Universal Display Corp (OLED) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to Universal Display's Second Quarter 2016 Earnings Conference Call. My name is Angela and I will be your conference operator for today's call. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the call over to Ms. Darice Liu, Director of Investor Relations. Please proceed.

Thank you Angela and good afternoon everyone. Welcome to Universal Display's second quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Before Steve begins, let me remind you that today's call is the property of Universal Display. Any redistribution, retransmission, or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website.

The call contains time sensitive information that is accurate only as of the date of the live webcast of this call, May 5, 2016. OLED 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's 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 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 would like to turn the call over to Steve Abramson.

Thanks, Darice, and thank you everyone for joining today's call. For the second quarter of 2016, we reported revenues of $64.4 million, operating profit of $34 million and net income of $21.8 million or $0.46 per share. In addition to our second quarter earnings release, we announced today a new long-term license a material supply agreement with leading Chinese paddle maker TMR microelectronic. TMR agreements and the closing of the DASF as a whole IP portfolio in pieces acquisitions. Or three significant a positive development, A further solidify our leadership position in the OLED ecosystem and buttress our long-term growth plan. They also highlight the high level of activity in our customer as strategic initiatives pipeline. I'll share more details on this shortly.

Let first review you are 2016 guidance. The underlying growth fundamentals of our long-term outlook are robust. Near term, we expect that our revenue growth will be delayed by about six months to the three principal factors. Product mix, we expect that some of our higher ASP new emitters to be adopted this year. Now looks like that has been delayed for next year. Royalties, we are revising our royalty forecaster reflect current revenue trends. In addition to those two continents, we believe that our customers are utilizing our materials more efficiently and are optimizing the recipes a head of the expansion in manufacturing capacity.

In this dynamic in evolving market or one or two decisions by our customers about materials, a production may impact our gardens in either direction at this point based on the most recent and best information we have on hand, we believe it's prudent to revise our 2016 revenue guidance to approximately $190 to $200 million.

Beyond 2016, the increasing number of capacity related announcements points with significant multiyear Capex cycle, we're only in the early stages of that size. From new vessels plans of large equipment orders. The OLED industry is clearly ready for a new growth cycle. This surging capacity is stated to start coming on line next year, which is when we as both a technology and a material supplier should begin to see new contributions to our top and bottom line. And just like our customers, who are investing to strengthen and scale their manufacturing processes ahead of this high buying capacity wave, we are also investing in our future growth organically and inorganically through acquisitions.

Our confidence in the future is being driven by new OLED capacity, new OLED products new OEMs, and new opportunities. Just week Samson Electronics announced on its conference call that it would be focusing in display capital expenditures on OLED. In line with that statement, there are reports that Samsung Display is planning to install and ramp its Gen 60 OLED fab, which currently runs 15,000 plates per months, to its full capacity of 120,000 plates per month beginning in 2017.

Additionally industry watchers believe that Samsung may convert one of its existing LCD production lines to a Gen 6 OLED line to meet the growing demand for small and medium OLED displays. LG display recently proclaimed that OLED the technology is a megatrend. During its earnings call, LGD made its fifth OLED investment announcement in 12 months, stating it would $1.75 billion for a Gen 6 flexible mobile OLED line and pod (inaudible) dubbed E6, which is stated to come online in the second half 2018. This brings our total announced OLED investments to over $12 billion.

On the OLED TV front, LG display reaffirmed that OEM interest is increasing. In the last two months low MET's NEC have all reportedly jumped on the OLED TV bandwagon. This adds to the growing list of OLED TV OEMs, including Phillips, (inaudible), and Vestel in Europe, (Sky Worth), (Sanghong), and (Konka) in China, Japan's Panasonic, and leading the pack, Korea's LG Electronics.

Outside of Korea, OLED display activity in Taiwan, Japan, and China continues to grow. AU Electronics is currently focused on production of OLED panels for virtual reality wearables. AUO is developing 3.8 and 5.2-inch OLED panels for use in VR devices as well as flexible OLED panels.

With (Foxconn's) investment, Sharp is reportedly accelerating its OLED development work with plans for initial OLED panels shipments in the 2017, 2018 time frame. And in China, DOE technology has reportedly started ordering equipment for its Gen 6 Green field OLED fab in Chengdu, which is slated to begin production in 2018. As well as discussing possible OLED investments in D6, BOE's Gen5.5 fab (inaudible).

