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Edited Transcript of OLED earnings conference call or presentation 1-Aug-19 9:00pm GMT

Q2 2019 Universal Display Corp Earnings Call

Ewing Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Display Corp earnings conference call or presentation Thursday, August 1, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darice Liu

Universal Display Corporation - Director of IR & Corporate Communications

* Sidney D. Rosenblatt

Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director

* Steven V. Abramson

Universal Display Corporation - President, CEO & Director

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Conference Call Participants

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* Andrew Abrams

* Andrew Lodovico DeGasperi

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Brian K. Lee

Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst

* Hendi Susanto

G. Research, LLC - Research Analyst

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Matthew Patrick Prisco

Evercore ISI Institutional Equities, Research Division - Associate

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

* Shek Ming Ho

Deutsche Bank AG, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Universal Display's Second Quarter 2019 Earnings Conference Call. My name is Doug, and I will 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.

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Darice Liu, Universal Display Corporation - Director of IR & Corporate Communications [2]

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Thank you, and good afternoon, everyone. Welcome to Universal Display Second Quarter Earnings Conference Call. Joining me on the call today are Steven Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Before Steve begins, let me remind you that today's call is a property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the 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, August 1, 2019.

During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic report 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 Steven Abramson.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [3]

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Thanks, Darice, and welcome to everyone on today's call. We are pleased to report second quarter 2019 revenues under ASC 606 of $118.2 million, operating profit of $48.7 million and net income of $43.4 million or $0.92 per share. Under ASC 605, the prior accounting standard, our second quarter 2019 revenues would have been about the same at $119.8 million, operating income of $50.3 million and net income of $44.8 million or $0.95 per diluted share. Including these results is approximately $15 million to $20 million of orders we estimate were pulled in from the second half of the year from our Chinese customers due to what we believe were trade-related reasons. With OLED momentum continuing to grow, we're raising our 2019 revenue guidance. Our new 2019 revenue forecast under ASC 606 is in the range of $370 million to $390 million. Under ASC 605, 2019 revenues are expected to be in the range of $425 million to $435 million.

Sid will provide further details shortly. In the past 3 months, OLED activity has continued to increase across the consumer landscape. As the display of choice for premium smartphones, premium TVs and smart watches, OLEDs have been gaining strong traction in the consumer electronics market, and emerging new segment is the IT market.

From Samsung Display's announcement in May that it was expanding its AMOLED commercial focus to the IT market to laptop makers showcasing OLED products at Taiwan's COMPUTEX trade show in June, including the Gigabyte Aero 15, Alienware m15, ASUS's ZenBook Pro Duo, Razer Blade 15 Studio Edition and the Dell XPS 15. What's driving this interest in OLED and IT? As Samsung noted in their announcement, AMOLED displays are known not only for their outstanding color reproduction but also for properties that enable low-power consumption, ultra-slim bezels and thin and light designs. They also noted that AMOLED panels deliver the best display specifications for netbooks by enhancing the mobility and seamless streaming capabilities for high-resolution gaming and graphics content.

Samsung further highlighted that AMOLED display solutions have been optimized for cloud and streaming services that speed up the commercialization of 5G technology. They believe that their latest AMOLED displays will allow the users to have the most visually stunning experience in the 5G era with its rapid response rate and exceptionally high frame rate, while delivering unbelievably rich DisplayHDR True Black colorization. Additionally, Samsung announced last week that it expects to begin shipping the Galaxy Fold in September.

And on Tuesday, Samsung reported their Q2 OLED panel sales grew quarter-over-quarter and made up a significant percentage of its display revenues in the high 70% range.

Looking forward, Samsung's forecasted OLED growth with shipments and utilization rates to increase in the second half of the year over the first half of the year. During its recent earnings call, LG Display laid out its total OLED solution strategy, spanning from small size to ultra-large size.

On the mobile side, LG denoted that its plastic OLED plant in Paju will commence operations in the second half of this year. Additionally, augmenting its small and medium portfolio, LGD will also launch its first plastic OLED display for the automotive market in the coming months.

