Universal Display Corp (OLED) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Display Corporation Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Darice Liu, Director of Investor Relations. Please go ahead.

Thank you, Amber, and good afternoon, everyone. Welcome to Universal Display's Third 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 a 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, November 5, 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, those--such as those relating to Universal Display Corporation's technologies and potential applications of those technologies, the Company's expected results as well as the growth of the OLED market, and the Company's opportunities in that market. These include, but are not limited to, statements regarding Universal Display's beliefs, expectations, hopes, or intentions regarding the future.

It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected. These risks and uncertainties are discussed in the Company's periodic 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'd like to turn the call over to Steve Abramson.

Thanks, Darice, and welcome to everyone on today's call. For the third quarter of 2015, I am pleased to report solid results of $39.4 million in revenue, operating profit of $8.4 million, and EPS of $0.15 per share. As anticipated, the demand environment improved during the third quarter as customers increased fab utilization rates and new capacity came online. This drove our proprietary phosphorescent emitter sales sequentially up by over 40% to a new record high.

We generated $5.4 million of cash from operations, and we are on our way to generating over $100 million in operating cash flow for the year, which is double from last year.

The past three months have provided a small preview of OLED technology's growing promise in the marketplace, from the expanding list of consumer electronic makers evaluating and adopting OLED panels, to the number of new OLED products being introduced on a monthly and sometimes weekly basis. Additionally, there has been an abundance of OLED activity and announcements from panel makers, including Samsung. Samsung recently reported strong third quarter results and one of the main sources of operational strength was its OLED vision. Samsung's OLED shipments were up meaningfully as it launched new products, increased fab production, and expanded its customer base.

Samsung also made a significant announcement that has achieved OLED cost competitiveness while maintaining very strong product performance. Looking forward, Samsung expects to maintain its solid OLED earnings in the fourth quarter and forecasted approximately one-third of its OLED panel sales will go to merchant customers in 2016.

Furthermore, Samsung reaffirmed its commitment to flexible OLED investments and reiterated that it expects flexible OLED to be a mid to long term growth engine. LG display in mid-August announced investment plans to spend at least KRW10 trillion, or $8.5 billion, through 2018 for advanced displays with the bulk of the CapEx for OLEDs.

LG display plans to allocate the CapEx to OLED TVs and flexible screens for smartphones and wearables and plans to spend its OLED portfolio into signage and autos. LG display also announced impressive OLED TV yield improvements. LG's 55-inch OLED TV yields are now comparable to LCD yields. And LG expects its 65-inch and 77-inch OLED panels to reach similar yields in coming quarters.

In Taiwan, AU Optronics is continuing to expand its OLED wearables display portfolio and have secured a number of OEM customers. As a result, AUO expects increasing shipments in the coming months.

Additionally, a Korean equipment maker announced in early September that it received OLED tool orders from Han High Precision, also known as Bus Cut. And in China and Japan, with commercial plans on the horizon, R&D activity continues to progress with BOE and JOLED.

On the OEM front, we saw a number of companies unveil new OLED products, including Huawei, introducing its first OLED smartphone, the Mate S at IFA. This announcement was quickly followed up with Google's launch of the Nexus 6P, which is also made by Huawei. Other OLED products introduced include smartphones from Meizu, HTC, Infinix, Yanni, OnePlus, Microsoft, Motorola, to name just a few.

OLED TVs made a huge splash at IFA, the consumer electronics tradeshow in Berlin. LG Display unveiled its breathtaking, extremely cool, 111-inch and 55-inch double-sided wave shaped 4K OLED TVs. Panasonic officially unveiled its first commercial OLED TV, a curved 65-inch 4K OLED panel that is already receiving rave reviews for its jaw-dropping image quality and beautiful design.

Also at IFA, German TV brand, Metz, which is owned by China-based Skyworth, as well as Haier, demonstrated 4K OLED TVs. This expands the list of Chinese TV vendors, which includes (Chinese), TCL, and (Chinese), all of whom are reportedly planning to sell OLED TVs in the near future. Vestal, the Turkish-based tech giant, plans to introduce OLED TVs to the market in early 2017.

Also taking place in Germany in September, the IAA Commercial Vehicles Show became a grand stage to showcase OLED display and lighting prototypes, which may be arriving soon to a dealership near you. Porsche unveiled a new concept car, the Mission E, an electric car with a curved OLED display dashboard that adjusts to the driver's seat position.

