Universal Display Corp (OLED) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Universal Display's First Quarter 2018 Earnings Conference Call.

My name is Rob, and I'll be your conference moderator for today's call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

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 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 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 3, 2018.

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'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.

To start, I'd like to remind everyone that we adopted the new accounting standard for revenue recognition, ASC 606, effective January 1, 2018.

Our first quarter 2018 revenues were $43.6 million, operating profit was $4.5 million and net income was $6 million or $0.13 per share.

These first quarter financial results were below our expectations, and we believe this was primarily due to 3 factors.

First, the smartphone market. The short-term slowdown in the premium smartphone market, which we expect to last through the second quarter, is impairing our customer's production plans, which in turn, we believe, is impacting our material business.

During the quarter, material sales demand for OLED panels declined faster and to a greater magnitude than we expected.

The second factor was the new accounting standard, ASC 606. Without the impact of ASC 606, our first quarter results would have been $68.2 million in revenue, $29.2 million in operating profit and $25.9 million in net income or $0.55 per share.

And thirdly, as we mentioned previously last quarter, the inventory pre-purchasing of materials we believe that occurred in the fourth quarter of 2017.

We expect orders and revenues to pick up in the second half of the year. However, due to weakness in the first half, we are revising our 2018 revenue guidance range to between $280 million and $310 million. Sid will go into further detail shortly.

So where do we expect things to go from here? When and what will fuel the pick up? And what is our view beyond this year?

From a material sales standpoint, we believe Q1 represents the bottom for the year. The OLED panel market conditions are expected to remain weak in the second quarter due to the soft smartphone environment, which is consistent with Samsung and LG's comments last week on their respective earnings calls, and we expect a pickup in OLED panel demand in the second half of the year.

Looking out to next year, we expect significant growth to resume.

Long term, OLED market fundamentals remain robust. We are encouraged by the ongoing OLED investment plans by current and new OLED manufacturers. OLED mobile panel makers are improving yields and cost, which are expected to further increase OLEDs competitiveness, OLED TVs are continuing to garner interest from a number of OEMs and are gaining market share in the premium market and R&D activity in foldable OLED products is accelerating.

In the small and medium display market, we expect top smartphone leaders to launch new flagship OLED mobile products in the second half of the year.

Apple is expected to launch 2 new OLED smartphones in the third quarter. Samsung is also expected to launch its flagship Note 9 in the third quarter.

On a broader scale, OLED panel manufacturers are focused on driving the proliferation of OLEDs by working with OEMs on new designs to expand the adoption of OLEDs and to expand their own customer wins, increasing the competitiveness of OLEDs by reducing costs and improving yields and broadening its product landscape into applications like IT and automotive and investing in differentiating attributes like new form factors.

OLEDs are inherently conformable, foldable and rollable. With Samsung reiterating plans to launch a foldable OLED display product and panel makers recently showcasing advances in foldable OLED panels, foldable R&D activity is heating up.

Most recently, in China, major players, including BOE, Vision Ops, Tianma and EverDisplay, all highlighted foldable display prototypes at last month's China Information Technology Expo.

Also last month, it was reported that Huawei is planning to launch a foldable OLED handset later this year, with additional plans to launch a foldable phone with 5G support in the second half of 2019.

In the large-area display market, OLED TVs continue to gain global momentum. LG Display continues to add OEMs for their OLED TV customer list, with the most recent being HaiSheng in China. OLED TVs are also gaining share in the premium market. With an expanding OEM base and growing market share, demand is outpacing supply.

LG Display recently reported that current OLED TV demand exceeds supply by 30%. This has led LGD to start reviewing additional new OLED TV capacity plans.

Also, during last week's earning call, LG reaffirmed its plans to increase OLED TV shipments by approximately 50% year-over-year to 2.5 million to 2.8 million units.

Adding to all this OLED TV momentum is Samsung. Samsung has reportedly resumed its OLED TV research activity.

With respect to the multiyear OLED CapEx growth cycle we are in, while we are seeing some capacity digestion this year, we are also seeing a significant amount of capacity building.

A number of panel manufacturers are building the framework for the next expansion wave of high-volume OLED production, which is expected to ramp next year.

