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Edited Transcript of OLED earnings conference call or presentation 1-Nov-18 9:00pm GMT

Q3 2018 Universal Display Corp Earnings Call

Ewing Dec 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Universal Display Corp earnings conference call or presentation Thursday, November 1, 2018 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

* Atif Malik

Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst

* Brian K. Lee

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

* Christopher James Muse

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst

* Hendi Susanto

G. Research, LLC - Research Analyst

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Sidney 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 Third Quarter 2018 Earnings Conference Call. My name is Dana, 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's third quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Before Steve begins, let me remind you 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, November 1, 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 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.

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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. Our third quarter 2018 revenues were $77.6 million, operating profit was $26 million, and net income was $22.8 million or $0.48 per diluted share. Under ASC 605, a prior accounting standard, our third quarter results would have been $91.6 million in revenues, $40.1 million in operating profit and $34.2 million in net income or $0.72 per diluted share.

During the quarter, we began to see a pickup in the smartphone market, as new OLED products were launched, including the Samsung Note 9, Huawei Mate 20x and 20 Pro, LG V40, Google Pixel 3 and 3 XL and others. Also notable was Apple moving from 1 model with an OLED display last year to 2 models with OLED screens this year. We believe that these launches are indicative of the increasing demand and value of OLED in leading OEM product roadmaps, and reinforces the strong secular OLED growth story.

Near term, however, the magnitude of the pickup to our material sales was not to the degree we had earlier anticipated. As a result, we are lowering our 2018 revenue guidance to approximately $240 million to $250 million. Under ASC 605, we estimate that our 2018 revenues to be approximately $315 million to $325 million.

And as we look to 2019, we continued to anticipate it to be a meaningful year of growth, driven by a number of factors. These include continued growth in the smartphone market. We believe that new, innovative OLED product launches, implementation of 5G and other factors will help drive the continued pickup in the smartphone market.

We also believe that the proliferation of OLEDs across the consumer electronics market will continue to broaden. We have seen OLED adoption in myriad applications in AR, VR, wearables, tablets, laptop, automotive, TVs and smartphones, which is where the majority of OLED displays are used today. We believe that the adoption of OLEDs across the consumer electronics spectrum will continue to broaden as OEM and consumer interest for beautiful, innovative, energy-efficient displays continues to grow.

For example, in the TV market, demand continues to outpace supply as OLED TVs are recognized as the best TVs in the market. The most recent accolades comes from Forbes and rtings.com who jointly named LGE's OLED TV One of the Best Products of the Year. The report noted that "The LG B8 is the best TV reviewed in 2018. It has outstanding picture quality, thanks to the OLED panel that delivers excellent darkroom performance. OLEDs can dim each pixel individually, so it delivers perfect blacks and wide viewing angles."

No wonder why consumer demand for OLED TVs continues to grow. As new OLED TV capacity increases, we expect our business to increase significantly.

On the IT front, Samsung Electronics announced last month that it is working on developing new laptop form factors, including one with a foldable OLED display. LG Display is reportedly working with Lenovo on developing a foldable OLED tablet, which may ship by the end of next year.

And in automotive, from Samsung announcing last month that its OLED displays were selected for the Audi e-tron, Audi's first all-electric vehicle to replace the side view mirrors, to reports that LG Display is working with Visteon, the second largest automotive display supplier; we believe that interest for OLED displays in automotive applications continues to increase due to its many attributes, including high resolution, fast response time, high contrast and form factor.

We also believe that new form factors only made possible because of OLEDs will be introduced. Since the OLED stack essentially consists of film layers, they are inherently conformable, bendable and rollable. Back in 2013, with the move from glass-on-glass to glass-on-plastic, we saw the first conformable smartphones with the Samsung Edge and LG G Flex. We believe that the next milestone in the OLED form factor roadmap is foldable. With Royole's announcement on Wednesday and Samsung and Huawei both aggressively working towards a commercial product, we expect the emergence of foldable OLED products to excite the consumer industry.

