapor Jet Printing, (inaudible) coupling, novel device and architecture structure, flexible panels, solid state lighting and much more. The increasingly exceptional value of our OLED technology and (inaudible) materials has resulted in the industry's growing consensus that UDC is a critical partner to the commercialization of OLED in the marketplace.

Supporting this consensus is our growing list of partners. In 2014, we announced a long-term license agreement with (inaudible) for lighting, a commercial material supply agreement with Phillips, an extended evaluation agreement with BOE technologies. And, just two months into this year, we have already signed three long term license agreements with (inaudible) Chemical, OLED Works and LG Display. LG's license agreement, which runs until the end of 2022, is a key partnership milestone for us. But, more importantly, it is a significant inflection point for the industry. We believe this agreement illustrates LGs long-term commitment to expand and accelerate the OLED product road map. The LG license is a conventional royalty agreement where we're paid ongoing royalties with a quarter lag. Sid will go into more details about this.

On the material side, as the OLED industries sole provider of commercial phosphorus and emitters, we will continue to be an integral R&D partner and supplier of our proprietary emissive materials to all of LGs lines. Switching gears for a moment to solid state OLED lighting, while principally the R&D state, more D than R, activity in the OLED lighting pipeline continues to grow. In December, Acuity brand launched the first set of OLED lighting fixtures in the mainstream market at Home Depot. Last month, we signed a long-term agreement with (inaudible) for solution processed OLED lighting. Last week, it was reported that our customer, LG Chem, is planning to invest 200 billion (inaudible), or $184 million to launch a gen 5 production line in 2017.

During the same week, we announced a long-term license agreement with OLED works. All of this activity is adding up to increased confidence that the OLED lighting market is preparing to transition from development into commercial product in the coming years. Now let me spend a few minutes on where we are in the market, the dynamics driving our business, and the Company's outlook for 2015. 2015 is poised to be an exciting year, and a bit of a transitional year as LGD scales up it's production line, Samsung introduces new products and flexible display capacity ramps. All of this is expected to drive the expansion of the OLED product portfolio and attract new OEM adopters which we believe will fuel new capacity plant and drive the OLED markets next wave of robust commercial growth. Capacity, as many of you are aware, is one of the primary factors to the directional growth of our business.

Earlier this month, Samsung Display, our top customer and long time close collaborator, now plans to invest 4 trillion (inaudible), or $3.6 billion, from 2015 to 2017 in OLED production. Plans include a gen 6 fab with the initial phase of flexible phase ramping in Q2. Although there have been some minor bumps in the road to the OLED market, Samsung is one of the top brands and companies in the world and we believe their OLED business will continue to flourish as they broaden their road map to include mid end smartphones like the Galaxy series, expand their OEM base, and launch the next generation of their flagship products, including the S6 smartphone. Shifting to a larger screen size, the reviews are in and LGs OLED TV has been applauded as the greatest TV ever.

LG display is reportedly investing between 1 trillion and 1.2 trillion (inaudible) or about $1 billion in 2015 to add TV capacity. With plans to sell 500,000 to 600,000 TV panels this year and 1.5 million TV panels next year, LG announced it would add 20,000 plates per month of gen 8 TV capacity in Q4. Supporting these capacity plans is interest from various OEMs, including Air, Konica, (inaudible), Sky Worth and Panasonic, all of which showcased OLED TVs at CES. Additionally, LG has demonstrated a line, which is geared for wearables such as smart watches and plastic (inaudible) mobile phones has an install capacity of 14,000 plates per month. Outside of Korea, we're also seeing OLED activity in Taiwan, China and Japan pick up. In Taiwan, (inaudible) announced the start to produced OLED panels for smart watches and (inaudible) are reportedly planning to start OLED production in 2016 or 2017.

In China, there's ongoing developmental activity that we believe will lead to commercial production growth begging next year. In Japan, JOLED which counts Japan display Sony, Panasonic as shareholders was established last month and reportedly setting up a test production line. Now to guidance. The drive by our customers to commercialize OLED technology is creating significant momentum for the industry, and for us. We expect 2015 will be another year of growth.