Audi presented its new matrix OLED taillights for the first time in a concept car. According to Audi, OLED lighting attains a new level of homogeneity. It's dimming, it's continuously variable, and there is minimal heat output. OLED lighting does not require any reflectors, light guides, or similar optical components, and as a result this makes OLED lighting efficient and lightweight. As OLED lighting technology progresses, Audi believes that OLEDs may be incorporated in turn signal and brake light designs, too. Audi calls OLED technology the next step in automotive lighting.

Not to be outdone, BMW recently announced that it is starting to produce in limited commercial quantities the concept M4 GTS model, which is equipped with OLED taillights. Overall, we are highly encouraged by the bustling global OLED pipeline from leading panel manufacturers investing in additional OLED capacity to deliver bright, thin, beautiful, high resolution displays on a broader scale to OEMs around the world designing OLEDs into a plethora of new concept applications and consumer products.

All of this is fueling the OLED industry's extraordinary momentum and our momentum.

Now let me turn the call over to Sid.

Thank you, Steve, and again, thank you, everyone, for joining our call today. We had a great quarter, with strong top line and bottom line results. Revenues for the third quarter of 2015 were $39.4 million, compared to third quarter 2014's revenues of $32.9 million.

As Steve mentioned, strength in the quarter stemmed from our record emitter sales. Our total material sales were $34.1 million in the third quarter, of which commercial was $30.2 million. The breakdown of commercial material sales by color for the third quarter of 2015, the prior quarter, and the comparable year ago quarter, are green emitter sales were $21.4 million in the third quarter, up 53% sequentially from the second quarter's $14 million, and up from the comparable year-over-year's quarter of $13 million. Red emitter sales were $7.3 million in the third quarter, up 22% sequentially from the second quarter's $6 million, and up year-over-year from the comparable quarter's $5.1 million.

Green co-sales were $1.4 million in the third quarter, down 13% sequentially from the second quarter's $1.6 million, and down year-over-year from the comparable quarter's $5.9 million.

Our third quarter 2015 royalty and license fees were $5.2 million. This does not include any Samsung license fee, which is $60 million for 2015, and recognized in two equal installments in the second and fourth quarter of the year.

Moving along to material costs. Material costs for the third quarter were $7.2 million, down year-over-year from the third quarter of 2014's $7.4 million. Third quarter 2015 material gross margins were approximately 79%, compared to third quarter 2014's material gross margin of approximately 73%. The margin expansion was due to product mix.

Third quarter operating expenses, excluding cost of materials, were $23.8 million, which is essentially flat from last year's--last quarter's $23.5 million and up year-over-year from the comparable quarter's $19.4 million. For the year, we now expect operating expenses, excluding cost of materials, to be up around 5% year-over-year, principally from growth in R&D activities.

Operating income was an impressive $8.4 million for the third quarter of 2015, up 38%, compared to $6.1 million in the third quarter of 2014. Third quarter's net income was $7 million, or $0.15 per share, to the comparable quarters of 2014's $4.3 million, or $0.09 per share. \

Shifting to the balance sheet, we generated $5.4 million of cash from operations, and built our cash position to $362 million, or over $7.70 of cash per share.

Moving along to guidance. 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, but we are narrowing the upside and downside potential to a plus or minus 3%. Our revenue guidance includes Samsung's license fee, which is $60 million for this year. It also reflects the impact of the quarter lag of 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.

Fundamentally, our position remains exceedingly strong and we believe that we are continuing on the right path for long term growth.

With that, I will turn the call back to Steve.

Thanks, Sid. The evolution of the OLED market has been remarkable with the ongoing proliferation of smart watches, mobile phones, tablets, and TVs, and novel form factors driven by OLED innovation, which is transparent, rollable, and flexible plastic based products, which will blaze new commercial paths in the display and lighting industries. Before you know it, the benefits of OLEDs will be everywhere for all to experience and enjoy.

Less than five years ago, the majority of the population probably had no idea what an OLED was. And then, Samsung introduced its Galaxy S1 smartphone. Fast forward to today and OLEDs have captured a tremendous amount of share of the mobile market. It is now forecasted that 30% of the smartphone market will be OLEDs in 2016. OLEDs have taken the burgeoning wearables market by storm. The benefits of OLEDs, including thinness, lightweight nature, manufacturability on plastic, and a gorgeous screen, have made the optimal display technology for wearables and leading smart watch OEMs agree.

The OLED TVs - seeing is believing. LG launched its first 55-inch full HD OLED TV in April 2013 for $15,000. And now you can find it for under $2,000. LG's 4K OLED TV line has also gotten more affordable for the premium market and is priced comparable to some high end LCD models. In just a few years we believe that OLED TVs will be a significant contender in the mainstream market.

