Universal Display Corp (OLED) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Universal Display's first quarter 2015 earnings conference call. My name is Joe and I will be your conference moderator for today's call. As a reminder, today's conference is being record for replay purposes. I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

Thank you, Joe and good afternoon everyone. Welcome to Universal Display's first quarter earning conference call. Joining me on the call is 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 web cast 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 date of the live web cast of this call, May 7, 2015.

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 expects 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 believes, expectation, hopes or intentions regarding the future.

It is important to know that these statements are subject to risk and uncertainties that could cause Universal Display's actual results to differ from those projected. These risk and uncertainties are discussed in the Company's periodic reports risks 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. The year started off well with the announcement of three long term license agreements. Sumitomo Chemical, OLED Works and LG Display. Our first quarter 2015 results were consistent with our expectations. We reported revenues of $31.2 million, operating profit of $1.8 million and net income of $1.3 million, or $0.03 per share. In addition, during the first quarter, we generated $47 million in operating cash flow mainly stemming from the receipt of up front licensees, prepaid royalties and milestone payments.

As we noted in last quarter's conference call, 2015 is expected to be a transitional year. OLED momentum in the display (inaudible) landscape is clearly building. The question is one of timing. Our top customers are making long-term OLED investment commitments, the adoption of OLED technology by current and new OEM s is increasing and the OLED product road map is expanding with new OLED wearables, smartphones, tablets and TVs. Just last month, Samsung Electronics launched its new flagship OLED mobile phones, the Galaxy S6 and S6 Edge to rave reviews. I have the S6 Edge and I can tell you that the design, the display and resolution are pretty awesome.

Back to Samsung's OLED business. During last year's first quarter earnings call, Samsung guided for OLED shipments to increase in 2015 due to new product launches and expanding its merchant customer base. Samsung also noted its focus on flexible OLED products as a mid to long-term growth engine while continuing developmental work in OLED TVs. From a capacity standpoint, Samsung reaffirmed it is ramping up A3, it's third OLED (inaudible). And just earlier this year, Samsung announced it would invest four trillion Yuan, or $3.6 billion from 2015 to 2017 in OLED production.

There's also been a lot of buzz with LG display. It's beautiful 4K OLED TV series unveiled at January's CES are starting to become available for purchase. During its first quarter earnings call, LG reaffirmed its OLED TV shipment target of 600,000 units for this year and 1.5 million units for 2016. From a capacity standpoint, LG currently has 14,000 plates per month of Gen-8 capacity for OLED TVs and 14,000 plates per month of Gen-4.5 capacity of flexible OLED panels. Just to giving you some perspective, while these (inaudible) capacity start is the same for both production lines, a Gen-8 size substrate is roughly 8 times the square meters of area compared to a Gen-4.5 substrate.

During their call LG also reiterated plans to add approximately 20,000 plates per month of Gen-8 OLED TV capacity by the end of this year. Outside of Korea, OLED display activity in Taiwan, China and Japan is progressing nicely. In Taiwan, AU Optronics announced it's extending its OLED footprint beyond Smartphones and into the wearable device market. It began shipping a 1.63 inch OLED panels in the second half of 2014 and earlier this year, they launched a 1.4 inch full circle (inaudible) OLED panel that is being qualified by a Chinese customer.

Shipments are slated to begin in the second quarter. In China, the OE technology has reportedly started to order mass production equipment for its Gen-5.5 LTTS OLED fab in orders. And in Japan, at last month's fine tech conference J-OLED gave its first presentation since its inception. During the presentation J-OLED revealed that it is targeting the 10 inch to 30 inch mid sized OLED panel market as well as a flexible OLED panel market. Also during the first quarter, we saw a number of OEMs unveil new OLED product at CES and Mobile World Congress including the growing wearables market where Wawei, ASUS, Hair, LG and HTC have all launched OLED smart watches.