On the large-size front, LGD's second OLED TV fab in Guangzhou, China, will reportedly be completed at the end of this month. These new Gen-8.5 factory is expected to have an initial install capacity of 60,000 substrates per month, nearly doubling LG's total output to 130,000 substrates per month.

Last week, LG Display announced a new $2.6 billion investment for its Gen-10.5 OLED TV plant in Paju, which will commence production in the first half of 2022 with 30,000 substrate starts per month and an additional 15,000 substrate starts per month in the first half of 2023.

According to reports, there are currently 10 OLED facilities expected to be built in China over the next 3 years.

Leading China's OLED investment is BOE. Last month, BOE announced the opening of its second OLED fab in Mianyang, similar to its first fab in Chengdu as well as they announced third and fourth OLED fab in Chongqing and Fuzhou, respectively. Mianyang is a Gen-6 flexible OLED fab slated to have 48,000 substrate starts per month.

According to reports, Visionox has accelerated its expansion in OLED smartphones, wearable devices, vehicle manage systems and intelligent homes.

The company is expected to commence commercial production as Hebei go on fab at the end of this year.

This 30,000 plates per month fab began pilot production last year and Visionox is building a second OLED production line in Hefei, which will also produce 30,000 plates per month. In lighting, OLEDWorks announced a collaboration with Audi to advance OLED lighting technology in automotive applications.

Additionally, OLEDWorks announced an exclusive arrangement with Acuity Brands, North America's largest lighting company to work on an expanded OLED product portfolio.

Acuity Brands, using OLEDWorks' technology, intends to develop a series of affordable and innovative OLED luminaires for architectural lighting applications.

The OLED revolution is just getting started in this multiyear OLED CapEx growth cycle. We continue to estimate that year-end 2019 installed base of OLED square meter capacity will have increased by approximately 50% over year-end 2017.

On the R&D front, we're developing new OLED technologies and next-generation materials to stay ahead of the curve and continue to leverage our first-mover leadership position.

Let me walk you through some of our initiatives. OVJP, or Organic Vapor Jet Printing, is our novel manufacturing process for maskless, solventless, dry-direct printing of large-area OLED panels.

At SID DisplayWeek in May, we showcased, for the very first, printed panels from our OVJP pilot system. At the display trade show, you're able to view up close the essentially perfect lines we printed in our pilot line tool. And we have already been able to achieve lifetimes of over 50,000 hours at LT 95 at 1,000 nits for green FOLED. This is very encouraging for very early data. And just last month, we received a third and last chamber of our pilot system, which will enable us to make full color RGB test panels. We are excited about the continued progress we are making and for the commercialization path of OVJP.

With multiple customers who have numerous product roadmaps for a myriad of end users through discovery, development and delivery of new phosphorescent emissive materials, including new reds, greens, yellows and blues, continues to be our highest priority. Specifically, on the blue front, we continue to make excellent progress in our ongoing development work for our commercial, phosphorescent blue emissive system. As a number of end users specs continues to rapidly above with the adoption of OLEDs across our broad array of consumer products, including AR/VR, smart watches, smartphones, tablets, laptops, automotive and TVs. Corresponding new OLED recipes need to be designed to meet this ever-changing and ever-demanding specs. To help enable our customers and accelerate the design pace, we have been establishing a network of OLED material partnerships. These partnerships will center on our proprietary phosphorescent emitters, which are at the heart of essentially every commercial OLED stack to ensure high performing, highly efficient and cost-effective OLED solutions.

We expect to be able to announce some of these partnerships in the coming months. We have been working on developing new host materials side-by-side with our full emitters. We have also been working on a new host commercialization roadmap. One of the partnership frameworks that we have been establishing over the past few years is with local material companies to commercialize hosts that are complementary to our proprietary phosphorescent emitters. These local partners will be volume manufacturers for these complementary hosts for direct sales to specific customers, creating a win-win situation for us, our partners and our customers.