OLED technology is transforming the consumer electronics landscape. The industry has grown by leaps and bounds in just a few years for the mobile market. And we believe the TV market is just beginning its commercial journey.

We are excited for the future, with our vast experience, strong focus on execution, expanding product portfolio of new OLED materials and technology, we are and will continue to be well positioned to take advantage of the great opportunities of this growing industry, drive profitable growth, and deliver the most energy efficient, high performance, and cost effective emissive layer solutions in the industry.

On that note, Operator, let's start the Q&A.

Thank you. (Operator Instructions) Brian Lee, Goldman Sachs.

Hey, guys. Thanks for taking the questions. I had several model relating ones, if I could. First, Sid, what drove the year-on-year decline in the royalty and licensing revenue line, I would have thought with LG now being in the mix this year ever since the contract was signed earlier in the year, that would have grown year-on-year.

Well, the majority of it this year is from LG. And when you look at last year's, it was not all LG. We did recognize milestone payments on certain contracts. And we also--again, we have a lag quarterly from LG on licenses. So we have only--we've reported the second quarter sales in this license from LG.

Okay. Fair enough. And that might answer partially my second question. But the short term deferred revenue, it's been coming down a few million dollars each quarter here. But you're still sitting on a $20 million balance. Given you started the year with $25 million, would it imply we're going to see this get drawn down to zero in the next one to two quarters? Is that the right read in what's driving that degree of lumpiness?

No. It is not--when you do that, it is what you expect over the next 12 months. So it's not one to two quarters. It's over the next 12 months.

Okay. So maybe to just follow up on that, the $25 million balance you started with at the beginning of the year, you were obviously expecting to see that get drawn down to zero over the course of 12 months, which would mean end of 2015 calendar. But you've added to that balance since and that's why we're still sitting here at about $20 million. Is that the right--?

Yes. You adjust it every quarter, so that it is always a 12-month number that--what--that you drawn down. So you take whatever it is that you received and reduce it, and then you estimate what it's going to be. And this is only based upon what we received in cash upfront.

Okay. Fair enough. And last one for me, and then I'll take these offline. The OpEx reduction, first time in a few years that we've seen it be below 10% to 15% year-on-year growth. What were the major drivers of that? And is there anything to read into it heading into next year?

I actually--well, it's actually 5% to 10% growth for this year. I think I just said 10% on the--in my prepared remarks. But most of it is in R&D. And we do manage our expenses pretty closely. I can't say for sure what will happen. We'll give you guidance in February and we'll talk about it at that time.

Okay. Thanks, guys.

Thanks, Brian.

Austin Fernandez, Cross Research.

Oh, yes. Thanks for taking my question. You highlighted it in the press release for certain developments in terms of deepening your technology research. And I was just thinking, if you could sort of give us any highlights or any updates in terms of the pace of your materials types lines from a new development standpoint. I understand you're always working on new materials. But is there anything you could provide that you can--any data or any information you can provide that perhaps lends to what you're thinking going forward for the next 12 months on new material--?

--Well, Osten, we're constantly developing new materials and expanding our research and development activities, both on our red and green emitters, on host materials, and of course, on our (inaudible) truck project that we're focusing a great deal of attention to as well. We don't provide specific updates or specific (inaudible) except to say we are continually working to improve the efficiency, the lifetime, and hit the appropriate color points that our customers are interested in.

Got it. And then, secondly for me, I was just wondering whether you could provide an update in terms of what you are seeing from a manufacturing standpoint--from a display manufacturing standpoint in terms of some of the innovations that are taking place there in the OLED technology space and whether you see any new technologies, be it from--developed by Universal Display or any of your partners sort of adding incremental opportunity within the next 12 months or so.

Within the next 12 months, it really looks like LG is focusing on their manufacturing footprint, both on the flexible side and the--on the TV side. And Samsung doing the same. So--and the other companies in China and Taiwan are continuing to move forward all around the same concept of operation--these operation systems and vacuum deposition systems.

But--so you don't expect any sort of--any material impact from inkjet printing or anything in that realm?

No, we don't expect that in the next 12 months.

No. Everything that has been announced and all the capacity that's in place and the capacity that's been announced is based upon vacuum deposition.

Thank you.

Jim Ricchiuti, Needham & Company.

Hi, thanks. Good afternoon. Just looking at the revenues from your two largest customers in the quarter, and the materials business, looking at that, it appears to be more balanced. And I'm just wondering, is that business becoming any more predictable for you?

