Universal Display Corp (OLED) 2017 Q1 法說會逐字稿

Thank you, and good afternoon, everyone. Welcome to Universal Display's First Quarter Earnings Conference Call.

Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Before Steve begins, let me remind you today's call is a property of Universal Display. Any redistribution, retransmission or rebroadcast at 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, May 4, 2017.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as those relating to Universal Display Corporation Technologies and potential applications of those technologies, the company's expected results as well as the growth of the OLED market and the company's opportunities in that market. These 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 concerning making any investments in the company 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, Daras, and welcome to everyone on today's call.

We are pleased to report the revenues in the first quarter of 2017 were $55.6 million. Operating profit was $12.1 million, and net income was $10.4 million or $0.22 per share.

Results were solid across the board, including record emitter sales of $46.2 million. As we look to the year, we believe, overall, momentum in the OLED industry is accelerating. As a result, we are raising our 2017 revenue guidance range to, at least, $260 million to $280 million, reflecting 30% to 40% year-over-year growth. Sid will provide further details shortly.

We continue to be encouraged by the growing customer discussions and pipeline activity that we are seeing in the OLED display and lighting markets. Since our last earnings call, the OLED landscape continues to expand from new product launches, new investments and robust amount of OEM design activity.

Samsung, according to reports, is slated to invest about $9 billion into new OLED facilities this year, on par with last year's robust capital expenditures. Investments include expanding into Gen-6 OLED fab, converting an existing LCD line for additional Gen-6 flexible OLED capacity and building OLED module assembly lines in Vietnam.

Additionally, at the end of March, Samsung Electronics unveiled its new flagship smartphone, the Galaxy S8 to an abundance of positive reviews. One of the most raved design features is the Infinity OLED display, which DisplayMate awarded its highest grade ever, an A+. And according to Samsung, preorders as well as initial sales of the Galaxy S8 phones were very strong.

At last month's Scientech Japan Expo, LG Display's CTO stated in his keynote address: In 2020, OLED sales are expected to grow to more than 50% of LG Display's revenue by. To meet the ever-growing demand for OLED, LG Display is investing in both Gen-6 flexible mobile capacity and Gen-8 OLED TV capacity. How much advancement is expected to come online in the coming years? LGD's CTO said that from 2016 to 2020, OLED TV production capacity will be 6 times larger; and for plastic OLED, it will be 14 times more.

BOE Technology [will be] prudently committing over $10 billion in OLED pilot and commercial lines, including 2 Gen-6 flexible greenfield [flags], one of which is expected to commence mass production next year, announced a joint venture with OLiGHTEK to produce OLED microdisplays for the consumer VR and AR markets.

Last month, TianMa began production at each new Gen-6 OLED line in Wuhan and plans to ramp production of rigid and flexible OLED displays. And leading Chinese OEM PCL announced plans to invest $5 billion in OLED facility through its subsidiary, China Star Optoelectronics Technology. The new plant is expected to start mass production in 2020.

Sharp is reportedly planning to spend about $900 million to build OLED displays, slightly higher than initial expectations. In this expanded plan, Sharp, which is majority-owned by Taiwan's Foxconn Technology, looks to make at least 30,000 plates per month starting next year. And just a couple of weeks ago, Foxconn affiliate, Innolux, announced it was working with Sharp to advance their OLED R&D activities.

And AU Optronics continues to focus on the wearables market and forecasting that in the second half of the year, its quarterly shipment volume of wearable OLED displays may reach more than 1 million units.

On the lighting front, LG Display garnered great attention at last month's Euroluce Lighting Exhibition Show. Partnering with one of the world's leading industrial designers, Ross Lovegrove created revolutionary OLED lighting artworks inspired by the curves and patterns seen in underwater marine life. Also, last month, LG and world-renowned designer, Tokujin Yoshioka, took the top prize at Milano Design Award 2017 for the collaborative installation that partly tapped into the innovative properties of LG's OLED display and lighting technology. And in terms of capacity, LG Display is slated to start mass production on its Gen-5 OLED lighting fab in the second half of this year. The initial production phase is expected to be 15,000 plates per month, and LGD expects to ramp it to 90,000 plates per month in the future.