New capacity takes approximately 12 to 24 months to build. These new capacity builds, primarily in China for mobile and OLED TVs, are expected to begin to materialize into additional revenue opportunities for us next year.

Looking out to 2019, we anticipate the significant growth in the OLED industry to resume, as we expect the installed capacity base, as measured in square meters, to increase by approximately 50% by the end of 2019 as compared to the end of 2017.

Samsung noted on its recent conference call that it is actively responding to demand for flexible OLED products, increasing market share by expanding its consumer base, improving cost competitiveness by cutting edge technologies and products, reinforcing competencies in new applications and offering differentiated technologies outside of LCDs.

LG Display reiterated its OLED CapEx plans to build new mobile and OLED TV capacity. LG's second OLED TV fab, located in Guangzhou, is on track to ramp production in the second half of 2019. And due to the strong and growing demand environment, LGD is considering plans to build additional new OLED TV capacity, possibly by converting some of its LCD TV capacity to OLED TV capacity.

In Japan, Sharp announced earlier this year that it was sampling OLED panels from its Gen-4 Sakai pilot line and will begin production for Sharp's own branded smartphones in the summer of 2018. It has been reported that this line is expected to ramp to 15,000 plates per month by year-end.

And in China, a region that is an increasing revenue contributor for us, BOE Technology is currently ramping its first Gen-6 flexible OLED plant in Chengdu. Construction of its second Gen-6 OLED plant in Mianyang is reportedly progressing ahead of schedule, with production slated to commence next year. And on March 9, BOE announced plans to construct its third OLED fab in Chongqing. BOE's new fab, will cost approximately $7.3 billion and is expected to commence production in the second half of 2020.

China's aggressive OLED stance is also evident with pilot and initial commercial production capacity plans from EverDisplay's Gen-6 fab, Oriole's Gen-5.5 line and Govisionox' Gen-6 plant.

In the automotive market, in addition to the growing use of OLEDs as tail lights, OLED display design activity is increasing. Samsung has previously highlighted that some of OLED display's benefits for autos including: high contrast, which means less eye fatigue; wide color gamut, which means natural, saturated, consistent colors; low temperature response time, which means no staggering and extreme coldness that you experience with LCDs; and flexible display design, that means you can not only create conformable displays but also unbreakable displays that are made on plastic.

Most recently, it was reported that Mercedes Benz has designed LG Display's OLED panels in some of its models starting in 2020. This is in addition to the reported OLED design wins with Toyota, Volkswagen and General Motors.

According to UBI Research, the automotive OLED display market is expected to grow from $4 million today to $5 billion in 2022.

On the lighting front, OLEDWorks recently introduced its next-generation OLED lighting panel, the Brite 3, which has higher efficacy and lifetime.

In addition, OLEDWorks launched the BendOLED, its first flexible and conformable OLED lighting platform.

According to OLEDWorks, BendOLED marries feather-weight elegance with bold lighting functionality, powering exceptional designs from architectural lighting to transportation, only microns in thickness and grams in weight, BendOLED delivers a superb light quality and excellent color rendering that is uniquely achievable with OLEDs.

What is also paving our path for long-term growth is our continued innovative R&D work. Our team of scientists and engineers are continually discovering and developing new emissive material systems and technology, including next generation reds, greens, yellows and hosts to meet our customer's ever demanding and ever evolving performance needs for displays and lighting.

With respect to blue, we believe we are making excellent headway in our ongoing development work for a commercial phosphorescent blue emissive system. Additionally, we continue to make advancements with our novel organic vapor jet printing technology for mask-less, solventless, dry, direct printing of large area OLED panels.

On that note, let me turn the call over to Sid.

Thank you, Steve. And again, thank you, everyone, for joining our call today.

I will review our first quarter 2018 results and then discuss our guidance.

One thing I want to note is that our results for the first quarter and going forward will be under the new GAAP accounting standard, ASC 606.

All historical data is under the old accounting standard, ASC 605.

Revenues for the first quarter of 2018 were $43.6 million, down quarter-over-quarter from Q4's $115.9 million, and year-over-year from Q1 2017's $55.6 million.