And lastly, we announced in May, the establishment of UDC Ventures, our corporate venture arm. UDC Ventures seeks to partner with entrepreneurs, disruptive start-ups and innovative emerging companies in fields related to our strategic focus area.

We seek to be impactful strategic investors with companies that could be at any stage, ranging from pre-commercial stage, research and development to early prototypes through late-stage established companies. We believe that these and our other strategic initiatives will strengthen and support our primary focus of enabling our customer success, and therefore, our success.

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

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [4]

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Thank you, Steve. And again, thank you everyone for joining our call today. Revenues for the second quarter of 2019 under ASC 606 were $118.2 million, sequentially up from first quarter 2019's $87.8 million and Q2 to 2018's $56.1 million.

As Steve mentioned, included in this quarter's results is an estimated $15 million to $20 million of sales through Chinese panel manufacturers, which we believe were pulled in from the second half of 2019 due to trade-related concerns. Under ASC 605, our second quarter revenues would have been $119.8 million. This compares to first quarter of 2019 revenues of $101.6 million and Q2 2018 $73.6 million.

As you can see, as revenues increase, the closer ASC 606 and ASC 605 become. And when we hit the inflection point, then ASC 605 will generally be lower than ASC 606.

Our total material sales were $76.3 million in the second quarter compared to material sales of $54.5 million in the first quarter of 2019 and $36.8 million in the second quarter of 2018.

Green emitter sales in the second quarter of 2019, which include our yellow, green emitters, were $60.2 million. This compares to $41.6 million in the first quarter of 2019 and $25.9 million in the second quarter of 2018.

Red emitter sales in the second quarter of 2019 were $16 million. This compares to $12.8 million in the first quarter of 2019 and $10.9 million in the second quarter of 2018.

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, capacity ramp schedules, production loading rates, device recipes, product mix, material ordering patterns, customer inventory levels 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 Q2 royalty and license revenues, we want to remind you that under ASC 606, irrespective of when billings occur, we will recognize royalty and license revenues in proportion to corresponding OLED material shipments.

Second quarter 2019 royalty and license fees were $38.9 million. This compares to $30.3 million in the first quarter of 2019 and $15.5 million in the second quarter of 2018. Second quarter 2019 Adesis' revenues were $2.9 million. This compares to $3 million in the first quarter of 2019 and $3.8 million in the second quarter of 2018.

Cost of sales, which included Adesis' cost of sales for the second quarter of 2019 were $24.1 million. This compares to $15.8 million in the first quarter of 2019 and $11.6 million in the second quarter of 2018.

Cost of material sales, which only relate to OLED materials and does not include Adesis' cost of sales were $22 million, translating into material gross margins of 71.2%... This compares to 76.2% in the first quarter of 2019 and the comparable year-over-years quarter material gross margin of 74.8%... This quarter included an inventory reserve of $3.9 million, impacting material gross margins by 5%.

For this year, we now expect our overall 2019 material gross margin to be in the 70% to 75% range, consistent with the last few years. As we have noted in the past, material gross margins can vary quarter-to-quarter.

Second quarter 2019 operating expense, excluding cost of sales, was $45.4 million, up from last quarter's $37.6 million and up year-over-year from the comparable quarter's $33.6 million.

Operating income under ASC 606 was $48.7 million for the second quarter of 2019 compared to last quarter's $34.4 million and the year-over-year comparable's quarter $10.9 million. Under ASC 605, second quarter operating income would have been $50.3 million. This compares to last quarter's $48.2 million and year-over-year comparable's quarter $28.4 million.

Second quarter 2019 income tax rate was 16.2%. Without ASU 2016-09, our second quarter 2019 tax rate would have been approximately 19%.

For the year, absent the effect of ASU 2016-09, we continue to expect our tax rate to be approximately 18%, plus or minus a few percentage points.