As the OLED industry continues to gain strong momentum, we remain focused on extending our innovation leadership and enabling our customers. We're also growing our business to capture the tremendous market opportunities before us, consisting of new materials and technology, new customer agreements and new OLED commercial products, all of which we believe will contribute to our growth in the coming years.

Before I hand the call over to Sid, I want to reflect on UDC's history for a moment. Founded back in 1994, our pioneering journey from an idea to a startup to a leading player in the global OLED ecosystem have been filled with breakthroughs, challenges, trials and unending persistence and vision as well as over $400 million in R&D spending. This quarter, we have reached another milestone. For the first time, we are pleased to report that we are generating retained earnings to shareholders' equity after a history of accumulated deficit on the balance sheet. Again, it takes a few decades to become an overnight success.

On that note, 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 2017 were $55.6 million compared to the first quarter of 2016 revenues of $29.7 million. Our total material sales were $46.6 million in the first quarter, of which commercial was $35.8 million. Commercial emitter revenues were up 61% in both year-over-year and quarter-to-quarter. Developmental revenues were $10.8 million in the first quarter of 2017, up 395% year-over-year and up 57% quarter-over-quarter. We attribute the increase in material revenues to new capacity coming online and product mix, including new emitters.

Green commercial emitter sales, which include our yellow-green emitters, were $24.5 million in the first quarter, up 46% sequentially from the fourth quarter 2016's $16.8 million and up 37% from the comparable year-over-year's quarter of $17.9 million. Red commercial emitter sales were $11.3 million in the first quarter, up 105% sequentially from the fourth quarter 2016's $5.5 million and up 163% from the comparable year-over-year's quarter $4.3 million.

As we have discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors to this can include consumer product demand cycles, new capacity ramp schedules, production loading rates, product mix, material ordering pattern, customer production efficiency gains and contractual volume pricing reduction. Since a number of these factors are moving variables for our customers, they are also moving variables for us. As a result, quarter-to-quarter forecasting remains difficult. We continue to be confident in our positive upward trajectory.

Moving to royalty and licensing. Our first quarter 2017 royal and licensing fees were $7 million, up 32% from $5.3 million in the first quarter of 2016. Material costs for the first quarter of 2017 were $13 million, up year-over-year from the first quarter 2016's $5.1 million. The increase is due to emitter sales essentially doubling year-over-year. Material gross margin percentage was 72% in the quarter compared to the first quarter 2016 material gross margin of 79%. For the year, we continue to expect our overall material gross margins to be in the 70% to 75% range.

First quarter operating expenses, excluding cost of materials, were $30.5 million, up year-over-year from the comparable quarter's $22.1 million but flat quarter-over-quarter from Q4's $30.7 million. The primary contributing factors to the year-over-year increase include incremental quarterly amortization expense of $2.7 million, from the acquisition of BASF's OLED IP assets and Adesis and incremental operating costs associated with Adesis and compensation expense. For the year, we continue to expect OpEx to be up around 10% to 15% year-over-year, principally from growth in R&D activity.

Operating income was $12.1 million for the first quarter of 2017 compared to $2.5 million for the first quarter of 2016. For the first quarter of 2017, we reported net income of $10.4 million or $0.22 per share compared to $1.9 million or $0.04 per share the same quarter in 2016.