In a recent publication, Display Mate noted that the key element for a great smart watch is its display and reported that Apple has done a great job with its state-of-the-art flexible OLED display on the Apple watch. Display Mate deemed Apple's OLED display as an excellent smart watch display that provides, "Very nice, pleasing and accurate colors and picture quality and is a very good side-by-side match to the iPhone 6". On the lighting front, development am activity continues to advance.

On the lighting front developmental activities continue to advance. Last month's (inaudible) trade show, Conica exhibited OLED lighting panels that were 1.05 milliliters thick with 50,000 hours of lifetime. And just last week, our new licensee, OLED Works announced it had reached a agreement with Phillips to buy selective parts of its OLED light source components business. As the proliferation of OLEDs continue, we're seeing new end market opportunities emerge. One of those opportunities is the automotive market which is expanding the OLED display and OLED lighting TAM, or Total Available Market.

The benefits of OLED notably its thin form factor, minimal heat generation, transparency, conformability and manufacturability on plastic to create an unbreakable panel, these benefits are capturing the interest of a number of car makers. According to reports, car display volumes are expected to almost triple by 2018. Currently, luxury cars have two or three displays but as safety and convenience features multiply, they could have as many as 9 displays in the near future.

According to LG display, future cars could add transparent side window displays and replace rear view mirrors and side mirrors with screens. On the lighting side, Ali demonstrated a new OLED taillight concept for their 27 car at the beginning of this year. Also in January, the BMW demonstrated a new concept car, The M4 concept iconic lights that features a new OLED-based taillight. According to BMW, the simplicity and slim mechanical structure of OLED is paving the way for more compact lighting systems and opening up new dimensions in panel design.

How soon could we see an OLED panel on a commercial car? Well, just last month Car and Driver reported that BMW's 2016 M2 car will be the first one to adopt these OLED tail-lights. It is undoubtedly an exciting time for OLEDs as the level of commercial and development activity increases. And with the OLED industry continuing to gain traction with consumers and OEMs, the future of OLEDs and our Company has never been brighter. Now let me turn the call over to Sid.

Thank you, Steve. And again thank you everyone for joining our call today. Revenues for the first quarter of 2015 were $31.2 million. Our results were consistent with our expectations. As noted on last quarter's conference call, we continue to expect our first half of 2015 sales to be similar to the second half of 2014. I just want to take a moment to talk about our business. On a fundamental level, we'll have two main businesses. Materials and licensing.

As the OLED industry continues to gross and mature, and as we continue to expand our material product portfolio with new emissive layer systems and as our revenue dollars continue to increase, we think the best way to view the Company is to look at our total material revenues as a whole and our total royalty and licensing revenues. Regarding our total material revenues, they were $26.8 million for the first quarter of which commercial material sales were $25.6 million.

Commercial red and green emitter volumes by grams were up sequentially in the quarter, offset by volume pricing discounts. The breakdown of commercial material sales by color for the first quarter of 2015, the prior quarter and the comparable year ago quarter are green emitter sales were $14.4 million in the first quarter, down 5% so conventionally from the fourth quarter 2014 $15.2 million, and down year-over-year from the comparable quarters $17.2 million.

Green host sales were $4.4 million in the first quarter, down 28% sequentially from the fourth quarter 2014, $6.1 million. And down year-over-year from the comparable quarters $12.4 million. Red emitter sales were $6.3 million for the first quarter, up 34% sequentially from the fourth quarter 2014, $4.7 million and up year-over-year from the comparable quarters $3.9 million. Our first quarter 2015 royalty and license fees were $4.4 million.

The quarter does not include any Samsung licensing which is $60 million for 2015. Half of which is recognized in the second and fourth quarter of the year respectively. The quarter also does not include any earned LG royalties which will be recognized one quarter in arrears when the royalty amounts become known to us, which will begin in the second quarter. Moving down the income statement, material cost for the first quarter 2015 were $8.6 million, down year-over-year from the first quarter of 2014 $9.9 million due to lower host sales.