The quarter's results were primarily impacted by 3 factors: the slowdown in the premium smartphone market, which caused weaker OLED panel demand, and therefore, weaker OLED material purchasing; ASC 606, which impacted revenues by $24.7 million, without the impact of ASC 606, our first quarter revenues would have been $68.2 million; and an estimated $15 million to $20 million in material inventory pre-purchases in the fourth quarter of 2017, which we discussed in February.

With the adoption of ASC 606, our revenues are expected to be disconnected from billings. This disconnect is magnified when material shipments are significantly down. The reason is, under 606, all our major revenue streams, including royalty and licensing, are correlated to material shipments. As a result, a decline in material shipments is magnified across the board. Likewise, a significant increase in material shipments will be magnified on the upside.

Our total material sales were $25.3 million in the first quarter compared to material sales of $59.8 million in the fourth quarter of 2017 and $46.6 million in the first quarter of 2017.

Green emitter sales in the first quarter of 2018, which include our yellow-green emitters, were $17 million. This compares to $40.9 million in the fourth quarter of 2017 and $33.3 million in the first quarter of 2017.

Red emitter sales in the first quarter of 2018 were $8 million. This compares to $18.3 million in the fourth quarter of 2017 and $12.8 million in the first quarter of 2017.

As we 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, capacity ramp schedules, production loading rates, product mix, material ordering patterns and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us.

Before we discuss Q1 royalty and licensing, I just want to remind you that ASC 606 impacts our royalty and licensing revenues regardless of how much is billed or when it is billed. In prior years, we received certain fixed license fees, only in specific quarters, such as Q2 and Q4. Today, under ASC 606, irrespective of when billings occur, we will recognize license revenues on a quarterly basis, in proportion to the corresponding OLED material shipments.

First quarter 2018 royalty and license fees were $15.9 million. This compares to $53.8 million in the fourth quarter of 2017 and $7 million in the first quarter of 2017.

Cost of sales, which includes Adesis cost of sales for the first quarter of 2018 were $7.5 million. This compares to $16.9 million in the fourth quarter of 2017 and $13 million in the first quarter of 2017.

Cost of material sales, which only relates to OLED materials and does not include Adesis cost of sales, were $5.7 million, translating into material gross margins of 77.5% compared to fourth quarter 2017 and a comparable year-over-year's quarter's material gross margins of 74.1%. We expect our overall material gross margins for 2018 to be in the 70% to 75% range.

First quarter operating expenses, excluding cost of sales, was $31.6 million, down from last quarter's $41.1 million, but up slightly year-over-year from the comparable quarter's $30.5 million.

Operating income was $4.5 million for the first quarter of 2018, down from last quarter's $57.9 million and down year-over-year from the comparable quarter's $12.1 million. Without the impact of ASC 606, our operating income would have been $29.2 million.

For the first quarter of 2018, our effective tax rate was a benefit of 3.8% or $200,000. Without the $1.3 million benefit of ASU 2016-09, our effective tax income rate for the quarter would have been 19% or a $1.1 million expense.

Net income for the first quarter of 2018 was $6 million or $0.13 per diluted share, sequentially down from last quarter's $32.8 million or $0.69 per diluted share, and down from the comparable year-over-year's quarter of $10.4 million or $0.22 per diluted share. Without the impact of ASC 606, our first quarter net income would have been $25.9 million or $0.55 per diluted share.

Now looking to 2018. Based on our current forecast, we expect 2018 revenues to be in the range of $280 million to $310 million. Our revenue guidance reflects continued softness in the second quarter of 2018 but a sequential increase in revenue.

The second half of the year, we expect OLED panel demand to pick up. We would note, as we have in the past, a shift in the industry's momentum in either direction can impact our financial results.

2018 revenue, as we noted earlier, is being impacted by the inventory pre-purchasing as well as ASC 606. Without ASC 606, we believe that our 2018 revenues would be approximately 10% to 15% higher.

Moving along to gross margins. While quarterly material gross margins can vary quarter-to-quarter, we expect our overall 2018 material gross margins to be in the 70% to 75% range, which is consistent with the last few years.