Additionally, new production capacity is expected to significantly expand the panel maker landscape. As a pioneer of AMOLED manufacturing, we expect Samsung to continue to lead the OLED market. At the same time, other panel makers, including LG Display, BOE, Tianma and Visionox are investing in building new OLED production capacity. Additionally, panel makers including Sharp, Japan Display, Royole and EDO are advancing their commercialization initiatives. We believe that all these panel makers will help to significantly expand the production capacity landscape in the coming years.

In short, with billions of dollars committed to fueling the commercialization of OLEDs around the world and the landscape of OLED panel manufacturers expanding and OLEDs playing an increasingly larger role in leading OEM product roadmaps, we believe the stage is being set for OLEDs to become the dominant display technology across the consumer electronics spectrum.

Now let me briefly touch on some of the recent news in the panel maker ecosystem. In mid-October, Samsung held an OLED forum in China to discuss some of its R&D initiatives and its product roadmaps. Last week, Samsung reportedly confirmed that the IMID Exhibition Show in Korea is developing technology for QD-OLED, or quantum dot organic light emitting diodes, for TVs.

And just this week, Samsung reported during its earnings call that demand for flexible OLED panels was recovering. Samsung discussed its focus on diversifying its OLED customer base, differentiating its OLED product portfolio and expanding into new OLED applications, including foldable, automotive and IT.

Heading into next year, Samsung expects its OLED revenues, profits and fab utilization rates to be up year-over-year.

During LG Display's earnings conference call, the company reiterated its strong capital commitment to OLEDs for both TV and mobile. Additionally, LGD hit a key operating milestone in the quarter with its OLED TV Panel business achieving positive operating profit for the first time. With continued strong demand for OLED TVs, LGD's capacity plans are on track. Its second OLED TV fab in Guangzhou, China is expected to open in mid-2019. LGD is also evaluating plans to convert additional Gen-8.5 LCD capacity to OLED capacity in Paju. This is in addition to its ongoing Gen-10.5 OLED TV fab plans.

LGD plans to sell 2.4 million to 2.8 million units this year, 4 million OLED TVs next year and 10 million units by 2021.

In Japan, Sharp announced early last month its long-awaited move into the OLED market. According to reports, Sharp will offer OLED panels in its new smartphones later this year and plans to sell OLED displays to other manufacturers.

And in China, BOE Technology was upbeat on its OLED mobile shipment outlook during their earnings call this week. BOE continues to ramp its Gen-6 flexible plant in Chengdu, with new capacity phases expected to be added in the coming months. Its second Gen-6 OLED plant in Mianyang is reportedly on schedule to commence operations in the first half of next year. And BOE reaffirmed plans to build its third OLED fab in Chongqing, which is expected to come online in the second half of 2020.

Visionox announced last month a second phase to its Gen-6 OLED production fab. This $6.3 billion, 30,000 plates per month flexible OLED line is expected to begin mass production in late 2020, early 2021.

With respect to UDC's internal R&D activities, our focus remains on being at the forefront of leading-edge OLEDs technologies and phosphorescent materials. Our team of scientists and engineers are continuously inventing, developing and delivering next-generation emissive material systems and technologies, including new reds, greens and yellows and hosts to meet the ever-changing and ever-evolving customer specifications for an array of consumer applications.

With respect to blue, we continue to make excellent progress in our ongoing development work for a commercial phosphorescent blue emissive system. In addition to our phosphorescent core competencies, one of our major R&D initiatives is OVJP, organic vapor jet printing, for large area TVs.

In the third quarter, we installed the first chambers of our pilot prototype system. We're planning for additional chambers to be delivered by the end of the first quarter of 2019. We believe that this prototype system will enable us to scale our novel and proprietary maskless dry printing technology to Gen-8 and higher commercial platforms, paving an alternative path for high throughput, scalable and cost-effective manufacturing of RGB side-by-side OLED TVs.

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. Before I discuss our third quarter financial results, I want to remind you that revenues before 2018 are under the prior accounting standard, ASC 605. Beginning in January 2018, we adopted the new accounting standard ASC 606.