First quarter 2015 material gross margins were approximately 68% compared to first quarter 2014's material gross margin of approximately 72%. The decline in margin is substantially due to competitive pricing pressures. First quarter operating expenses excluding costs of materials were $20.8 million, flat year-over-year from the comparable quarters $21.3 million. Operating income was $1.8 million for the first quarter of 2015 compared to $6.6 million for the first quarter of 2014.

During the quarter we incurred income tax expenses of $600,000, or a tax rate of 32%. For the first quarter of 2015, we reported net income of $1.3 million, or $0.03 per share, compared to $4 million, or $0.09 per share for the same quarter in 2014. Shifting to the balance sheet we generated $47 million in operating cash flow and ended the March quarter with $329 million in cash and short-term investments, or over $7 of cash per share. The increase from the year end cash levels of $289 million mainly stem from up front fees. Moving along to guidance.

Our outlook for the year remains unchanged. As we noted on last quarter's conference call, we expect 2015 to be a transitional year. We continue to 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 licensing (inaudible) to $60 million (inaudible). It also reflects the impact of the quarter's lag in LG's royalty taking effect where we will only recognize three-quarters of LG's royalties this year with the fourth quarter royalties to be recognized in the first quarter of 2016. With that, I would like to turn the call back to Steve.

Thanks, Sid. OLED's are inherently bright, beautiful, brilliantly colorful and simple devices. The broadening of the OLED display product portfolio from flexibles and wearables including smart watches, to high end smartphones, mid-end smartphones, high-end tablets, full HD and 4K TVs, exemplifies the growing breadth of the OLED display market opportunity even while it remains in what we believe are the early stages of technology adoption.

On the lighting front, developmental activity continues to flourish as efficacy rates in lifetime increase and the universe of manufacturer's expands. OLED technology is redefining the design, feel and use of consumer products. Due to the benefits of OLED, display and lighting panels can be extremely thin. They can be transparent. They can be manufactured on plastic to create an incredible unbreakable and light weight panel and because OLEDs are simply layers of film, they're easily conformable and can be curved, bent and even rolled. Broadly speaking, we believe that OLED technology provides the design freedom for the display and lighting makers to dramatically alter the consumer and illumination landscape and create differentiated high performing, energy efficient, innovative products.

On that note, Operator, please start the Q&A.

Certainly. (Operator Instructions). We'll take our first question from Brian Lee with Goldman Sachs.

Hey, guys, thanks for taking the questions. Good job on the quarter. I guess I wanted to dig into the deferred revenue and up front payments here a little bit because it's different from what we've seen historically. So Sid, can you talk a little bit about the deferred revenue that you're booking this quarter, which customer it's for, which agreement it's tied to, and then how we should think about the revenue recognition timing?It looks like about $25 million is in the current liabilities and $25 million in long-term so just wondering how this is going to phase in?

Well, we can't disclose specifics about a customer but as we said, we signed five agreements in this quarter. I'm sorry, three agreements in this quarter. The up-front fees and license fees and milestone payments that we talked about are related to those. The license fees will be amortized over the life of the license and we really can't go into specifics about any of the contracts, but we have classified some of them as current and some of them as deferred revenue.

Okay. That's helpful. I guess, in classifying some of this as current or close to half of it as current liabilities, what sort of criteria are you using given some of the agreements you signed up recently are sort of running royalty agreements and so to have a kind of 12-month view that some of this will be booked, you are sort of projecting what type of run rates?Am I thinking about that in the correct fashion?

There are specifics in the contract about when revenues will be earned so part of it has to do with the way that we negotiated the contract. And the other is an estimate of when we believe that these will be earned over the life of the license and we've looked at it and allocated it amongst long term and short term.

Okay. That's helpful. And then in the 10-Q you also mentioned a $1.9 million payment from a milestone payment in royalty and license fees for a customer that became a commercial application with certain product. First part of the question was going to be can you elaborate which customer?I'm assuming no. But can you elaborate on which material that's referencing and what end market segment application that product's being ramped into commercial application?