Operating expenses of SG&A, R&D and patent costs are expected to increase in the aggregate in the range of 10% to 15% year-over-year, driven primarily by R&D. We expect the effective tax rate to be approximately 20%, give or take a few basis points.

For 2019, we anticipate significant industry growth to resume. We expect the installed base of OLED square meter capacity to increase by approximately 50% over 2017, and the majority of capacity ramping in 2019. While the timing of capacity installs and ramps during the year are fluid, we believe that this new capacity translates into additional revenue opportunities for us.

And lastly, the Board of Directors approved a $0.06 quarterly dividend, which will be paid on June 29, 2018, to stockholders of record as of the close of business on June 15, 2018. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.

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

Thanks, Sid. We believe we are on the right path for long-term growth, long-term market leadership and long-term profitability.

Over the last decade, OLEDs have penetrated only a little more than 10% of the consumer electronic display market. This, we believe, is just the beginning of the technology's promising potential. Market Research firm IHS, recently issued their OLED forecast, calling for OLED panel shipments by area to more than quadruple to 22.4 million square meters by 2024 from 5 million square meters in 2017.

With our extensive experience, unwavering focus on innovation and execution and expanded OLED product portfolio of new materials and technologies, we are, and believe that we will continue to be, well-positioned to deliver the most energy-efficient, high-performance and cost-effective emissive layer solutions to our customers and partners.

As OLED proliferation continues in the display and lighting markets and additional capacity is being built to serve those markets, we believe that Universal Display is poised to leverage these vast opportunities into top and bottom line growth.

I would 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 valued shareholders for your ongoing support.

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

(Operator Instructions) The first question today is from the line of Sidney Ho with Deutsche Bank.

I understand the first half weakness from premium smartphones market. But would you say your visibility for the second half has improved, the same or the worse than what you think a quarter ago? In other words, the $70 million reduction of your full year guidance comes entirely from first half or second half guidance is different as well?

Ladies and gentlemen, please standby. We're facing some technical difficulties.

(technical difficulty)

Caller, please state your question on the line. You may continue.

Can you hear me?

Yes, I got it, Sid. Thank you. We apologize for that. Most of it is in the first half. It's just, as we stated, that the climb was faster than expected. In addition the -- and when that happens, the 606 is magnified, which led us to revise it. However, first half is down, obviously, from the guidance. And the pickup in the second half, we see significant. But it does not pick up completely to where it was in -- when we gave the guidance 2 months ago.

Okay. So just -- I would say -- would you say it's -- in terms of dollar amounts, it's roughly the same as what you thought before for the second half and then, of course, 2019 as well?

It is a little bit lower in the second half than what we thought before. We just think that some of this is going to carry through from the first half into the second. But the second half is close to what we anticipated, but it is lower.

Okay, great. My second question is, again, back to your full year guidance. How much of the change is coming from changes in assumptions that you use for the -- I guess, you have to look at the entire contract period under ASC 606, and whether that amount -- that's amount of emitter sales or ASP that you're going to receive? And in general, when you look at ASC 606, how often do you change those assumptions?

Well, to answer the first part -- the second part first, I mean, you look at them every quarter. But unless there is realistically something that we believe is a significant change, you probably won't change it. But you do look at it every quarter. But everything is impacted because of the lower material sales in the first half. And when material sales are lower, then your license fees and royalties are lower, since they are literally tied together. So the multiple effect of having lower material sales is you will also see lower license fees and royalties when your material sales are down.

Our next question is coming from the line of C.J. Muse with Evercore.

I guess first question, I'm trying to better understand the $70 million reduction in your outlook for the year. So you knew about the excess material in the channel exiting '17. So I would imagine that's not in there. And I imagine ASC 606 was included in there. So can we read this and just say that it is purely a reduction in premium handsets that's driving this miss? And if I think about your business running at kind of 2/3 material, 1/3 royalty and assuming $0.25 plus or minus per handset, it sounds like you're pulling out about 150 million units, which sounds a little bit high. So I would love to hear your thoughts on that.

Our guidance is based upon -- clearly, the smartphone declined faster than we expected. This impacts our customers' material purchases and their ordering forecasts, which leads to, for us, lower demand. And because of that, the lower demand then impacts -- 606 impacts not your -- the material sales are impacted directly by the orders coming down and expectations coming down. But in addition to that, the license and royalties come down because you're not selling as much material for the year. And they are really tied together. So when material goes down -- estimates go down, it also brings down your royalty and license fee estimates.