So as OELD activity grows so our relationships. We announced after the market close today, the signing of a new long-term license agreement and commercial material supply agreement with (Tiema) Microelectronics, a leading Chinese panel maker for small and medium displays. According to reports, (Tiema) has built an OLED production line at its Gen 5.5 Shanghai fab, and is planning to set up flexible OLED capacity of approximately 30,000 plates per month at its GEN LTPS Wuhan fab with production tentatively slated to begin in the second half of 2017.

Switching gears to OLED lighting, in may (Alvy's) CEO announced that the new A8, which is expected to launch in 2017 will feature new technologies including laser headlights, OLED taillights, and infotainment system inclusive of OLED screens, and gesture control support. And last month, Osram showcase flexible automotive OLED lighting prototypes. According to Osram, OLED technology opens up new design options for light sources, which is generating huge interest among consumers in the automotive industry.

Next year, a key milestone for the OLED lighting industry is expected when LG Display commences operations on the world's first Gen 5 OLED lightning fab. The OLED display and lighting industries are gearing up and so are we. With increasing OLED capacity, a growing customer list, and broadening product roadmaps we are also scaling for growth. Like our customers, we're improving efficiencies, lowering costs, and expanding our capabilities in preparation for the next growth wave, which is expected to begin next year.

Over the past three months, we have spent of approximately $130 million to acquire (Adesis), a privately held chemical contract research organization also known as a CRO, and BASS OLED IP access. These transactions straighten our future growth plans and accelerate our internal material and technology initiatives.

The (Adesis) acquisition, which closed last month centers on bolstering our technical capabilities to help us reduce costs, accelerate product cycles, and expand product portfolio. We've been working with (Adesis) for over five years.

We started with a few chemists and over the year's we've grew to roughly half their business. Now that (Adesis) is a subsidiary of UDC, the even closer collaboration will help expedite our material cycle for prevention, through process development to production. Especially as we continue to expand our materials portfolio, for new red, green, yellow green, and blue emitters and hosts, to meet our customers growing requests. The BASF OLED IP acquisition primarily centers on phosphorescent blue missile systems.

BASF, the largest chemical company in the world, invested in OLED for 15 years but had not progressed to the commercial stage. We believe that with our vast patent portfolio and 20 plus years of knowhow, we will be able to leverage BASF's IP to further our commercial blue research efforts, and help us -- help enable us to meet our customers' increasing demand for all phosphorescent (inaudible).

We believe new investments, new capacity, new materials, new technology. and new agreements are part of our robust plan for the future, all of which will help lead us to strong growth, expand our operating margins, and increase profitability.

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 second quarter of 2016 were $64.4 million compared to second quarter 2015 revenues of $58.1 million. Our total material sales were $22.3 million in the second quarter, of which commercial was $20.7 million. Commercial emitter revenues were up year-over-year but down quarter-over-quarter. Commercial host sales were negligible in the second quarter of 2016, compared to $1.6 million in the second quarter of 2015.

Green emitter sales, which includes our yellow-green emitters were $15 million for the first quarter, down 17% sequentially from the first quarter 2016's $17.9 million and up from the comparable year-over-year's quarter of $14 million. Red emitter sales were $5.8 million in the second quarter, up 33% sequentially from the fourth quarter 2016's $4.3 million and down from the comparable year-over-year quarter's $6 million.

Material buying patterns can vary quarter-to-quarter. As we saw in Q4 of last year, red emitter sales were up but green was down. In Q1, red was down and green was up, this quarter red was up and green was down. Some of the contributing factors to this include material ordering patterns, efficiency gains, product mix and contractual pricing reductions. Our second quarter 2016 royalty and license fees were $42 million up from the comparable year-over-year to $33.7 million. This include Samsung license fee which is $37.5 million in the second quarter of 2016, of from the comparable year-over-year quarter $30 million. The Samsung license fee which is $75 million 2016 is recognized in the second and first quarter of the year.

Moving down to income statement. Material cost for the second quarter of 2016 was $5.7 million, in a comparable 2015-quarter material cost were impacted by an inventory down $33 million. Exclusive of the write down second quarter 2015, material cost was approximately $6.1 million. The year-over-year decline was due to negligible host sales. Second quarter 2016 material gross margin were 75% unchanged year-over-year excluding the write down.

Second quarter operating expenses, excluding cost of materials, were $24.7 million, slightly up year-over-year from the comparable quarter's $23.8 million. We will amortize the acquisition of BASF OLED IP assets over 10 years, which will result in an increase of approximately $2.5 million in quarterly amortization expenses that exclude BASF amortization but including the (Adesis) acquisition we continue to expect operating expenses to increase approximately 10% to 15% year-over-year, from growth in R&D activity.