No, we really don't disclose specifics about each of the contracts or about each of the customers. Our contracts, a lot of them have certain milestones that need to be met and we get payments, so this was just one of our customers that met it and we have other contracts that have similar provisions.

And we'll move along to our next question. (Operator Instructions). We'll take our next question from Jim Ricchiuti, with Needham and Company.

Thanks, good afternoon. Question about how the materials demand was from your major customers through the quarter. It looks like your largest customer if you excluded the host materials, it looks like the revenues were up about 30% on the materials. I'm just wondering, how did that track as you went through the quarter?

And I also have a question on your second largest customer in general, if that decline is more a function of the new agreement?

The first question is regarding a specific customer. You're probably looking at the queue where it talks about customer A, B and C?

That's right.

Well, clearly what has occurred with one of them is that the host sales were down so that end customer's sales would then be reduced, mainly because of host. And the second part of your question is, our customers, we have the total grams of emitters sold is up quarter over quarter. And that's based upon the demand from our customers and I really can't talk specifically about different customers.

Sid, maybe another way to ask it is just in general as you went through the quarter was the demand that you were seeing from your major customer, was that in line with expectations?Because again, you've talked in the past how you sometimes don't have great visibility with some of your major customers.

It was in line with our expectations and specifically we talked about in the fourth quarter that we expected, in our year end call, we expected the first quarter and second quarter to look very similar to Q3 and Q4 and this is pretty much the same as Q4.

Okay. Thanks a lot.

And we'll move forward to our next question from Alex Gauna with JMP Securities.

Hello, everyone and congratulations to a nice start to the year. I know you don't give much color on near-term expectations but I'm wondering with the impressive new slate of license-bearing agreements, can you talk about how material we might expect the incremental royalty streams to be in this upcoming quarter, or because of seasonality and time lag should we think about it being a more back end loaded to the year? Thanks.

Well, as we stated, Q1s royalties from LG won't be really reported until Q2. And so that's part of it. So you should see an increase on that side since we have no royalties from LG. And what do we see as we move forward for the year?

We have stated we have do expect a second half of the year to be better than the first half of the year. Based upon increased capacity, based upon as we said there's a number of variables in why we think the second half of the year will be there. One of them the Samsung and building out A-three. Second part is LG and increase in their OLED TV capacity in the second half of the year. So based upon that, that's why we believe that the second half of the year will be obviously better than the first half.

Sid, I recognize that the payments from LG will start in Q2. I guess that's the nature of the question. I mean can you give us a ballpark about, I know they haven't give you exactly what it's going to be, but I think you know what programs you're engaged in. How meaningful is that incremental contribution going to be in Q2?That's the question.

We honestly, there's been no reports of what shipments have been. LG reiterated on our conference call that they expect to sell 600,000 TVs this year. But we really do not have information regarding what the royalty amount will be for Q1 because to be honest, if we did know what it was, we would report it. But we don't get it until after this call.

Okay. Steve, I was wondering if you could talk about some of the progress you're making on a technological front behind the scenes. Is the greatest excitement here in the near term around flexible?Is it maybe around lifetime improvement of new colors?Can you give us any sense of what's happening on the R&D front behind the scenes?

Sure. On the phosphorescent materials, we're continuing to invent new red and green emissive layer systems that have different color points, higher efficiencies and longer lifetime. We've also been doing a lot of work on blue and we're making progress although we have nothing to announce at this time. In addition, some of the work that we're doing on our single layer encapsulation system and organic vapor jet printing technologies, although those are both in the "R" stage of the R&D, are coming along really nicely and we think both of them are addressing pretty important issues that the OLED industry is facing over the next few years.

One is encapsulation that is relatively inexpensive, easy to manufacturer and fully rollable yet protects against oxygen and moisture. And the other is an efficient way of making large area TVs. People are making TVs both side-by-side right now and white with color filters. People are looking at ink jet printing. We can participate in all of these. We also have another way of doing it with organic vapor jet printing where we print the actual similar molecules that we use in vacuum deposition today. These are just some of the research and development things that are very exciting as we build for the future.