Okay. And I guess as my follow-up, to maybe get the street aligned properly going ahead. Can you share with us how you think about first half versus second half revenue ramps? Will we be thinking kind of 35%, 65%, something in that ballpark?

It's hard for us to give quarterly guidance. What -- we do believe that the first quarter is the bottom, and that we expect it to start to recover. But it is still soft. We still see it being soft in Q2. But then, we see Q3 and Q4 going back close to where we thought it would have been when we gave our original guidance.

Our next question is from the line of Mehdi Hussain (sic) [Hosseini] with SIG.

It's actually Mehdi Hosseini. Going back to your 50% supply growth, '17 to '19, how is the mix between smartphone application and TV? And in that context, how does your revenue mix by these 2 different applications change as we move from '18 and look into '19? And I have a follow-up.

Sure. Well the 50% is regards to installed square meters of glass from the end of '17 to the end of '19. And as Steve talked about, there's BOE and a number of the Chinese manufacturers. So what you will see in that number is we believe that a lot of that is smartphones. The only thing that is really TV related would be LG's new fab, that's in Guangzhou.

Okay. So the -- okay. So the TV mix could remain the same. Now let me ask this same question a different way. If I were to look at your pro forma guide for 2018 -- and I appreciate for providing the color -- and were to add the material sales that got pulled in into December of last year, $18 million to $20 million, your revenue show 10% growth. Now again, this is pro forma, and we also are trying to normalize for the material sale that got pulled into the December quarter. So you effectively are still doing 10% revenue growth in an environment where the smartphone demand -- the premium smartphone demand was weak. As you mentioned, there hasn't been much of a supply growth. And as supply growth kicks in, in '19, your revenue growth could actually accelerate. And I want to get your thoughts on it. And I'm not asking for a guide on '19. But it is important for investors to better understand the growth nature of the company.

Thank you. That's a great question because we think that your math works. You are correct in your math when you do that. So we think for the year, it's flattish or up a little bit. So up possibly 10%. The new capacity really will drive our revenue, and we see a significant increase going from '18 to '19 in our revenue because of the installed base going up. So we do think that, that is a great indication of our -- that you're going to see growth in our revenue because of the installed base. And to be honest, you saw it from '15 to '17, there was a 50% increase. But from '15 to '16, our revenues were somewhat flat. And then they went up in '17. So it looks a lot like that.

Our next question is coming from the line of Jim Ricchiuti with Needham & Company.

Yes, you guys have said in the past this is a difficult business to forecast and especially on a quarterly basis. But I guess when you gave guidance back in late February for the year, you clearly had a miss, which we understand why. There's been a downturn in the premium segment of the mobile phone market -- smartphone market. But now you're giving guidance for a fairly significant ramp implied in the second half. And so I'm just wondering, what may -- what changes may you have made in terms of going about the forecast, just in light of the reality and how challenging it is to forecast this business, that gives us the confidence that you can get to the numbers?

I -- we agree with you. It is very difficult for us to forecast. And you can see that. It's historically, we've had difficulty with it. We do work with each of our customers. We get forecasts from each of our customers. We listen to what the market says. We listen to what our customers say on their conference calls. We do look at our internal forecasts. And right now, based upon everything we know, pretty much as of today, this is where we believe that our revenues for 2018 will be. And that is the range of $280 million to $310 million. And we are confident. We are confident as we ever are when we do this.

Okay. Sid, can you give us any help as to how we should think about operating expense? How that might ramp as we go through the year? Just with the expected ramp in the business. Is there any major changes going forward on OpEx?

No. Our OpEx is not going to change. We expect OpEx to grow 10% to 15% year-over-year. And however, it will be probably more highly weighted towards R&D. So that excludes amortization. But it is R&D, patent costs and G&A.

Our next question is from the line of Hendi Susanto with Gabelli & Company.