Under ASC 606, net income for the second quarter 2019 was $43.4 million or $0.92 per diluted share. This compares to last quarter's $31.5 million or $0.66 per diluted share and the comparable year-over-year's quarter of $10.8 million or $0.23 per diluted share.

Under ASC 605, our second quarter net income would have been $44.8 million or $0.95 per diluted share. This compares to last quarter's $42.5 million or $0.90 per diluted share and the comparable year-over-year's quarter of $25.1 million or $0.54 per diluted share.

We ended the quarter with approximately $553 million of cash, cash equivalents and short-term investments or approximately $11.75 of cash per diluted share. Additionally, we achieved a new financial milestones with assets totaling over $1 billion for the first time.

Moving along to guidance. Based on customer discussions, current operating levels, product mix as well as other major variables, our expectations for 2019 have increased and we are raising our full year's guidance.

We now expect our 2019 revenue under ASC 606 to be in the range of $370 million to $390 million.

Under ASC 605, 2019 revenues are expected to be in the range of $425 million to $435 million.

As I mentioned earlier, the higher the revenues, the spread between ASC 605 and ASC 606 diminishes. And when we hit the inflection point, ASC 605 will generally be lower than ASC 606.

And lastly, the Board of Directors approved a $0.10 quarterly dividend, which will be paid on September 30, 2019 to stockholders of record as of the close of business on September 16, 2019.

The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders. And with that, I will turn the call back to Steve.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [5]

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Thanks, Sid. OLEDs are not only inherently simply, beautiful and versatile, they are redefining how we design, feel and use consumer products. The broadening of the OLED display product portfolio from an ever-expanding array of wearables, smartphones, tablets, laptops and TVs as well as the continued progress in the form factor roadmap, leveraging flexible OLEDs, all of this illustrates the immense growth potential of the OLED display market even in the nascent stage of adoption. Our mantra has been and continues to be vision, innovation and reality. The exceptional value of our proprietary OLED technologies and phosphorescent materials has resulted in Universal Display Corporation being an integral partner in the commercialization of OLEDs into the marketplace.

We are proud of the leadership position we have created. With our extensive experience, steadfast focus on innovation and execution and expanding product portfolio of new materials and technologies, we are well positioned to enable our customers and the OLED industry with the most energy-efficient, high-performance and cost-effective emissive layer solutions.

I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements.

We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers and for our shareholders.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [2]

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Question on the prebuying? What did you notice the prebuying activities in the quarter?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [3]

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Thanks for the question, Jim. It kind of happened throughout the quarter -- it was -- we did talk to our customer and we understood what they were doing. We think there were trade-related issues.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Sid, can you say -- I mean I'm looking at -- in your Q and customer B, there is a significant increase in revenues from customer B. Is the -- was that the bulk of that prebuying with that customer?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [5]

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Yes. Customer B is leading Chinese panel maker, and it is not just one customer, but it is all across the board for our Chinese customers.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [6]

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Okay. Did you guys see any of this in Q1? Or is this mainly what you noticed in Q2?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [7]

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It's pretty much just Q2.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [8]

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Okay. Got it. And just moving, if I could just quickly on OpEx. Any change in how we should be thinking about operating expense in the second half?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [9]

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No. I think as we said in the past that we expect R&D to be up higher than 20% to 25% year-over-year this year. G&A is probably in the 10% to 15% range, I think, as we said in the past. So there is no change. There's no change.

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Operator [10]

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Our next question comes from the line of Brian Lee with Goldman Sachs.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [11]

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Maybe just a follow-up on that.

The $15 million to $20 million pull-in, can -- from China, can you give us some sense of how you're sizing that? What sort of visibility, or I guess data you're working off of to give you confidence that it's that amount versus something higher or lower?

And I guess reason I ask that is if I take the full $20 million out of China this quarter, the so-called normalized revenue would have been more like $35 million, which is still up 70% sequentially.