That's great. Thank you. Good luck.

We'll move forward with our next question from Osten Bernardez from Cross Research.

Thanks for taking my question. Wanted to get back to the deferred revenue line item. Is there a way for us to understand whether there's any portion of that is sort of based on the fixed amount that we may see recur throughout the year?Can that grow on a balance sheet net of sort of whatever runs down from a revenue recognition standpoint?

Well, in deferred revenue we've got up front fees, prepaid royalties, and milestones. So the license piece would be amortized over the life of the license. Royalties, prepaid royalties as you get a report that reports it and which earned it, we would then take it as revenue. But there's no way of knowing how much it would be and what the rate that we would report it would be because it really is on the royalty side based upon what our customer reports as sale and based upon the ASP of what they sell, that's what our royalty is based upon.

Okay. And then secondly, on the price downs that up noted for your red and green emitters, are these price downs on newer skews, new materials or are they price downs on prior materials that were already, were previously, is it a price down on top of a price down, and if it is on newer skews? Are we to assume that the rate of the price down is the same as it's been historically?

Well, we have volume price discounts which in general the more the customer buys, the better price they get. And so in terms of some of them early on, we go back with Samsung, we go back to the original agreement and we have volume discounts built into the agreement. There always is some negotiations with the customers. But the rate of which is, those are negotiated. On hosts, it's a little different because it really is a competition and priced with the competitors that we have in that business. The important thing that we look at, though, is overall we expect to maintain our emitter margins and our overall margins are targeting between 60% and 70% as we have historically had those same ranges.

Thank you very much.

We'll proceed to our next question from Hendi Susanto, from Gabelli and Company.

Good evening. Based on my calculations and the data in the 10-Q we are seeing declining LG sales. May I under more about the dynamics there. I was initially guessing that sales would increase since LG all of TV production is higher in volume. Does that reflect higher efficiency of material utilization?

With LG, I think we have increasing sales.

Oh, okay. And second question, when will the next opportunity to win design wins for green host materials take place at your large customer, Sid?

I'm sorry, repeat that question?

When will the next opportunity for design win of green host materials take place at your large customers?

We're constantly communicating with our customers about new material sets so there's no public schedule that they've made or that we have made. It's a constant interaction with our customers over what is available and what their needs are.

Thank you, Steve. I'll get back to the queue.

You're welcome.

And we'll proceed on word to our next question from Rob Stone, with Cowen and Company.

Hi, guys. Sid, I wanted to ask about the operating expense run rate. I think you were generally targeting something like a 10% to 15% increase this year but you were actually slightly lower in Q1. Is this just sort of quarter to quarter lumpiness implying, you know, a bump up in the second quarter?Or have your thoughts on OpEx trends changed?

No, I think it's lumpiness. I would expect the second quarter to be a little higher and we still anticipate the year to be in the 10% to 15% range. There really are different things that occur in different quarters so it is a little lumpy.

Okay. And turning to the tax rate, that was also slightly higher than we were modeling. I think you talked about a 29% rate on the year before, so was Q1 some kind of an anomaly or should we be using higher rate?

I would use this for this range for the year. The issue, the real issue is there's a 2% R&D tax credit that Congress passed at the end of last year but did not extend it. They usually pass it for two years. So I believe at the end of the year that that will get approved so the overall yearly tax rate will be closer to the 30% range. But for the quarter since it has not passed, we're required to assume it will not.

Okay. With respect to your host material run rate, I think you said you're expecting the first half of the year to be similar to the second half of last year. Do you have visibility on host demand later in the year or any comments you to make there?

Well, we expect the downward trend to continue with our current host business. The magnitude depends on a number of variables which are to some extent are still up in the air. But directionally we think it is going to continue down for our existing host business.

Okay. Thank you.

Thank you.