Revenues for the third quarter of 2018 were $77.6 million. Under ASC 605, our third quarter revenues would have been $91.6 million. This compares to Q2 2018 revenues of $56.1 million and Q3 2017's $61.7 million.

Our total material sales were $51.2 million in the third quarter compared to material sales of $36.8 million in the second quarter of 2018 and $47 million in the third quarter of 2017. Green emitter sales in the third quarter of 2018, which include our yellow-green emitters, were $35.9 million. This compares to $25.7 million in the second quarter of 2018 and $32.8 million in the third quarter of 2017.

Red emitter sales in the third quarter of 2018 were $14.6 million. This compares to $10.9 million in the second quarter of 2018 and $13.7 million in the third quarter of 2017. 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, 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 Q3 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 on a quarterly basis in proportion to corresponding OLED material shipments.

Third quarter 2018 royalty and license fees were $23.3 million. This compares to $15.5 million in the second quarter of 2018 and $12 million in the third quarter of 2017.

Cost of sales, which includes Adesis cost of sales for the third quarter 2018 were $16.1 million. This compares to $11.6 million in the second quarter of 2018 and $13.5 million in the third quarter of 2017.

Cost of material sales, which only relates to OLED materials and does not include Adesis cost of sales, were $13.8 million, translating into material gross margins of 73.1%. This compares to 74.8% in the second quarter of 2018 and a comparable year-over-year's quarter material gross margins of 75%.

Third quarter operating expense, excluding cost of sales, was $35.4 million, up from last quarter's $33.6 million and up year-over-year from the comparable quarter's $32.4 million.

Operating income was $26 million for the third quarter of 2018. Under ASC 605, Q3 operating income would have been $40.1 million. This compares to last quarter's $10.9 million and the year-over-year comparables quarter of $15.8 million.

Third quarter 2018 income tax expense was $5.3 million or a tax rate of approximately 19%. Net income for the third quarter of 2018 was $22.8 million or $0.48 per diluted share. Under ASC 605, our third quarter net income would have been $34.2 million or $0.72 per diluted share. This is sequentially up from last quarter's $10.8 million or $0.23 per diluted share and up from the comparable year-over-year's quarter of $13.5 million or $0.28 per diluted share.

For the 9 months of 2018, revenues were $177.3 million, operating income was $41.5 million and net income was $39.6 million or $0.83 per diluted share. Under ASC 605, our 9-month 2018 revenues would have been $233.4 million, operating income would have been $97.6 million and net income would have been $85.2 million or $1.80 per diluted share. This compares to 9 months of 2017 results of $219.8 million of revenues, $88.4 million in operating income and $71.1 million in net income or $1.49 per diluted share.

Now looking to 2018 based upon our current forecasts, we are revising our 2018 guidance. As Steve mentioned, we did see a pickup in the smartphone market, driven by a number of new OLED mobile launches, but the magnitude of the pickup to our material sales was not to the degree that we had earlier anticipated. As a result, we now expect 2018 revenues under ASC 606 to be approximately $240 million to $250 million. Under ASC 605, we expect 2018 revenues to be approximately $315 million to $325 million. This compares to 2017 revenues of $335.6 million.

We would note, as we have in the past, a shift in the industry's momentum in either direction can impact our financial results.

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 past 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 year-end 2019 installed base of OLED square meter capacity to increase by approximately 50% over year-end 2017, with the majority of the 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 cash dividend, which will be paid on December 28, 2018, to stockholders of record on December 14, 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.

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

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Thanks, Sid. Since Universal Display was founded, we have been steadfast in enabling the OLED industry's tremendous potential. And while that potential has been affirmed through these past 2-plus decades, commercial growth of the industry only began a few years ago. We are still very much in the early stages of the incredible long-term growth path of OLEDs in displays and lighting.

UDC is in a unique position as we continue to play a critical role in the OLED market's future. As a leading player in the ecosystem, we have the largest, deepest and strongest team in the world, focused on phosphorescent OLED emissive layer technology. We're expanding our team to fuel our long-term growth and increase our competitive edge. Building on the depth of our experience and know-how, we are continuously innovating and inventing the best OLED emissive layer materials, while also strengthening our global IP portfolio.