Operating income was $34 million for the second quarter of 2016 compared to $28.2million for the second quarter of 2015, which excludes the inventory write down. During the quarter, we incurred an income tax expense of $11 million or a tax rate of 33%, because of our write down in the second quarter of 2015 the year-over-year tax rate is not comparable. For the second quarter of 2016, we reported net income of $21.8 million or $0.46 per share including net income of foreign currency exchange loss of $1.8 million relating to the BASF OLED IP acquisition and Brexit. This compares to $19.4 million or $0.41 per share for the same quarter of 2015, or up about 12% year-over-year absent to inventory write down.

Shifting to the balance sheet, we generated $36 million operating cash flow, invested $96 million on the acquisition of BASF OLED IP asset, an end of June quarter with $332 million in cash and investment for about $7 with cash per share. Subsequent to second quarter we closed the (Adesis) acquisition and spent an additional $33 million.

Moving along to guidance. As Steve noted due to high ASP material not anticipated to be adopted this year, as lower royalty projections combined with more efficient materializations, we now expect 2016 revenue approximately $119 million to $200 million.

Now with that, let me turn the discussion back to Steve.

Thanks, Sid. With increasing investment out from expanding OEM product pipelines and abundance of equipment bookings. The OLED industries gearing up for the next wave of high volume capacity growth. Market the research firm IHS forecasted OLED capacity -- substrate will grow by approximately 300% from 2016 to 2020. HIS also estimates that OLED will also make up more than one-third of all smartphones played by 2020. And the queue neighborly OLED ecosystem Universal display is well positioned to support this growth. We are expanding our team and broadening our core competencies to view our strategic initiatives and increase our competitive edge.

Building on our vast experience and know how, we're continually innovating creating state of the OLED system. While also expanding our global IP from work. And we believe the acquisitions of (Adesis) and BASF OLED IP portfolio will help advance and accelerate our efforts. We expect these initiatives along with new OLED capacity coupled with our pipeline of new materials, new technologies and new agreements to booster for a long-term growth plan.

In conclusion I like to thank our employees for their exceptional work and continued commitment to excellence and innovation. I would also like to recognize our customers, partners and value shareholders for your ongoing support.

And with that operator let's start with Q&A.

(Operator Instructions) And we will take our first question from Brian Lee of Goldman Sachs.

Hey guys thanks for picking up my questions and I have a few -- on the one in a follow up so first one the PMR agreement can you give us some sense of how the structure and economics compared to the Samsung and LG deals.

Well it's both of those both a license slash royalty component, and a material supply component. But the specific detail the confidential but clearly we're getting paid from both sources.

Maybe just a quick clarification, so I guess the that the biggest delta between Samsung LG in the licensing contracts Samsung have fixed up payment structure while LG is more the running agreements so and between the two which one did -- resemble.

The Specific of the agreement are confidential and we really can't talk about each one what the components are just on.

Okay, fair enough. I'll follow up. And in terms of the guidance change you know one of the things you mentioned said was the delay in new -- you better adoption does that relate to Samsung only or would that include LG? I know they had only been doing one of our legacy red emitters. Was the expectation that they would be doing a next Gen red and even a green at some point this year and that's pushed to next year? Just anymore clarity there would be helpful.

It's primarily Samsung but it is both.

Okay and then in terms of the BASF deal just this one and then get back in the queue and anymore color you can provide around how you think it impacts your timeline for commercializing blue and also you mentioned a blue emissive system I think that means -- I take it that means more than just be a matter so maybe some sense of what other parts of the OLED stack you could potentially address and how that compares to about what you do in red and green.

Sure at least focus on the introduction of blue, we focus on the emitter and the host in order to get of the materials into the stack. If you recall going back a few years, the way we were able to get green emitters into the stack without providing emitters and host. Because both materials are important for initial product introduction, so really that's the system that we are focusing on, the emitter and the host of the system. I can tell you that our scientists are very excited to get access to the BASF OLED IP portfolio and they are our study in depth provides some additional exciting path to process.

Thanks guys.

And now we will go to Jim Ricchiuti with Needham & Company.

Thanks, good afternoon. Just with respect to the revisions to the full year revenue forecast. You said the three factors I wonder if you can you give us a rough sense in terms of the waiting on these factors which was one a bigger issue was the adoption delay is that it is that the biggest factor in this or is it more equally weighted and wonder if you could.