So a pretty big number for that region. Just trying to parse, I guess, how comfortable you are with the $15 million to $20 million. And then, if it is that sort of $35 million run rate, that would've been the one you would have sort of normalized off of to build for the second half view.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [12]

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Yes. It's a great question. Brian, in conjunction with our internal analysis, we look at things, we also get input from our customers. And we think that the prepurchases this time are a little different than we've had in the past. So we've got more intel from our customers this time around. And this is different than the last time, which they were contract-related prepurchases.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [13]

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Okay. And I guess if we do look at the customer, ABC. Customer B from China, they actually represented it looked like a little over 50% of all China revenue. So it doesn't seem like it's all concentrated in one customer. So would you say the general trend across the Chinese customer base is pretty consistent in terms of how they're pulling in some material purchases?

And then I guess related to that, it seems like the diversification of revenue, that's going to hold pretty steady through the back half in China specifically?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [14]

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Well, the Chinese customers are -- it's across -- all of our Chinese customers are up. However, sales to a -- to China include our Korean-based customer. So included in the China sales, our sales. So it's not all Chinese panel manufacturers. We determine where it is going based upon where we ship the material.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [15]

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Got it. Okay. Fair enough. That makes sense given the JV out there, okay.

And maybe on that point, materials' inventory, that's always something that has been kind of a challenging thing for you guys to get a handle on. I know you were calling at the China pull-in. On the Korea side, just given order run rates and visibility you have into key customers in that region, are you seeing normal buying patterns? Anything there on the inventory side that you think could impact what would be normal seasonality into the second half year?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [16]

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No. We see -- we actually saw a growth across the board from all of our customers in the quarter, even without the inventory -- without the pull-in of inventory. And so it's -- it was strong across the board.

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Operator [17]

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Our next question comes from the line of Sidney Ho with Deutsche Bank.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [18]

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So I have a couple. The first one is going back to the same pull-in question. You mentioned that the pull-in was coming from the second half of the year. Do you expect that to mostly unwind by the end of this year, a.k.a. you raise the full year guidance, is that just moving from first half to second half? Or do you actually raise this $25 million at the midpoint?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [19]

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Well, we do believe that it is a pull-in from the second half to the first half. And we do see -- obviously, we've raised our guidance. So we do expect, compared to last year to this year, strong growth for this year.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [20]

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So most of that pull-in will be used up by the end of the year is what you expect in your full year guidance?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [21]

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Yes. That is correct.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [22]

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Okay. Great. If you just look at the full year guidance raised by, again, $25 million, where is the most upside coming from versus your prior guidance, either by region or by application?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [23]

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It's really across the board. It isn't just one region or one customer. It's -- like Q2 was stronger than we expected even without the inventory -- excess inventory purchases. So we're seeing strength across the board.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [24]

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Got it. And then in terms of the China revenue, if you back out the pull-in, if you back out the Korean customer, it seems like it's relatively flat from Q1 to Q2. Do you expect that to be kind of in that range as well in the second half, given there's a lot of preproduction material sales in the first half?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [25]

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We do expect some growth. I mean if you -- if you pull -- for China, I think, for the second half based upon what occurred, the second half will not be as strong as the first half. If you turn -- if you would put the inventory prepurchases in the second half where they should have been, then we would have seen growth in the second half of this year in China. But because of what occurred, we will not see growth in the second half.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [26]

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Great. My last question is on the Japan Korea trade restriction on certain chemicals. Have your customers indicated whether that export restriction will impact the OLED panel production? And have you seen any changes in the order pattern just following the restriction?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [27]

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So far we have not seen any impact on our business, Sidney.

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Operator [28]

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Our next question comes from the line of Mehdi Hosseini with SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [29]

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Perhaps this question is for both, Steve and Sid. When you look at the 50% square foot or square inch growth from '17 through '19, how does your assumption change when you look -- when we look into the next 2 years? Do you expect the same intensity and capacity add to sustain? Or is there a change in the growth rate? And I have a follow up.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [30]

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Well, we do see, as we said earlier that we do -- we did see installed base grow 50%, we still see growth at -- we're in a midst of a multiyear CapEx cycle. But any specifics going from 2020 to 2021 at this point, we really are not ready to make any projections.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [31]

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Sure. I ask this question because you have been pretty much on target for 2019, and these targets were put together in '17. And perhaps has visibility changed? Or do we need to wait for the second phase of investment in China to materialize?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [32]

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Well, there's -- look, there's a number of reported starts of fabs and production facilities that are going to be built. As Steve said, we -- there's going to be 10 in China.