As we head into this next wave of high-volume capacity growth, we are well positioned to leverage the vast opportunities in this thriving market, drive profitable growth and deliver the most energy-efficient, high-performance and cost-effective emissive layer solutions to our customers and partners.

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 committing 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.

On that note, 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 Brian Lee from Goldman Sachs.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [2]

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I guess, just wanted to start off with the guidance, given a pretty unexpected shift here so late into the year. The $50 million cut to the 606 guidance and then the $12.5 million revenue cut to the 605 guidance, I guess I'm still trying to reconcile how this all works. So your expectation of material shipments over the course of the licensing contract dictates how you pro rata recognize licensing revenue. So how often are you, I guess, remarking the baseline of expected material shipments? And the reason I ask is, when do you kind of see the catch-up on some of these licensing revenues that are being received but not recognized? That'd be the first question.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [3]

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Thanks, Brian. One of the primary reasons for the wide range between ASC 606 and 605 is really the product mix. Under 606, we use an average selling price for all materials sold over the life of the contract. Under ASC 605, it's actual billings. And each material has its own pricing and therefore, depending on products mix, it will impact the revenue profile differently under 605 and 606. For this year, the lower material sales caused a larger discrepancy between 606 and 605. Under 606, the declining sales is magnified across the board. As ASC 606 revenue guidance is approximately $240 million to $250 million, under 605, we expect 2018 revenues to be approximately $315 million to $325 million, and this compares with 2017's revenues of $335 million.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [4]

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Okay. Yes, no, that's helpful. I understand and I appreciate you guys continuing to provide the delta and bridge between the 2 different accounting methodologies. But when I look at the material revenue for 3Q and then what you're inferring for 4Q, it actually looks like you're in line to maybe slightly up versus the second half of 2017 when we adjust out for the $15 million or $20 million of pre-buys you had. So if that's kind of the baseline, I guess I'm still trying to figure out how much higher does materials revenue have to be for some of these step downs in the ability to recognize royalty and licensing revenue to sort of flip back the other way.

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

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It's -- the higher the -- based upon 606 and the way that we have to interpret 606 is as we've gone through a number of times, as you estimate the number of ramps you saw over the life of the agreement. And when you are below the amount that you've estimated, it has an impact not only on our material sales but on our license fees also, since they're tied together, and it magnifies the problem. So when your material sales are lower than you anticipated, you end up with a much bigger decline than just on the material side.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [6]

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Okay, fair enough. I'll take the accounting question offline. Now just 2 more and I'll hop back in the queue. When I look at the customer split, it looks like LG revenues fell almost $10 million sequentially. Any color you can provide as to why that customer might have slowed to that degree? Just looking back at their second half revenues historically, they're stronger, not weaker, which would make sense given the seasonality of TVs, their main product.

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

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It's difficult for us. I mean, customer ordering patterns are really difficult for us to anticipate. Quarter-to-quarter forecasting is always an issue for us.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [8]

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Okay, last one. Steve, in your prepared remarks, you alluded to a few developments at Samsung, one specifically being the QD plus OLED approach to making TVs. I think they also mentioned that that process is in R&D stage on their third quarter call earlier this week. So there's also the expectation that as part of that material stack field, that component would be blue. Can you comment on your involvement there, if any, and then just maybe even at a high level, what the implications would be for your own blue development? Because what we hear from industry chatter is that the blue fluorescent that's in the white OLEDs might not be the best long-term solution given the lifetime and burning issues that we've been hearing about on that product set. So I would be curious to just kind of your guys' take since you brought it up.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [9]

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Sure, Brian. Well, we think it's a really good movement in OLEDs that Samsung is moving towards QD-OLEDs for TVs. We think it's an exciting development. As you know, we work with our customers on a number of different projects, but we don't talk about any of the specific projects. But I will say, our customers are obviously very interested in our progress in phosphorescent blue.