We'll move forward to our follow-up question from Jim Ricchiuti with Needham and Company.

You had commented about the automotive market. And it seems like we're hearing more about the potential for OLEDs to go into that market. I'm curious if as you look at some of these emerging markets and you talked about lighting, for a while we've seen some announcements in that area. Is auto coming on more strongly of late?As you look at the opportunities in the market, based on what you're hearing, potentially what you're seeing from some of your customers, is it possible we're going to see more traction earlier in the automotive market?

I think that some of the initial automotive stuff we're seeing right now is an outgrowth of the lighting business. So we're seeing a general acceleration of lighting because it's starting to meet certain commercial requirements. And I don't know if you had a chance at the CES to see the BMW tail light demonstration, but it was pretty extraordinary. I think we are starting to hear more buzz about OLEDs and lighting, or OLED lighting in cars. We're also seeing OLED lights in Home Depot as well. So you are seeing the initial commercialization of OLED lighting now. As we know it kind of creeps up on you and then all of a sudden it will explode. We just don't know exactly when that will happen.

But there's nothing, and again I know you can't talk about specific plans that your customers have but more broadly as you talk to these customers, do you get the sense that automotive is one of the driving factors in some of the capacity that they're adding?

We certainly think it's an important factor, yes.

Okay, thanks.

And we'll take our next question from Andrew Abrams of supply chain management research.

Hi, guys, thank you for taking the question. Looking at the royalty and license line going back maybe to third quarter and then fourth quarter comparing if to now, this is pure non-Samsung and LG in this quarter. If we look back at the previous two quarters, you were running 5.3 or 5.4 and three million. Is most of this the new licenses that's the incremental piece here? Because I would also assume that there was some LG royalty that is now being taken out in first quarter.

One of them is milestone payment. One of the increases related to the milestone that was met by one of our customers.

Okay.

And the others it has to do with amortization from, you know, a number of different contracts and so it is what it is what it is but the real increase is in the milestone.

Got it. And are you able to look at unit volumes from any of your non-Samsung and LG customers at this point?

I know there's not a lot of unit volumes being pushed at this point from those customers. But are you able to get some handle on that as to kind of the way the incremental unit volumes are moving from quarter-to-quarter?

Are you talking about lighting?

No, no, just in OLED display on a general basis?

To be honest the only two that really are doing anything are Samsung and LG.

Got it.

When the lighting customers, we do have royalty reports because we do have a number of licenses and they are small volume but we do get reports on them. But on the display side, you really don't have much besides Samsung and LG.

And lastly, the ratio between your new red and green versus your old red and green. I know you probably can't give exact numbers, but how do we look at that now relative to maybe where we were two quarters ago where it was probably predominantly old red and old green. Has there been an appreciable change there in terms of ratios?

There clearly is changes in that the new ones are being adopted for newer products being made and as older ones are being phased out, the older ones are going to go down. But beyond that, you know, I really can't answer the question specifically without going through every material.

Gotcha, okay, thank you.

Thank you.

(Operator Instructions). We'll move to our next question from the queue from Hendi Susanto.

Sid and Steve, with regard to the flexible OLED display, may I verify that Apple smart watch uses only your (inaudible) materials? And I'm wondering whether you can give some insights whether you believe that the new Samsung Galaxy S6 Edge on the flexible part use one or two types of (inaudible) materials?

Well, with Samsung, they use red and green materials. That is our customer and, you know, we have stated that they do use our red and green and the adopting that green gave them an incremental power efficiency. When you talk about the Apple Watch, we can't speak for Apple at all. But we do know that the benefits of OLED has attracted a lot of attention from various OEMs and, you know, it's a gorgeous display. We have one of them in our demo room. But no one has disclosed and there's nothing reported about who is providing Apple with that display. So I really can't answer any other questions regarding it.

Okay, Sid, thank you.

Thank you.

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

Thank you all for your time today. We appreciate your interest and your support. And that would be it. Good night, everyone. Thank you.

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