First quarter 2017 income tax expense was $2.3 million or a tax rate of approximately 19%. During the first quarter, we adopted ASU 2016-09, which relates to the accounting for stock-based compensation awards under U.S. GAAP. Now in any quarter where there are vesting equity grants, the difference between the price of the stock, the day that it was granted compared to the price of the stock on the day of vesting will affect our tax rate. We expect some volatility in our tax rate, primarily in the first half of the year, which is when the majority of employee share is best. Without ASU 2016-09, our first quarter 2017 tax rate would have been approximately 28%. For the year, absent the effect of ASU 2016-09, we expect our tax rate to be approximately 28%, plus or minus a few percentage points.

Shifting to the balance sheet. We ended the March quarter with $340 million of cash, short-term and long-term investments or approximately $7.20 of cash per share. The company also announced today that the Board of Directors approved a cash dividend of $0.03 per share on the company's common stock. The dividend is payable on June 30 to all shareholders of record as of the close of business on June 15, 2017.

Moving along to guidance. Based on customer discussions, current operating levels, product mix as well as other major variables, our expectations for 2017 have increased, and we are raising our full year's guidance. While this quarter exceeded our expectations, it is still early in 2017, and we want to see how these trends progress throughout the year. We now expect our 2017 revenues to be, at least, in the range of $260 million to $280 million.

With that, I'll turn the call back to Steve.

Thanks, Sid.

Across the company, we are building momentum for continued profitable growth. We are expanding our customer collaborations, significantly stepping up our R&D efforts, increasing our technical field capabilities and fortifying our product development engine. We continue to make great strides in broadening the breadth and depth with our phosphorescent technology and material portfolios, including the red, green, yellow and blue emitters and host materials. We're also advancing our next-generation manufacturing technologies such as organic vapor jet printing. We believe that these and our other strategic initiatives will strengthen and support our primary focus of enabling our customer successes, and therefore, our long-term success.

I would like to take a moment to thank our employees for their hard work and dedication to excellence and getting us to where we are today.

In summary, we are proud of our first quarter results and believe we are well positioned to continue playing a key role in enabling the growing OLED market. Our growth trajectory, with top line and bottom, are extraordinarily positive for the foreseeable future. It is indeed a fantastic time for the OLED industry and Universal Display.

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

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

If I look at your revenue guidance, Sid, versus what you did in the first quarter and then I normalize for the $90 million fixed Samsung licensing payment and then you do the same math for the past 4 years, you're tracking to something like 30%, 31% of your full year number in Q1. And that's on your new higher number, not the old number. So if I compare that to the past year, it was more like 20%, 25%. So it does seem like, even with these higher revenue guidance range, you're tracking well ahead of prior year. So curious how you're thinking about potential upside drivers from here moving through the year, or if you would temper that type of analysis with a view that maybe the cadence for this year, first half versus second half will be very abnormal versus what you typically see.

Thanks, Brian. And I clearly expected that question, to be honest, and it is a good one. We believe that it's still early in the OLED multi-year CapEx cycle and how it plays out quarter-to-quarter is not always predictable. One of the key factors is consumer product demand cycles. Product introductions and sell-through rates are extremely dynamic, and they could impact capacity schedules being pushed in -- pulled in or pushed out. Then you add production loading rates and product mix and material ordering patterns and customer productions, efficiency gains and contractual pricing reductions. These variables are moving targets for our customers, and to be honest, they're moving targets for us. While material volume uses trend is clearly up, the revenue slope is really difficult for us to predict. And we believe that our 2017 revenue will be at least be in a range of $260 million to $280 million. Could it be higher? Possibly. Could it be lower? Possibly. We'll revisit the guidance every quarter, so there are things that are just difficult because of the early stage of the industry.

Okay, okay. Fair enough. The second question I had was maybe around the same line of thought. But last quarter, coming off of a really -- the robust 4Q results, you had mentioned that some of that momentum had carried over into Q1. And I know you don't give quarterly guidance, but you had reported Q4 results pretty late into Q1. And then we're giving the full year guidance, so I suppose that's part of the color you wanted to provide. When you look into the near term here coming off of, again, the quarter where you exceeded expectations, what sort of momentum or trends are you seeing off of the results you just reported. I guess, the concern investors may have is that you've seen in past years periods where there is forward buying or inventory levels that might have gotten a little bit out of the range that you want them to be in. But maybe, if you could comment around what you're seeing just trend-wise, that'd be helpful.