We believe that the magnitude of that growth will be primarily dependent on the timing of a few variables, specifically are with respect to Samsung, how quickly their business grows, which products we use our (inaudible), and whether we obtain new host design with. With respect to LGD, it will be mainly how quickly they ramp the OLED TV production line (inaudible). As we have seen in the past, a short-term shift in the industry's momentum in either direction can impact our financial results. In a transition year like this, we were going to approach our guidance differently and provide a baseline revenue forecast, where there's a limited downside, but favorable upside potential. Taking into account these multiple variables as the industry builds for the next wave of commercialization, our current best estimate is that 2015 revenues will be around $200 million with a downside range of about 5% and upside potential of about 15%. This includes Samsung's license fee, which is $60 million this year, as well as the quarter lag in LG royalties taking effect.

Now, let me turn the call over to Sid.

Thank you, Steve, and again, thank you everyone for joining our call today. We are pleased to report another record year of revenues, operating profit, and net income. It demonstrates great execution by the UDC team in meeting customer needs on driving operational excellence in a highly dynamic emerging growth industry. It also reflects our position to capture the industry's momentum. Revenues for the year were $191 million, a 30% increase from the $147 million generated in 2013.

Material sales for 2014 were $127 million, a 32% increase from $96 million in 2013. Of which, total commercial material sales were $115 million, up 41% from $81 million in 2013. The break down of commercial material sales by color for 2014 compared to 2013 is, total red emitter sales were $18.5 million, up 59% year-over-year from 2013s $11.6 million. Total of green emitter sales for 2014 were $61.3 million, up 54% year-over-year from 2013s $39.9 million. Total green wholesales in 2014 were $34.8 million, up 17% year-over-year from 2013s $29.7 million. 2014 operating expenses excluding cost of materials were $91.1 million, up 15% from $79.5 million in 2013 and in line with our outlook of a 10% to 15% year-over-year increase.

Operating income was $58.6 million for 2014, up 53% from $38.2 million in 2013, illustrating the strength of the operating leverage in our model. Net income was $41.9 million or $0.90 per share compared to adjusted net income of $32.6 million excluding a one-time net tax benefit, or $0.70 per share, for 2013. Moving to the quarter. Revenues for the fourth quarter of 2014 reached $56.2 million compared to fourth quarter 2013 revenues of $49.5 million. Royalty and license fees were $28 million which included Samsung's $25 million license fee.

The Samsung license fee which was $50 million in 2014 is recognized the second and fourth quarter of the year. Total material sales were $28.1 million in the fourth quarter, of which commercial was $26.6 million. Material costs for the fourth quarter were $12.1 million, up year-over-year from the fourth quarter 2013, $7.7 million. The increase is primarily due to higher volumes, product mix, and an inventory write down of $3.9 million related to host material. Absent the write down, material gross margin percentage would have been on par with the prior quarters. Fourth quarter operating expenses excluding cost of materials were $27 million, up from last quarters $19.5 million and up year-over-year from the comparable quarters $22.3 million.

The increase is mainly attributable to PPG expenses, increased headcount and compensation accruals. Operating income was $17.1 million for fourth quarter of 2014 compared to $19.4 million for the fourth quarter of 2013. Net income for the fourth quarter was $13.1 million, or 28% per share. In the fourth quarter of 2013 there was a one-time net income tax benefit of $41.4 million. Excluding that benefit, adjusted 2013 earnings were $16.5 million, or $0.35 per share, absent the inventory write down, operating and net income would have been up year-over-year.

Shifting to the balance sheet. We ended the fourth quarter with $289 million in cash and short-term investments, up from $268 million at the end of the third quarter. The increase was driven primarily by $28 million of cash generated from operations during the quarter, just partially offset by the repurchase of shares. On June 2, 2014, the board approved a $50 million stock repurchase program, over the course of twelve months. During the quarter, we repurchased 242,034 shares of common stock at a cost of $7 million.

Now, looking to 2015. We expect our 2015 revenues to be around $200 million with a downside range of approximately 5% and an upside potential of approximately 15%. Our revenue guidance includes Samsung's license fee which is $60 million this year. Additionally, it reflects the impact of the quarter lag in LGs royalty taking effect. As Steve mentioned in his prepared remarks, the LG license is a conventional royalty agreement. Similar to all of our long-term lighting license agreements, we are paid ongoing royalties which is based on the percentage of the module sale price.

Licensees generally report shipment information 30-60 days after the end of the quarter, so we recognize royalty revenues with a one-quarter lag. For example, the LG royalties earned with OLED products shipped in the first quarter will be recognized in the second quarter. This is in addition to upfront license fees, which will be recognized throughout the term of the agreement. Overall gross margins are expected to remain unchanged. OpEx, excluding cost of materials, is expected to increase approximately 10% to 15% year-over-year.