Well, it's clear that we're getting the second large customer that is buying more and the percentage of our revenues is growing from our second largest customer. Is it getting more predictable? It is somewhat, but we are really a just-in-time supplier, and in the rapidly moving consumer electronics ecosystem, each month order flow can have a large impact on our revenues.

As we've seen in the past, a short term shift in a customer production in either direction can impact our financial results. Since there are a number of variables that are really still in play, this is--right now we're doing the best we can to estimate it. And it's a little better, but it's still not really predictable.

Okay. And just with respect to LG, amidst all the positive news, they did reset modestly their expectations for the TV market--the OLED TV market--for this year and next year. And I was just wondering, I mean does that--did that enter in at all to your narrowing the guidance for the year, or had you already been pretty cautious about the expectations for the TV market this year, 2015?

Well it does--it did impact it because that it did not occur as fast and they have reduced it. So that clearly does have an impact on our business for this year.

Okay, thanks a lot.

Thank you.

Rob Stone, Cowen and Company.

Hi guys. A bit about the tax rate, which was quite a bit lower if I'm calculating it correctly than I've been thinking. How do you see that--what drove that in Q3 and how do you see the tax rate in the fourth quarter and going forward?

Well, it--the issue with the tax rate on a GAAP basis is the fact that we--our material business is out of Ireland and the rest of our business is from the U.S., and because of the write-down, it impacted Ireland and it ended up in a loss position. And from that position you can't include that loss because it's been a loss company since inception. So for GAAP purposes, the tax rate is lower.

You essentially do the GAAP tax rate on an annual basis, and each quarter just falls where it is. On a non-GAAP basis, we expected approximately 30% to 32% for the year. For the fourth quarter, the tax rate actually will be higher because it ends up being a plug number, and for the fourth quarter, depending on what the revenue number is, it could be around 45%.

Okay. I guess that only makes sense to a tax accountant.

That is correct, unfortunately. We can talk about it offline if you'd like.

Yes. The other question I wanted to ask is the more existential question, and it's a bit of a follow-up to Jim's, perhaps, which is what drives the upside and downside scenarios that you can see from here through the end of the year? I mean, volumes seem to be pretty strong. I believe LG Display is trying to make as many TVs as they can. It's not market demand, it's how much they can get out of their capacity--the units. So what factors were you entertaining for the plus-minus 3% scenarios?

The key factors are, one, Samsung, and how their merchant and captive OLED business progresses and its impact on fab utilization rates and the ramp of A3 and its flexible investments. And with LG, it's mainly ramp of their OLED TV production line flexibles and wearable business. And these are the two variables that impact our--will impact this quarter. And as we said, we are a just-in-time supplier, and the order flow in one quarter impacts the order flow in the subsequent quarter.

Yes. How has been the order flow in the quarter so far?

We can't talk about the quarter, obviously.

Fair enough. Final thought is on--gross margins were quite good for materials. You said it was mix. Any updated color on pricing?

Well, I mean, we deal with the largest companies in the world. And you've got Samsung and LG and others, and there's always pricing pressure. And we do provide volume price breaks. We're in constant discussion with our customers. We're working with them all the time to achieve what we think could be a win-win solution for all of us. And it's--and it's clearly in this quarter because the host business was so small, which had much lower margins. That impacted our gross margins on our material business.

Great. Thank you.

Thank you.

Hendi Susanto, Gabelli and Company.

Good evening, Sid and Steve.

How are you, Hendi?

Good. Sid and Steve, when should we expect the next round of design win competition for greenhouse materials?

Hendi, it's really not on a calendar basis. It just happens consistently over the year. And each customer is different.

Okay. Got it. And then (inaudible) preferable margin mix in your gross margin is due to primarily higher (inaudible), in other words, there's no like pricing reset that we have seen in the past?

We--as we've stated in the past, we always have volume price discounts. And we've also built into our pricing strategy when we--our customers want volume discounts, and as our volumes grow, we get economies of scale. And as we've been able to do over the years, we've passed the benefits on to our customers with price breaks. But we've also--have worked at and been able to maintain our gross margins in this--for emitters, which we've said are 70% to 80% and the host business, when it started, was 40% to 50% and then went down.

But we do pass them on. When we get economies of scale, we do pass them on. That's part of our strategy, to give our customers lower pricing. But we really have attempted to maintain our margins because we spend a lot of money on R&D and we need to have these margins in order to do that.