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Operator [10]

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Our next question comes from the line of C.J. Muse from Evercore ISI.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [11]

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I guess, first question, trying to isolate the material that you reported versus what we were modeling and to get your thoughts on it. So it looks to me like you're roughly $10 million to $15 million lower Korea, $8 million upside China. And so just curious, as we isolate kind of your material sales to the September quarter, how much of that -- and I presume Korea, how much of that was lower unit demand versus perhaps, better customer efficiencies that you didn't anticipate?

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

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Well, there's number of factors that impact our revenues, obviously, whether it is customer demand, inventory, efficiencies. So all of them really have an impact on our material sales. But I mean, to look at the quarter and look at what has occurred, I mean, we saw a pickup in the beginning of the second quarter and -- of material sales. And further, we saw an even bigger pick up during the summer, but orders then began to slow down in September and then continued through October. And as a result of that, our material, we believe that our expectations for material sales are going to be lower for the rest of the year. What compounds this reduction is ASC 606. The impact of 606 magnifies the effect of lower-than-anticipated material sales. However, as we head into 2019, with utilization rates increasing and new capacity ramps, we believe that 2019 will be a strong year of growth.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [13]

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Okay, that's helpful. And I guess, thinking about the prior question regarding $12 million shortfall on a non-ASC 606 translating to $50 million and I get the impact of royalties. Before, you had talked about roughly 2/3, 1/3 relationship between materials and royalties. Is that relationship changing? And/or has your refined guide on ASC 606 basis reflected perhaps a change in accounting that you've come to in terms of how you think best to adopt 606?

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

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No, we think that a ratio of 2:1 under 606 is still appropriate for our materials to royalties. But as we've said, because everything is tied to materials when your material sales are lower, your royalties and license fees are going to be lower because they literally are tied together now.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [15]

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But how does $12 million turn to $50 million, I guess, is the question that we're all trying to figure out?

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

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Well, it's product mix in that we -- our products that are sold to customers are priced differently, whereas under -- each material has its own pricing and then dependent on the mix, they're different. Under the -- under 606 versus 605, under 605, you use the actual price that you sell the materials. Under 606, it's an average price over the life of the agreement. So they can be different. And so when you do that, you do see a difference. And as I said, product mix really does make a big difference in this case.

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Operator [17]

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And the next question comes from the line of Jim Ricchiuti from Needham and Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [18]

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I'm just wondering, as you started seeing the orders slowing in September, October, can you help us understand which areas you started to see that? And was it -- did it seem to be coming more from smartphone applications or the larger area screens?

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

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Yes. Pretty much, we believe it's on the smartphone side. I mean, it's this -- even though our sales to customer A went up from Q2 to Q3 significantly over 100%, it was not at what we expected and that really would be the smartphone side.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [20]

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Okay. And Sid, as you saw that happening, did it -- did the slowing accelerate as you saw or is it -- has it stabilized? I'm trying to get a sense as to whether there's the potential that this is going to start to reverse in the next couple of months, and I'm wondering what's going to drive that.

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

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As a just in time supplier, provider of material, we have very short lead times. We do talk to our customers and based upon customer discussions that we've had recently, pretty much what we see over the next couple of months is what we've recorded. The range is not that large and obviously, there's always multiple variables that could impact ordering patterns from customers, which would include timing of introduction of new products and inventory levels. But pretty much when we saw this slowing down in September and October, we see that carrying through through November and December.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [22]

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And are there any contributing factors, either more broadly price breaks or volume price breaks or just in -- are you able to tell if -- the question's been asked, just increased efficiency of the materials?

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

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No. We don't have anything specific that we can point it to. It really is what our customers have said. It's not our customers have said that we need to do this or do that, it really is the customer, it's their demand side that's driving what they buy from us.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [24]

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Are you seeing the same thing in China? Or is it just because so many of those producers are at very early stages of ramping?

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

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China is really early and it is -- going forward, things should get easier to predict. But as you are aware, particularly, when guys are ramping up early, their volumes of -- volume of material that they buy is always very volatile. They start lines, they do some production testing and then they look at it and see what the results are. So once they get up to a consistent run-rate, it's a little bit easier.