And we expect our effective tax rate to be in the range of 29%, give or take a few basis points. This transitional year of strategic capacity investment and product expansion is setting the stage for meaningful growth in 2016 and beyond for the market and for us. As our revenue mirrored the trajectory of the OLED market or even out perform it in the outgoing years, we also expect to expand our operating margins and increase profitability. With that, let me turn the discussion back it Steve.

Thanks, Sid. At Universal Display, our directions and innovations are built around solving our customer's high-value problems. As we embark on 2015, we're excited to operate from a position of strength. We're energized by the great opportunities to accelerate our, and the OLED industries momentum. We remain highly focus with execution, building on our technology leadership, growing the Company, and creating value for our shareholders.

Even as we advance our existing business initiatives we are diligently working to invent the future through materials research, technology development and other innovative activities designed to yield new and novel solutions to help enable the OLED market's growth. None of this would be possible without the world-class talent within Universal Display. I would like to take a moment to thank our employees for their continued commitment to excellence and innovation. Our solid performance is due to the talent, dedication, and hard work of the whole UDC team. In summary, the OLED revolution is gaining momentum and so are we.

Our trajectory top line and bottom is poised to be exceptionally positive over the long-term. Our strategic initiatives and robust operating model have created a strategic competitive advantage that translates with strong market leadership, revenue growth and profitability. We're excited about the opportunities that lie ahead as the evolution of the OLED industry continues to create traction, and result in new capacity, new product and new adopters. On that note, operator, please start the Q&A.

Thank you. (Operator Instructions). We'll take our first question from Rob Stone with Cowen and Company.

I wanted to start with your new approach to the guidance sort of the over and under, and see if you could provide a little more color? I know you won't break this out by dollars exactly, but what are the factors you're considering to get you to the potential downside versus upside, and, specifically if you can, how much is in there for host? That's my first question. Thanks.

In specifically talking about host, let me get to that in a second. The timing of events is really important and when things occur. While we expect 2014 to be a year of growth, things are difficult for us to gauge. We do think there is limited downside and we believe on the upside, there clearly is something that can occur quicker that will help us. Specifically with host, we expect our host sales to be down this year from last year.

Okay. With respect to operating expenses, I was a little surprised by the magnitude of the jump in the fourth quarter. That wasn't what we took away from the trend year-to-date or your commentary. If we just annualized the Q4 run rate, it would come out at somebody like 19% above what you spent last year, so I'm assuming to get to 10-15%, it will not be at this level throughout the year. Can you give us a hint of the linearity of expenses to the year?

It should not be at the fourth quarter level the fourth quarter always has catch up accruals so that we expect, if you look at the full year's expenses compared to the prior year's, and particularly when we stated in Q3, Q3 was actually the lowest quarterly expense run rate, so there were things that in this quarter that came in that affected Q4 compared to Q3 and year end stock compensation and other accruals in Q4 are catch up one's depending on what happens. On an annual rate we don't expect it to be at 19%, we believe it will be at the 10-15% run rate going forward.

But it should be meaningfully lower in Q1?

From Q4, I would suspect that would be the case.

Okay, thanks, I'll jump back in the queue.

Thank you. We'll go to Jim Ricchiuti with Needham & Company.

Hi, good afternoon. I wanted to again tackle that question about the downside/upside. Can you say whether that variability lies more with the portable display market or is it more so towards larger displays?

I think it is really, OLED TVs when they really start to ramp. There is increased capacity from LG in Q1, but I've talked about increased capacity in Q4 and the second piece has to be how quickly the mobile side recovers. As we stated, you can see from the first half of 2014 to the second half of 2014, things from the Samsung side went downhill, and it will take some time for that to recover and some of that would have to be how quickly that recovery occurs.

So I think that's really where the downside potential could be because you can look at the first half of the year. Our revenues were $102 million first half of 2014 and the second half they were $89 million, so you really need to see what the recovery in the first half of 2015 looks like because we believe the end of 2015 will be much better.

Okay. Sid or Steve, you both had talked about still pursuing the green host market. Can you update us on where you stand with that? Is that still a major focus for you or are you maybe looking at some other opportunities where you might allocate some resources?

Well, host is still an important market for us. We have an inherent advantage because we design the emitters, so we design our host to match those emitters for high performing (inaudible). We're also designing our host to be competitively priced, so if we can deliver a good quality host at a good price, we believe we're well-positioned to participate in that business.

Is there any update on where you stand with the new material?