As you're aware, we are just-in-time supplier. And what we saw, our customer orders were coming in better than we had anticipated and could continue to -- through the first quarter. We are comfortable with our guidance to being at least $260 million to $280 million. It is only one quarter into the year. And to be honest, historically, we have seen things that go up and down. We do believe that the trajectory is up this year. We really believe it's too early to say whether or not our revenues are going to exceed 30% to 40% growth, which we currently project. We will revisit the guidance again on our next call.

Okay. Last one for me, and I'll pass it on. Just given the focus around new materials, we found out in Q4 that they were adopted. You mentioned that they didn't have much of an impact in the Q4 results. It sounds like they had some amount of impact here on Q1 on top of the volume growth you saw. So any kind of sense you can give us, quantification, if possible, of how much impact you saw from a new emitter adoption and then what you might expect going through the next few quarters on that mix?

We saw a good growth in the first quarter from new production capacity and the product mix, which includes new emitters. But we have a number of new emitters in the pipeline. And as our business continues to grow with new customers and new product specs, we expect to develop and invent and introduce new emitters. And as you're aware that we do have cumulative volume discounts, so you will see pricing for some of the new emitters, depending on the quantities that they buy, trend down during the year.

And we'll take our next question from Rob Stone with Cowen and Company.

Sid, I wanted to drill down on the gross margin a little bit, particularly for materials. It looks like you're not breaking out the cost of the contract research, how does that affect the reported margins this year versus last year?

Okay. Adesis revenue was -- it's really not very large. I think it's $1.9 million in this quarter. So even if their margins are either above or below our overall margin, it's not going to really -- it is not going to move the needle. I mean, the margin, as we said early, that we -- at the end of last year, we expect the gross margins to be in the range of 70% to 75%. And it really has to do with product, mix, new materials being introduced, our cost. So it is still -- we're very comfortable with that range, and it's a healthy gross margin.

Okay. Related to Adesis, it looks like that -- quarterly run rate is also trending up. Is that tracking better than you were expecting a while ago? And how should we think about the linearity of that business?

It is in line with what we expected, and it's -- we expect that to be a growth business. But again, we don't really believe that Adesis for the foreseeable future is really going to move the needle in our revenue stream.

And we'll take our next question from Mehdi Hosseini with SIG.

Looking at your development revenue, which has seen very nice rebound on a Q-o-Q and a year-over-year, I imagine that has more to do with prospective customers. But in China, they're investing in technology. And in that context, what would be the realistic assumption for this development work to turn into material or [immaterial] sale?

These are, Andy -- not Andy. I'm sorry. Mehdi, these are material sales. And the way that we categorize our emitter sales is when we introduced a new material, we go through a scale up and development process that we do here. So this is -- this categorization is a categorization that we make. It isn't our customers' categorization. But these are emitters. Mostly, they're developmental emitters; they're new emitters. We go through multiple scale-ups until we are comfortable that we've got this process down, and then we then just classify these as commercial materials. But these are all new materials, and they are emitters.

Got it. Okay. And then a follow-up. You, recently, a couple of months ago, changed your contract manufacturing with PPG. And given the traction you have seen so far in the year and what you would expect over the next 12 to 18 months, do you foresee going back to PPG and actually increasing the minimum capacity or modifying it, given the strong start to the year?