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Operator [26]

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

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Sidney Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [27]

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I have a few. Just following on the Q4 guidance, are you expecting the decline quarter-over-quarter to come primarily from 1 large customer or is it more widespread? The reason I ask is it's kind of strange that the larger OEMs have -- the smartphone OEMs have 2 SKUs this year and the fact that you started seeing a slowdown so early after the launch, it seems like it should be -- I don't know if it's just 1 customer who's being the driver for Q4.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [28]

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Based upon our initial estimates, it's across the board, but we -- as we just said, it is smartphone related that seems to be the larger part because they have historically been our largest customer.

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Sidney Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [29]

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Okay. Maybe a follow-up to a question earlier on ASC -- well, I guess it's ASC 606. I understand that the lower expected unit shipment for Q4 is driving a change for the full year guidance, but are there any major changes in your ASC 606 assumptions whether it's unit ASP assumptions over the life of the contract as a result of what you've seen this quarter? Or do you assume the revenues are now being pushed out to future years?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [30]

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Pretty much that is correct. It's being pushed out to future years. We have not made any change in assumptions. I mean, after 3 quarters of ASC 606, we're refining things and getting better in terms of estimating what will occur, but there's been no significant changes in how we do this.

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Sidney Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [31]

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Okay. And my last question is on the customer C and customer D. For customer C specifically, a 10% customer this quarter, is that the same customer as last quarter's customer C? And if they are the same, I'm curious if this is volume starting to ramp, or is it just part of the seeding process that kind of started in Q2?

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

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Yes, it's customer C is the same as customer C in the last quarter, they did open a new line in the last quarter.

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Operator [33]

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Our next question comes from the line of Atif Malik from Citi.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [34]

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At the start of this year, you had a little bit of an inventory problem with your top customers. To your best understanding, do you think that inventory has been worked down with the utilization going up in Q3 or there's still some inventory there?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [35]

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It's our understanding that inventory levels for each specific material at our customers vary and it's depending upon changes in OEM customers' orders and corresponding impact to fab utilization rates. So there may be still some excess inventory in the channel.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [36]

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Got it. And then, Steve, in your prepared remarks, you talked about a bunch of drivers that are incremental to next year, foldable phones, QD-OLED at Samsung, the premiums of mobile OLED panels have come down versus rigid. So what does this all mean qualitatively in terms of the seasonality for first half next year?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [37]

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No, I'm not sure given our history, there's really less seasonality in the marketplace. It's really dependent a lot on the new fabs opening up, the increased utilization rates of our customers, which then either are driven by or can drive new product introductions. So it's really when the fabs are going to open and how they're able to increase the utilization with the product developments.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [38]

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Okay, and one last one for Sid. Did you see an impact from China tariffs to your supply chain or did you hear it from your customers in terms of impacting their end demand?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [39]

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Well, we work really closely with our customers in China on a wide variety of opportunities and continuing to grow our partnership with them. This includes discussions on how current trade issues may apply to our materials. We have not seen some pre-tariff purchases during the quarter, but -- I'm sorry, we may -- I'm sorry, I didn't -- I mean, I said we may have seen some not we may not have. But we have not seen any indication that in the current trade situation, that it will impact our business long term.

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Operator [40]

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

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Hendi Susanto, G. Research, LLC - Research Analyst [41]

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I would like to understand more about ASC 606, Sid. So how does higher or lower material sales affect your gross margin?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [42]

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On our gross margin, because of ASC 606, you use an average selling price, so it would not affect our gross margins very much. It's always product mix that affects our gross margins, but it is not 606 that's going to specifically impact our gross margins.

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Hendi Susanto, G. Research, LLC - Research Analyst [43]

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Okay, got it. And then secondly, under ASC 606, how about if you change your assumption on how much material yourself is across multiyear contracts? Like if you make adjustments whether your sales of material is higher or lower during the said multiyear period?

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

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We do change our assumptions over the life of the pot but we haven't -- we have not seen a significant change in or what we believe our business will be over the foreseeable future and over the life of all of these long-term agreements. Quarter-to-quarter, things change but overall, we don't see any real difference today that we did 2 months ago or 6 months ago.