Now that we have ASC 606 in your numbers, would you be able to share your methodology and assumption on like, first, how you assume yield? Second, how do you spread out royalty and license across material shipment? Is it by unit? And third, how do you distinguish that among various periods, let's say, like year 1, year 2 or Q1 and or Q2?

There's a lot of questions there. So I will try to walk through it. The way that 606 works is, based upon our business, our material business really drives our business, so that our royalties and license fees are tied to our material business. So in the case where you have a fixed fee, you then take the fixed fee over the life of the agreement and you know what that fixed fee is. You then estimate, over the life of the agreement, how much material you expect to sell to them. And when you do that, you then come up with a dollar amount per gram or per kilogram, and then when you ship it, you actually just multiply that times your kilograms or grams. That's a little different than when you have royalties. Because on the royalty side, you don't have a fixed number, you have to estimate the royalties. And we use internal data and we use external data to estimate how much we're going to receive on -- from each of the customers. And then we then estimate, as we did under the other scenario, how many grams or kilograms of material. And then in any given -- and whenever you ship it, you then record your material sales and your license fee or royalty per gram or per kilogram. And you do look at this every quarter and you make adjustments as you go along. So that, in the end, it actually all trues up.

And then if I may clarify, so there is no -- it's all based on dollar per gram. There's no distinction about yield assumption or whether it's like year 1 or year 2. Is that correct?

Yes. And to be honest, the best way to model us is you look at our material sales. You've done material sales estimates. Since our royalty and license revenues correlate to material shipments, we think a good shortcut in modeling is for us to assume that material revenues are roughly 60% of our revenue pie, give or take a few percentage points. And that royalty and licensing is roughly the remaining 35% to 40%, and that's give or take a few points. But that really should be the way you -- we will be modeled. It actually smoothes our revenue.

And then second questions. If I look at the $15 million to $25 million of material inventory pre-purchases and then compare that to, let's say, what your major customers took in Q4. Can I make that comparison to make an estimate when that material inventory pre-purchases will be fully consumed? So roughly, it will be less than a quarter?

It's hard for us to estimate our customer's inventory. But I do believe that the inventory, based upon the ordering that we've seen to-date, that the inventory was not all used up in Q1.

Our next question is from the line of Rob Stone with Cowen and Company.

I had a couple of balance sheet-related questions. Sid, one, could you provide any more color on the significant increase quarter-on-quarter in deferred revenue, short-term deferred revenue?

Yes. The short term revenue is based upon billings to our customers. And that is what we will recognize in the future. So when deferred revenue goes up, it means you receive more -- you [will fill] the customer more license fees or royalties in that period than you actually report. If it goes the other way, then you report more than you actually receive. So that's another -- that went up significantly. And you could also see from our cash flow statement that our cash flow in this quarter went up by approximately -- it was up -- it was like $38 million.

So that's an example of the disconnect between revenue under ASC 606 actually going on in terms of your customers and billings? You had mentioned that this would be the case. So we're seeing a good example of that.

Yes, yes. That is exactly the case. And that's why our 605 revenue number would have been, I think, $24 million higher.

Okay. In relation to inventory, also a pretty significant sequential [release]. I know that it takes a while to make the various materials you produce and you can't let the customers be cut short because you're sole source. But would you expect your inventory balance to start trending down in the second quarter? Or how should we think about the buildup in inventory?

Well, we try to run our material inventory building lines at optimal efficiency levels so that we can leverage the scale and make sure that we keep our costs in line. During the course of the year, we will maintain optimal production levels to build inventory for future demand that we expect to sell it. But I do expect as the -- as our revenues go up in the second half, that we will start to use some of this finished goods inventory.

Okay. Last question for me if I can squeeze in one more. You mentioned you expected second quarter to also be weak relative to original expectations, but to improve some from Q1. I know a lot can happen even in the last week of the quarter. But in Q2, so far, have you started to see some signs of improvement?

It is. It is -- we have -- it's still soft. And we believe that Q1 represents the bottom. Q2 is a bit better than Q1.

(Operator Instructions) Our next question is from the line of Brian Lee with Goldman Sachs.