We look at this constantly. We made this plan, and the changes -- we essentially are paying for the equipment upfront. You pay for either through a depreciation charge or you pay for it when -- if you pay in advance, you then don't have some carrying costs to get out of. So it's -- to some extent, it's the little efficiencies from our side. But we're always looking at our capacity. We believe even with the increase, because we expected a significant increase this year, we have enough capacity in place today, and then with this new capacity to meet our needs for the foreseeable future. However, we are constantly looking at what we need, what the mix of the materials are. Because each of our materials have a different manufacturing process. Even though these are all organic materials, the process and how you do it are different. So we are constantly looking at that, and we are very happy with our relationship with PPG. They support us. We are a just-in-time supplier, and we always have enough inventory.

And next, we'll hear from Shannon Cross with Cross Research.

It's nice to see -- I remember coming to see you guys back in probably like 2004, so it's nice to see the OLED market taking off.

Thank you.

It's been a while, but it's working. Okay. So my first question, can you just talk a little bit about cash flow? And I was looking at your accounts receivable, I would assume it's the growth of the material sales and timing of orders during the quarter. But how should we sort of think about working capital as you go through the year?

Well, if you look at the cash flow statement, the cash generated in this quarter was not significant compared to the increase in the revenue. But it really -- really, it relates to about a $15 million increase in AR. We have very, very little bit. That's our customers pretty much paying on our terms of either 30 or 60 days, whatever their terms are, and we very rarely do that. I believe you will see pretty much all of these receivables collected in the second quarter. Obviously, we'll add new receivables. But we don't believe that there's any issue at all with the receivables.

Right. I was assuming that was sort of more timing of when the orders came through during the quarter. And then can you talk a little bit about where you are -- you talked about, obviously, a focus on investing in development for new materials. Where are you at right now with blue?

We are -- blue, obviously, has been a challenge, as we have said. We have made significant progress in blue, and we -- it's difficult, and we believe that we will have a commercial phosphorus in blue emitter for displays, but we are unable to really give you a time frame. Some of the BASF IP that we purchased, most of their work was being done in blue. And we believe that the addition of BASF assets is really furthering our blue research efforts and what enable us to meet our customers' demand for an all-phosphorescent emissive stack. Timing is really difficult. We've taken some steps already to integrate what they're doing, where it's appropriate. And our current blue program is beginning -- show us pathways that we think will lead us to a commercial blue phosphorescent emitter.

Okay. Great. And then my last question is with regards to use of cash. Clearly, that's a capacity, made a few acquisitions, you now have the dividend. But given the significant growth, and I would assume both cash flow as well as obviously revenue that is going to be happening over the next couple of years, how are you thinking about where you want to deploy the cash, assuming that the market continues to improve and grow the way it appears to be?

Well, we clearly want to keep our cash reserve for opportunities that may come up, and you never know. We spent $130 million on Adesis and BASF. We just initiated our dividend in the last quarter, so we are constantly looking at that. The board reviews all of these on a regular basis, and we think it's important that if -- we do think that a return to shareholders of cash that we've generated in capital is -- giving dividends, we think right now, is the appropriate way of doing it.

Do you have any issues with having leverage over time, if that makes sense, from maybe an acquisition perspective?

I think that we are going to generate -- we're starting to generate significant cash. We have a very strong balance sheet. I don't believe that, that's going to be an issue. I think that we will always have the ability -- if a large acquisition came up, we would have the ability to get the cash to do it.

(Operator Instructions) We'll take our next question from Hendi Susanto with Gabelli and Company.

First question. Q1 red emitter sales has been running at less than half of the green emitter materials. Green emitter materials are relatively new compared to red. And I don't mean to be pessimistic, but there can be concern that the green emitter yield may still have a lot to catch up, at the same time, consumption rate may different -- may be different, too. How should we think of that?

Well, green emitter sales have always been larger than red emitter sales. And actually, in this quarter, the red emitter sales were up significantly from the last quarter. Our green emitter, as you're aware, also includes our yellowish greens, which is used by customers worldwide, OLED TVs. So it's not just specifically red and green side by -- RGB side-by-side. So these are within what we believe the appropriate tracking between the ratio of the 2 of them is.