But probably the beginning of next year, we will do a deeper dive and see where we think it is because we use market data, we use internal data. And as you said, we have been pretty accurate and we will take a look at it. But everything that we and all the indications that we see is growth in the OLED industry will continue to be strong for the foreseeable future.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [33]

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Great. And then a follow-up -- quick follow-up. How should we think about the commercialization of blue in the incremental update?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [34]

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We don't really have any incremental update. We're continuing to make excellent progress on blue and when we -- we're making excellent progress but we have nothing to announce at the moment.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [35]

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Is there any lifetime metric that we could use to better help us? Any progress?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [36]

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At this point, I don't think it's a metric that's key because as you know there is the 3 points, there's the color, efficiency and lifetime. And the customers are looking at the appropriate combination for their business. And, Mehdi, as we said, we're not going to be making discussions about incremental improvements that we make because we make them all the time, and we make them, as Steve said, across the board whether it's color, lifetime or efficiency. But when we have something that we believe is -- meets initial commercial specs, that's when we'll start sharing information.

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Operator [37]

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Our next question comes from the line of Matthew Prisco with Evercore.

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Matthew Patrick Prisco, Evercore ISI Institutional Equities, Research Division - Associate [38]

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As we think about your second-largest Korean customer turning on capacity at Guangzhou in the second half, how should we think about revenue growth into the back half, particularly considering 2Q was a record level for the company?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [39]

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We -- it really depends on when the fabs really start to ramp up. We know that they have been -- it's installed, and the question is what's their schedule and what utilization rates are? What they stated is that it's -- everything is completed, and they should start running the fab, at least some initial phases, at the end of this month into next month.

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Matthew Patrick Prisco, Evercore ISI Institutional Equities, Research Division - Associate [40]

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Okay. It's helpful. And then on the margin side, can you kind of review what drove the material gross margins lower in the quarter? And it seems like you picked up -- your guide -- I think last quarter you guys were saying it averaged around 70, and now you're 70%, 75%. So what drove that increased outlook?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [41]

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The increase -- we initially had talked about the lower end, approximately 70%, and now we're saying 70% to 75%. It -- we expect revenues to be higher and customer mix and product mix all impact our margins. So when we look at our forecast for the year, we saw that the margins will continue to go -- will be above the 70% range. And in this quarter, approximately 5% was an impact from the inventory reserve that we have.

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Operator [42]

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Our next question comes from the line of Andrew DeGasperi with Berenberg.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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This is a follow-up to Matthew's question in terms of the inventory reserve, quickly, what was that related to?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [44]

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As a just-in-time supplier, we have to keep inventory so that we can provide all of our customers with the material that they need when they need it.

So we always will overbuild our inventory so that we can meet all of our customer needs and at times based upon our accounting standards that we use. If it's anything that we estimate has -- is not good to be sold over the next 12 months' period, we will reserve it. That doesn't mean that it's not salable and doesn't mean that we may not sell it. But based upon customer estimates that we get. So we will always be reserving some inventory and it may shift from time to time different products that we have because we have so many new products because we have so many customers today.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [45]

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Got it. And then just quickly on the order activity. Can you discuss maybe how July shaped up? And just with regards to the tariffs. I mean I know -- just news today on potential increase in September. Are you concerned at all that could potentially impact your guidance for the year? Or do you think, at this point, it's not going to affect the ordering -- the order patterns?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [46]

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Well, I believe the tariffs that were announced or tweeted today are, it's stuff coming into the U.S. as opposed to shipments into China.