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Hendi Susanto, G. Research, LLC - Research Analyst [45]

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And let's say if hypothetically, you change your assumption on the amount of materials and then it's lower, will it drive like, a higher license revenue because the license revenue will be spread across like, a smaller volume?

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

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That is correct. If you sell less material than you estimated then because it is a direct correspondent, if you sell less and you have -- you know what your license fee is, then you will have an increase in the license fee per gram or per kilogram that you sell. That is correct.

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Hendi Susanto, G. Research, LLC - Research Analyst [47]

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That's helpful. And then, Steve, is there a way to tell how different materials for QD-OLED versus current OLED display materials?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [48]

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Sorry, could you repeat that question again?

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Hendi Susanto, G. Research, LLC - Research Analyst [49]

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The material for QD-OLED that Samsung mentioned in the call, like how different the emitter materials will be in QD-OLED versus current materials in regular OLED.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [50]

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Well, the way that QD-OLED works, as I understand it, is you have a blue emitter and then -- or a set of blue emitters and then you use the quantum dots to convert them into red and green as well. So Samsung would be designating the specific types of materials that they would be looking for, for both the OLED portion and the quantum dot portion.

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Hendi Susanto, G. Research, LLC - Research Analyst [51]

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So like, they need the blue emitter materials but they don't need the red OLED and green?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [52]

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That is correct. The way it's currently configured, that is correct.

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Hendi Susanto, G. Research, LLC - Research Analyst [53]

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I see, yes. And then 1 last question. Is there a way to tell whether the shortage in sales and sales projection is due to, let's say, like lower display unit production or whether customers may experience higher manufacturing efficiencies?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [54]

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As we stated earlier, we do think that obviously, the smartphone market has been much softer than we anticipated. There is always a number of variables that impact our material sales, whether it's utilization rates, whether it's inventory. So there is always a number of things. It is difficult for us to predict or to -- which one of those are the reasons that material sales are down.

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Operator [55]

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

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Andrew Abrams, [56]

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Just 1 quick question. Do you have any backplane changes or had you had any backplane changes in your assumptions for 2018? And do you see that in 2019 as you start to look forward?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [57]

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And your question is whether there is new materials that are going to be adopted or whether the same materials are being adopted. And we're constantly giving our customers new materials to evaluate and they're constantly asking us for materials that have different performance characteristics. But we really don't talk about which customers buy which materials.

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Andrew Abrams, [58]

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Just to clarify is -- would you expect any major change in a backplane? I know there was a point, I think it was last year, where one of those backplane changes got delayed. Is it the same kind of process going forward or are these more incremental changes that are made in terms of materials?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [59]

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I'm not trying to avoid your question. We can't really speak for our customers. And when they adopt new materials, as you're aware, it does have some impact on pricing. But under ASC 606, there really is not because when you build your long-term model with your customer, you actually have to build in when you think or when or will they adopt new materials because that affects your average price. So even if they adopted new materials, under ASC 606, you would not see a spike in price of the materials because it is an average.

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Operator [60]

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

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [61]

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Just 1 quick follow-up. I don't know if you called it out, but the $1 million inventory write-down, I think it was materials-related. Can you speak to what material type that was related to and just maybe provide any color there?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [62]

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Sure. As you're aware, you -- from an accounting standpoint, you look at your materials and you do estimates of your material utilization over a 12-month period. And so we do do that and our materials actually have a very long shelf life. So we did reserve about $885,000 this quarter. We review our inventory on a quarterly basis and estimate what is going to sell. And depending on the materials, sometimes we'll adjust our reserve levels as we move forward. But these materials have a long shelf life and then based upon forecast, things change and we may end up selling these materials. So we're always looking at that. We have a lot of new -- we have a lot of materials, we have new customers, so there are materials that we will have to continue to keep an eye on.

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Operator [63]

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Thank you. This concludes the question-and-answer session. I would like to turn the program back to Sid Rosenblatt for any additional or closing remarks.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [64]

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

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

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Thank you.

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Operator [66]

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