It's kind of equally weighted but clearly having capacity being pushed out. the other ones do impacted by having capacity pushed out a really just literally, Because it takes it away and recipe changes that also just takes away material sales. So it's not it's not one -- This is not one versus the other but also adopting new emitters which while we introduce new emitters as you're aware we have -- because of our pricing structure, we would have expected higher ASPs materials would be sold when they adopted new emitters.

Okay Sid, with respect the pricing can you talk about pricing with the existing emitter say you're selling was the -- can you give us a sense to whether that impacted your materials revenue was the pricing, are you seeing more pricing pressure.

I mean they have reached their threshold from a contractual standpoint down to the terminal value. So you know for the year so that that is something that as we said if you get new emitters adopted you go back to the beginning of -- tables so that does impact our revenues for the year.

Okay. R&D was a little bit lower than expected how we should think about R&D and the other optics. Expense items as G&A going forward.

I think as we said we still for the year will be up about 10% to 15%. And I do expect R&D to accelerate than SG&A.

Okay. Thank you.

Thanks Jim.

Operator We will now go to Jed Dorsheimer from Canaccord.

Hi thanks you for taking my question. So the delay to push out really is that I guess just to clarify is function of the new emitters not being adopted in the -- in the current recipe -- commercial recipe is that correct.

One of the three factors, the two factors are -- the road with reducing the though the royalty revenue guidance -- revenue guidance and there are more -- Our customers are getting more efficient with our existing materials we believe anticipation for the run of the next few years.

And show you have the capacity additions coming on from your largest or from I guess your two top commercial customers. Going into 2017 and 2018, How should we think about utilization increases though because it seems is that red has hit the threshold but there seems out of it -- it seems like we're now in that sweet spot for your customers I guess in terms of seeing the benefits of either the new materials producing more brightness in going to dinner angstrom of that of the material or utilization increases, so could you help provide any color on how we should think about that for -- as we look out?

Our customers, if I understand your question correctly, Jed, we have a wide variety of materials. We're constantly inventing new materials that provide more efficiency, more lifetime or different color points. Those new materials would generally be at a higher ASP. The customers get to choose which materials they will use and which set of products. So now, we have a whole suite of materials, if that's answering your question.

I'll follow-up offline. I wanted to get into -- get into it a little bit more but I've asked my two questions so I'll jump off.

All right, thank you.

We will now go to Rob Stone, Cowen and Company.

I wanted to follow up on the guidance a bit more. It seems like this implies essentially no growth or very little growth in materials year-over-year, but you mentioned the change in pricing and increased efficiency. Is there sort of a break point in the second half? In other words, things changing significantly from what we've seen in half one or just the absence of the step up that you were expecting? And then related to the -- you mentioned the price changes. How show we think about your expected materials gross margins in the second half of the year? They were down sequentially quite a bit and then I have one other question, thanks.

Well, you are correct. We expected to have new emitters, which have higher ASPs that would be introduced. So overall, we're looking at our material business being flattered off for the whole year. So I think that that answers your first part of your question. We expect next year for -- to grow as materials capacity growth we expected to grow. We just think this is temporary and it was the form a pricing standpoint they've been using the same materials for a number years so they've reached a terminal value.

Any impact on gross margins?

I think the gross margins were down I think this quarter over last. To be honest, gross margins are -- we always say they're between 70% and 80%. But it really depends on which material we sell. So if you sell more of a red more of one version of a red versus the other they're all in the ballpark but specifically the mix of the material will make our margins go from 79% to 75% or 70.9%. Q4 so it will vary between 70% and 80%.

Are you expecting it that a further decline in margins in second half.

Now we expect our margins to be between 70% and 80% for the second half.

Okay, so you had a fairly significant FX impact in the second quarter, I guess that was related to BAFS deal is that of a one-time thing what's your -- what's your sense of FX exposure for the for a second half.

To be honest, it was a onetime arrangement. I mean Brexit literally happened from when we had a pre prepared for the closing within a few days and after closing it was a sign and transfer the money at the same time, so we literally have the by the euro's a day or two before Brexit to ensure that they were in the account ready to be transferred a day or two after Brexit and because of Brexit we -- that's what happens we don't expect that all of our -- all of our other businesses in dollars.

Okay, my final question is on the TM deal I know you're not disclosing your specific detail but in the past you collected some cash up front when you signed a new long term license agreement, should we expect that in this case nothing for the amount of whether there would be some.

I think we ought to listen -- we can't disclose the terms that we've not historically done that in the next quarter any of these will come up in deferred revenue.