So will they impact us? If there are additional tariffs that are placed on material going in, it may impact us. But we are enabling the industry. We have strong relationships with our customers. And none of this has impacted our relationships with our customers.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [47]

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Got it. And lastly, the material sales to licensing ratio, do you expect that to be consistent with what you've seen in the first quarter going into the second half?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [48]

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We expect it to be closer to 2:1 for the year.

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Operator [49]

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(Operator Instructions) Our next question comes from the line of Andrew Abrams with SCMR.

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Andrew Abrams, [50]

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Congratulations regardless of the (inaudible) And I have one question more (inaudible) you were

(technical difficulty)

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [51]

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Andrew, you're breaking up. We can't hear you.

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Andrew Abrams, [52]

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You were talking a little bit about partnerships with local material suppliers for host material. Can you give us a little bit of how you see this being sold to your customers? Is it going to be a license that you give your material suppliers and they sell directly? Or will this go through you guys in one way or another?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [53]

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The way we're looking at it right now, Andy, is that we'll work with our host partners to commercialize hots that are complementary to our proprietary phosphorescent emitters. The local partners will then buy and manufacture those hosts and sell the hosts directly to specific customers.

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Operator [54]

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Our next question comes from Hendi Susanto with Gabelli & Company.

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Hendi Susanto, G. Research, LLC - Research Analyst [55]

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Sorry, If I missed this, what is the main reason of customers pulling in purchase in China considering that your shipment time is relatively short and you have plenty of production capacity?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [56]

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Hendi, these are trade-related issues whether the -- tariffs that were there and other trade-related issues that may have come up. So that's really what our customers told us.

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Hendi Susanto, G. Research, LLC - Research Analyst [57]

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And then with regards to strength in China, will that lead to consideration of expanding your production capacity in collaboration with PPG?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [58]

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We are always looking at where we are for our production capacity. This is -- the industry is a -- in a multiyear CapEx growth cycle, we expect our business to grow essentially as the OLED industry grows.

And we will always ensure that we have excess manufacturing capacity to meet any shifts in customer demand.

So once we finish one expansion, we're already looking at the next one.

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Hendi Susanto, G. Research, LLC - Research Analyst [59]

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Okay. And then one more question, can you characterize differences and similarities of customers purchasing behavior and inventory management practice between customers in China and customers in Korea?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [60]

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There -- our customers know that we are a just-in-time supplier, that we are a reliable supplier, and we have great relationships with them, with our management team and our technical team and our sales guys and customer support guys that we have around the world, and they work with everybody. And so there may be a little bit of differences but overall our customers are professional manufacturers and work very well with us and we work very well with them.

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Operator [61]

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

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [62]

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Given your cash balance and clearly improving margins and strong revenue, any thoughts on acquisitions? Anywhere that you think you might be able to maybe accelerate? Or is it pretty much you're happy with the investment level you have and the assets you've got right now?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [63]

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Yes. We're always open to any M&A. And we're focusing on leveraging in our [IP] so that we can increase our growth, and looking at any opportunity that we think will help grow our business or help grow the ecosystem of OLED.

So it isn't that anything will be accelerated. If something pops up, we have always been ready to move, if we can.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [64]

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Okay. And then I'm just curious, given all of the capacity that's coming on, what are your thoughts about what you expect pricing to do next year?

I mean I would assume, at some point, with all these TVs showing up, we would start to see more aggressive price cuts. But I'm just curious as sort of you talk to people in the industry, do you have any insights?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [65]

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I mean we -- typical consumer trends will apply with OLED TVs as there's more capacity, as volume grows, then you should see pricing come down for the end-user. I mean that's just the way it is. We don't have any specific insights because we're not the seller of the TVs.

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Operator [66]

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This does conclude our Q&A session for today. I'd like to hand the call back to Mr. Rosenblatt for any additional or closing remarks.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [67]

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Thank you all for your time today. We appreciate your interest and support, and hope you all have a good night. Thanks.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [68]

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Good night.

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Operator [69]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.