And then Sid, the new revenue guidance is $30 million higher. How much incremental guidance is attributed to the strong Q1 result? And how much is for your stronger expectation for the remaining of the year?

It's -- as I said earlier, there's a number of factors that impact our guidance, and it's not one versus the other. Our capacity, our revenue guidance is really fueled by what we sell, and that's based upon running capacity. We expect to see new capacity coming on in the second half and the first half of next year and the second half. And it really depends how quickly these are then turned on, actually producing product versus whether they're being ceded and worked on to start production. And those things are really out of our control, and that's some of the issue of pushing it in or pulling it out and how fast our revenues will grow. But really, it's based upon new capacity that's coming online that's actually making product.

And then one question for Steve, probably. There have been talks about new micro LEDs, what is your view on that?

This is Sid. Micro LEDs are just -- we have looked at them, they're new, they're early on, and they're really just small surface-emitting LED chips or they're unpackaged LEDs. We do believe it's an interesting research project. It is -- we've been working on OLEDs for 20 years. We are gaining strong momentum in the marketplace. And there's still a lot of unanswered questions about micro LEDs, and we're just going to have to see how they progress and whether they can really be cost-competitive. OLED displays are self-emissive materials. And just -- we talk about backlit, the structure of LEDs. We have no backlights whether it's micro LEDs or whether it is any other type of backlights. So our backlights are 0, essentially.

We'll take our next question from Nam Kim with Arete Research.

Can you hear me?

Yes.

All right. So I know you explained about material growth, but sorry, can you give some more detail, for example, is this because your -- you saw the more M8 related to material, the ASP was higher than expected? Or overall commercial material volume went up more than expected? Or is it because there will be a number of customer purchasing more? Or you have more-than-expected TV material business? Any color would be great.

We really can't talk about what our customers are actually doing with our materials. And I mean, to be honest, it's -- once we sell to them, they put it in whichever products and however their ramp is scheduled. So it's not that I can't give you a lot of information. It's really that's customer proprietary.

Okay. One kind of a follow-up on LD Display. Actually, I have a question here. I understand they're don't buy green emitter for mobile business today. They buy only yellowish-green or white OLED. In the future, if they buy green emitter from you guys, is your royalty rate changing? Or royalty rate is purely based on larger revenues? So you will have upside with material but not really worth the wait. So can you clarify that one?

Well, we have an agreement with LG that has material pricing built into the contract. So whatever material they buy, they know what the pricing will be for any of the materials that we offer them, and it's been negotiated in advance. And so -- and they have discounts as the years go by. So it is -- there's no real barrier or no barrier to what they're buying.

Okay. So -- but can you comment, they don't buy green emitter for their mobile business today, right?

They have been evaluating it, and our green emitters are being adopted by some additional customers. But to be honest, the quantities are very small.

(Operator Instructions) We'll take our next question from Andrew Abrams with Supply Chain Market Research.

And one quick question, and you know I'm going to ask you about red. The mix between old and new red, was that a major contributor to the incremental revenue? Or were volumes up significantly in terms of overall red usage?

We do not break out emitters whether they're old or new. We just really give you red and green, so we really don't give you that granularity, have not and cannot, to be honest.

And also, there has been some talk that an OLED TV manufacturer is shifting from yellow-green and florescent blue to an RGB combination for OLED TV. Have you guys seen anything that would indicate that is the case? Or have you had any discussions with any manufacturers that would indicate that, that change is occurring either with that manufacturer or others in general?

Andy, I don't mean to be evasive, but we cannot talk about our customers, what they do and how they do it. Just to be honest, I've seen the reports and talk about what they're doing, but you really have to talk to them. We can't say -- we can't speak for our customers.

Thank you, everyone, for your time today. We appreciate your interest and support.

And with that, thank you for calling in, and goodbye -- good night.

And once again, that does conclude today's presentation. We thank you all for your participation, and you may now disconnect.