There's no update at this point in time. The design cycles for the products are confidential.

Thanks a lot.

Sure.

And next question comes from Brian Lee with Goldman Sachs.

Hey, guys, thanks for take the questions. On the outlook, just had a question, a follow-up on a couple of the other ones here. If I look at your Samsung materials revenue for 2014, it was up about 10% year on year or about $5 million. Given that this amount includes a significant amount of green host, and you're saying that that's going to be down in 2015, I'm wondering if your base case outlook assumes that overall Samsung materials revenues can grow year-over-year or if it will be flat or down?

In specifically talking about the sales, just the Samsung, our host is sold to NSCC, so that goes to Japan. I think our overall we expect some growth in the material from Samsung and again, that depends on when A3 comes online and what their utilization rates are in the remaining part of the factory, and they have stated specifically they're out looking to be more of a merchant of displays.

Okay, fair enough. Maybe I should have clarified my question. I am assuming, as you do breakout in your disclosure, in your Qs and Ks that the material sold to NSCC are eventually purchased by Samsung. In that context, is there anything you can provide in terms of color on what that total amount might look like on a year on year basis?

We clearly don't break everything out and as we said, we expect our host revenues to be down year-over-year.

Okay, fair enough. Then a question on Samsung again. On 2014 did they hit their minimum volume requirements on the materials and can you can remind us of the catch up mechanism and timing if wasn't the case?

They have exceeded their minimum volumes.

Last one for me and I'll jump back.

They've done that every year, Brian.

Okay, great. Last one and then I'll pass it on. Is there any sense you can give us, given the new scope of the LG revenue that you're going to be generating between royalty and materials under the two new agreements heading into 2015? Just kind of what percent of royalty versus materials revenue you'll see from that customer?

We'll have to wait to be honest. We don't break it out in our guidance. As the contract unfolds and as we report quarterly results you you can then make projections. The terms of the contract and the pieces of it we don't really break out.

Fair enough. Thanks, guys.

We'll go on to Osten Bernardez with Cross Research.

Good afternoon. Thanks for taking my questions. I guess to start, I wasn't sure if you mentioned this with respect to the material sales for the fourth quarter, but to what extent were new material sales part of the growth drivers for the fourth quarter?

The new materials were introduced I believe earlier than the fourth quarter.

And so how should we be thinking about the material margin trend throughout 2015?

Well, we believe our overall margins will not be impacted in 2015. They should be about the same as they were in 2014.

And just real quickly. For the fourth quarter, it looks like your green host material sales improved quarter-over-quarter. (inaudible). How much of that was just a function of sort of either inventory clearing or a matter of shipments perhaps into mid tier phones? Would you have any visibility into that?

Yes. It really is when the customer buys it we don't specifically know what product is going to go into it. We know what goes into whichever generation product they're making, but we don't know specifically what exactly goes into which product.

Thank you.

Thank you (Operator Instructions). Jed Dorsheimer with Canaccord, please go ahead.

Thanks for taking my question. I guess there's been a lot of questions previously with respect to the upside/downside, and I just have one more. What I'm basically hearing is that in the downside scenario, most of the green host has basically been washed out and there's probably a little bit of expectations based in the TV in terms of the downside, but most of the upside is really around the TV application. Is that a fair assessment?

I wouldn't say all of our hosts have been washed out. We said it would be down year-over-year and we still believe in the host business and we are still going to work to move the host business forward. But the second half of the year, the capacity of LG putting their 20,000 substrates on in their gen 8 facility will have an impact on the second half of the year. From Samsung in their A3 line, which is 15,000 substrate starts of gen 6 size glasses.

Thanks, Sid, that's helpful. With respect to hosts, do you see a greater opportunity with non-Samsung or getting back into next gen product with Samsung, specifically on the green host?

Jed, as I mentioned, we believe we have the competitive advantage because we match our hosts to our emitter and we're marketing our host materials to all of our customers as well. So we believe we have a good opportunity on the host business.

Okay, fair enough. Thanks you guys.

Sure, Jed.

Thank you. Our next question comes from Hendi Susanto with Gabelli & Company.

I would like to understand more about the inventory write down and I also see sequential increase in (inaudible) in the fourth quarter. For the higher inventory, are you preparing for certain sales? And with regard to the inventory write down, I believe that upsell is usually not an issue, so I'm wondering if you have any insight into that?