I had 1 sort of straightforward one and then maybe 2 more technical modeling ones. Just first, for you Sid. Last quarter you said 606 is going to have a negligible impact. And then this quarter, appreciate the disclosure and the quantification, but it had a 40% impact to Q1, and it's a 10% to 15% impact to the year's guidance. So what changed in the past 2 months when you assessed no impact before and now you're quantifying a pretty big impact?

The lower material sales are -- cause a larger discrepancy between 606 and 605. That's why the first quarter is significantly different. With lower material sales, the decline in sales is magnifying because you don't report, essentially, the license fees and royalties. The impact, we believe, it's about 10% to 15%. The impact when -- and we've reduced the guidance, and when our guidance was higher, that the higher that your revenues are then the closer you actually are to getting parity between 605 and 606. The -- our difference was under 10% last -- 2 months ago when we did it. The difference between 605 and 606 was under 10% the last time, which is why we said it was not significant.

Okay. Fair enough. And then 2 kind of modeling questions. On the deferred revenues, $45 million up in the quarter. Was that all related to your Samsung fixed [license fee, you think]?

We have multiple customers that increased our deferred revenue during the quarter.

Okay. Last one for me. Again, on the 605 versus 606 delta, it's -- you would've done $68 million under 605. And then you're saying your guide would've been 10% to 15% higher for the year under 605. Then it implies Q1 would've been the high revenue quarter for the year under 605. And then presumably under 606, Q1 is the lowest, as you've said here. So what's the reconciliation there? Why would it be a high quarter under 605 when materials revenue under both 605 and 606, again, presumably are going to be up moving through the year and presumably up a lot in the second half versus the first half under both 606 and 605?

I'm not sure that, that would be the result. So I mean, the inventory prepurchases affect Q1 in terms of the material sales. And if it would have been at the same level as it was last year, then clearly, it would've been, but I don't think that -- the end result would be this would be the highest quarter.

But that's what the math would imply, if you take the full year guide of 10% to 15% up under a hypothetical 605. And then you subtract the $68 million you did under a hypothetical 605 for Q1. And then you sprinkle it out over the next 3 quarters, $68 million would be right at the high end of what that would imply for the rest of the year. I can take this off-line, but that's the math that I have been backing into. And I just wasn't sure why that was the case.

If the purchases would have been in this quarter and you added the $15 million in there. If you multiply the $70 million times 4, you get the $280 million. And if you think it would've been higher, you get to the $310 million, $320 million range. I think you need to take into account the inventory from the customers. I don't believe they would have what bought all of this in this quarter. I think that the prepurchases probably were much larger than we anticipated.

Our next question comes from the line of Shannon Cross with Cross Research.

Steve, I've got one for you.

Thank you. Go ahead.

Now what I'm trying to figure out is when I think about all of the ramps that you have coming toward the end of this year and that in terms of new production. Can you talk a bit about sort of how yields work? What you've seen from your customers? And I'm not sure Samsung's fair, they've been doing it for so long. But -- because I know, at one point, I can't remember which quarter, but you had a little bit of weakness because people started getting their yields up. So I'm just thinking, as you start ramping this big group, perhaps there's going to be sort of exits, material sales, et cetera, as they're trying to figure out exactly how to do it. So maybe if -- from a historical perspective, if you can give us some idea.

Historically, we do see more materials being sold in the early parts of the customer ramp. And the customers go through learning curves and they use how to -- they learn how to use the materials more efficiently. So we include that in our models moving forward.

Okay, but most of that probably would be a 2019, correct? Just based upon the timing?

That is true. Yes. That will start in 2019.

Okay. And then because nobody's asked it, any -- you sort of had the same commentary on blue. Has there been any change, stair-step improvement? I'm just curious.

Well, we're continuing to make good progress, but we have nothing yet to announce on a commercial blue.

Our next question is from the line of Hendi Susanto with Gabelli.

While OLED industry capacity and demand are taking a pause in the first half, would the board consider share repurchase?

We look at how we're going to allocate our capital pretty much each board meeting. And so we evaluate what we think the appropriate use of capital is. The beginning of this year, we raised our dividend. And we understand that, but we will look at it. We look at options at every quarter. So it is something that comes up every time.

This concludes our question-and-answer session, ladies and gentlemen. 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 support and hope you all have a good night. Thank you.

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