What I meant was in the past, like when you have a new version of (inaudible) pricing was reset back to like a starting point that is higher. Did you have that in Q4? I assume it wasn't the case, but I just want to verify that.

We don't specifically state when we introduce new, but we do have a pricing structure that we've talked about, in that when there's a new emitter introduced, from our standpoint if the volumes are not that high and they cost us more money to make, and our customers understand that, and we charge more for those emitters. But as the volume continues to grow we pass them on. So it shouldn't affect our margins whether a new product is introduced or not, because we do pass these on to customers.

Got it. Thank you, Sid. Thank you, Steve.

Thank you.

Alex Guana, JMP Securities.

Hi guys. Thanks for taking my question. Nice job on the quarter. I was wondering if you could give us a sense with LG having revised or trimmed their outlook on the OLED TV side, is there any basis to have increased new confidence in the targets, meaning anecdotally are they feeling good about the velocity on this number now, or do we still to wait and see how the holiday seasons progress?

We believe that LG is committed to OLED TVs and expanding their own base and their OEM customer base. I think we believe that the OLED TV market will grow. I don't think any of us, including LG, believes that we can predict, but LG is committing significant dollars. I believe that LG is--believes that the OLED TV business is one that will propel them going forward. So clearly you've got to wait for what sell-through is and things like that. But they've really done, I believe, a really good job of moving forward on OLED TV.

Okay. And then I know you've always said that don't think of your revenues as coming from Samsung Handset but Samsung Display. Can you give us a sense as Samsun Display has diversified and moved outside of Samsung internal sales, maybe what your mix exposure there is. Should we be thinking of your Samsung exposure as 75% Samsung internal and 25% external? Or is there no way for you to tell?

I think Samsung has actually stated on their call that they expect 30% of their sales to be to OEMs--Samsung Display. That's in 2016.

Does that carry any mix implications for you, or are the Samsung flagship phones taking higher-end materials than otherwise, or not really the case?

I don't--we don't know exactly what goes into each one. But I believe that they're selling to customers who want high-end phones and I think they want--they're paying high-end and mid-range phones--but they're paying for a display that gives them all the benefits of OLEDs including power efficiency and a great picture. So I think they do pay for it, and I think they expect higher performance.

And is there any sign that the broader OEM base out there, now that LG is in the mix and AU has made progress, those second source alternatives? Is that becoming a factor in the industry yet or not really?

I don't believe that it is a factor yet. But you are getting--you do have Samsung and LG, and LG is investing a lot in TVs but they've also talked about expanding to wearables and mobile markets. You've got AUO doing it. But realistically, it's those two guys.

And Steve, any anecdotal signs from what Samsung is doing on their interest in reigniting the OLED TV side of things?

No, Samsung really hasn't said a lot about the OLED TV market. They seem to be focusing, at least commercially, on the portable electronics business and the wearables business. But they've also--have kept their R&D efforts up on OLED TVs, and they've stated that.

Okay, thank you, guys. Good luck.

Thanks.

(Operator Instructions) Andrew Abrams, Supply Chain Market Research.

Hi, guys. A couple of questions specific to colors. Have you got any indication that LG is using red in anything in their small panel line, wearables, or smart phones, or anything along those lines?

Well, we do sell red emitters for LGs commercial products. And we're continue to sample green to LG. And we believe that replacing a fluorescent emitter with a phosphorescent emitter will result in a much more efficient product, so we believe it's only a matter of time.

Okay. And you had a pretty big increase in red material--red emitter material sales. Could we look at that as Samsung coming back to where they probably should have been all along, or was some of that from other customers or LG? Did anybody else make an increment there other than Samsung?

We sell red to all of our customers. But Samsung has grown their utilization--their factory utilization was higher in the quarter than in prior quarters, which they do use our red and green emitters.

Right. And again, you had a pretty big increment in the--on the green side also. If we were to break that out among customers, and it sort of blends together because of Korea. Was that also an indication of Samsung's higher utilization, or was that a blend between your two top customers?

I think it's a blend. I mean, we sell yellow and green, and you can look at customer A and customer B to get a better feel for it. We know it all goes to Korea, but there is the difference in customer A and customer B.

Okay. Thank you.

Thank you.

That concludes today's question and answer session. I'd like to turn the conference back over to Sid Rosenblatt for any additional or closing remarks.

We'd like to thank you all for joining the call today. And we appreciate your interest and support, and we look forward to speaking with you again in the next quarter. And thank you again, and good night.

That does conclude today's conference. Thank you, everyone, for your participation.