Frankly, we built a lot often inventory in anticipation of expected growth in the market, and looking back over the year, we realized that there was $2 million worth of inventory that required additional processing to make it saleable, and we didn't think at this time it was financially prudent to complete that process for that $2 million. In addition, because of the pricing coming down, competitive pricing coming down faster than we anticipated, we wrote down approximately $2 million so that our remaining host can be sold profitably. So we did an assessment at the end of the year to take a look at it and we will assess it every quarter.

Got it. Do you have any expectation how many (inaudible) you'll be selling into wearables or flexibles?

Well, for flexibles with the LG line, we believe that they are using their existing line that is a mobile-sized line and we sell LG red materials and with Samsung, they're a three-line which is designated for wearables and flexibles, and we sell Samsung red and green materials.

And not green host?

We sell them green host. We continue to sell them green host. I don't specifically know what the recipe or which back plane they're using for whatever they're putting into A3.

Got it. Thank you.

Thank you. We'll continue on to Andrew Abrams with SCMR, LLC.

Hi, guys, thanks for taking my question. First, was there any pricing pressure that you guys saw ex the host business just on the material business? You had mentioned in the previous quarter there was pricing pressure from Samsung or a request for better pricing.

In this industry, there's continual pricing pressure.

Other than your normal, maybe something a little exceptional.

There was nothing unusual about it other than the normal, and clearly Samsung had a really tough time in the second half of this year.

So there was nothing more unusual than normally is. As far as the host material for LG. Are you in the process or supplying host material for yellow/green?

We do supply samples of host for all of our products and to everyone, but in their commercial products we have stated that they're using our yellow materials.

I would assume it would be a back plane change that could change that or is it something different than that?

It would be that plus whenever they modify their recipe or build different stacks or whatever, but in the existing recipe that they have and back plane, we sell them our greenish yellow materials.

Got it. Lastly, I know this is a little on the complex side, but looking out a quarter or two when you're starting to recognize the royalty from LG, how is the break out between material sells and royalty relative to what we're used to on a like dollar basis? Let's say they buy a million dollars of emitter material. How is it going to look relative to the way it looked last year?

Very interesting question. It depends on a number of variables that we don't know the answer to yet because it's really going to depend on their utilization rates and their selling price of their end product, so we're going to have to see how that evolves over time.

Okay. And lastly. Are there material minimums on their contract also, their material side contract?

Yes, yes.

Got it. Thanks very much.

(Operator Instructions). We'll go to Rob Stone with Cowen and Company.

Hi, guys, just a quick follow-up on the inventory again. Should I interpret your comments that as you ended up with more inventory than you would like to have at the end of the year and we should see that level work back down, or are you prepping for significantly bigger material demand here, higher inventory run rate to be sustained?

Well, a couple of things in the inventory at the end of the year. There's raw materials in inventory this year that were not in the prior year. When you look in the K, you'll see there's raw material in there. And on the host, we built a lot of inventory. We would like to work down obviously the host inventory, but we still will be building inventory up in our materials to meet what we believe are customers needs are. And we are a sole source of commercial phosphorus emitters to the industry and we always want to ensure that we have enough inventory on-hand to meet any unexpected needs or increases. And to be honest, our cash position is very good and the best use for our money is to ensure we meet all of our customers needs.

So related to the commentary about pricing and continual price pressure, as you get to higher volumes, are you able to enjoy some off setting benefits on your supply chain so that you can pass on those better prices to customers without changing your margin profile?

That is really our goal.

And over the past few years, you can see our margin profile overall has been pretty consistent and there have been a number of pricing declines. We had a pricing decline in the contract with Samsung. So that's how we designed our business model, so that when we see price breaks coming through, we want to pass them on to our customers because it's important that everybody benefits in the supply chain.

That's all I had. Thank you very much.

Thanks, Rob.

Thank you. Our final question will come as a follow-up from Hendi Susanto.

Hi again, Sid. Would you provide the breakdown of commercial chemicals? I didn't catch that.

The total commercial chemicals?

The breakdown like host, red emitter, green emitter in Q4.

Total red emitter sales for Q4.

In the commercial category.

We provide it by year, Hendi.

Yes, we provide it by year. If you want, we can actually, I think you have a follow-up call scheduled. We can give you whatever details you need.

Yep, got it. Thank you.

Thank you. With no additional questions in the queue I'd like to turn the conference over to our speakers for any additional or closing remarks.

We'd just, again, like to thank everybody for your time today. We appreciate your interest and your support, and all have a goodnight. Thank you.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.