Okay, thank you.

Thank you.

We will now go to Andrew Abrams from Supply Chain Market Research.

Hi guys, just one quick question on the efficiency side or actually, two questions on the efficiency side and has there been anything on the process side, a big step up or a big change in process side that make you believe that there was a big step in efficiency changes and that was that if that is the case is that a function of new capacity coming on that starts high or low efficiency level, or none of the above.

They are constantly changing the recipe in orders to emanate reduce cost, there is a number of things that occur that we're actually not privy to so I think it's all part of the preparation for new production at higher volumes to ensure that they can maintain their margins and their profitability as they increase our capacity.

Is the change here going forward a function of the LGTV business being a bit slower than originally projected but not your projections but LG protections built or are there other major factors in.

This is just based upon where we are today and what we seen based upon what we have built our original plan. What actually switch which -- Then gave the original guidance were just saying it's slower that we have anticipated.

Thank you.

We will now move on to Osten Bernardez with Cross Research.

Good afternoon. I was just wondering if you could highlight the rationale and my call got cut off earlier on, but the rationale behind the customers not adopting some of your high ASP product, and to what extent you think that change signals any change in sort of the cadence with which they will adopt materials from you in the future?

I mean these are really customer decisions of when they change their recipes and when they adopt new backplane architecture for a new generation product because these are really up to our customer. It's really out of our control when these things occur we make the materials that they request we design the materials to meet their needs but when they actually adopted is sometimes different than what we anticipate and it really is up to them to make that decision.

Okay so you were anticipating it.

Right now, we're at right now we're anticipating that it would occur next year.

And then secondly, I just -- with respect to the TM announcement that I just want to make sure I understand this correctly is this a relationship that you believe will be meaningful from a standpoint of --No I just try to identify what are the large they would sign this and now if they're not looking to produce until sometime in second half 2017 or the small very -- can use sort of how material would be.

The 2017 is their second plat. They currently established in the production license in Shanghai Gen 5.5 plant and we suspect that so there should be some small quantities this year.

Okay, thank you very much.

We will now go to Hendi Susanto Gabelli & Company.

Good afternoon. Sid and Steve may I know what confidence that the delay in the revenue growth would not exceed 6 months. Considering that there can be various possible reasons including lumping this in capacity built out new capacity and others.

Well I mean based upon everything we know today based upon everything where and talking to our customers and where they are with you know what emitters. we're pretty confident at this time that this is just a six month push out of our revenue growth based upon all the orders based upon all of the equipment orders that are out there and when do you folks are supposed to deliver and what our customers are saying their capacity will be. We think that this is really just a six-month push up.

And then considering that there's a lot of industry built out happening between now and 2018. Maybe know how you plan to approach the capacity built out with regard to increasing your capacity.

Our capacity for the production of our materials. We have always looked at a two year window in advance insuring that we have enough inventory and enough capacity in place to meet any of the needs that our customers could potentially have we will always are all on the conservative side in terms of ensuring that we have more material that we probably will sell during that period.

So we are a sole source we understand that were sole source and that we tell our customers that we will meet their needs and we ship within 24 hours and you know we've built Barberton facility a couple of years ago and we're working on the next steps in that facility, and anything else we need to do to ensure. We're looking at -- from 2015 to 2017 a 50% increase in capacity and then another step up through 2018 and 2019. And we are on top of that at this time.

Thank you.

Thanks.

And we will now go to Nam Kim with Arete Research.

Hi. Thank you for taking my question. Similar question to previous one. I think you are reporting some delay on new material structure MA and they continue to use existing M7 structure this year. If this due to other material issue like cost or common layer is (inaudible) or any, like, certain issue on your new (inaudible)? And also, in a structure do you also supply green material or only red material changes? And then (inaudible) new material review also (inaudible) potentially with some big customer next year?

Well, we can't this talk about what the customer puts in any of the specific items you're talking about M&A, which some people may know what that is or what may not. I mean we provide our customers with the material they need. As I said, we don't -- we can't make the decisions on when they adopt in New. But we provide them with everything they need is there is nothing if you're asking if there's a reason that they have adopted because of us, we have we've given them everything they need.

We never talk about what our what specific material goes to which customer we really only talk about our red emitters and green emitters that go to customers and I honestly can't discuss which materials are changing and which materials are not changing at this time.

Okay, thank you.

Thank you. 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 for your time today we appreciate your interest and support and we look forward to speaking with you again next quarter. And thank you very much again and good night.

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