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Edited Transcript of OLED earnings conference call or presentation 2-May-19 9:00pm GMT

Q1 2019 Universal Display Corp Earnings Call

Ewing May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Universal Display Corp earnings conference call or presentation Thursday, May 2, 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

* 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

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Michael Joseph Cikos

Needham & Company, LLC, Research Division - Associate

* Nam Hyung Kim

Arete Research Services LLP - 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 the Universal Display's First Quarter 2019 Earnings Conference Call. My name is Homer, 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. Good afternoon, everyone. Welcome to Universal Display's first quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer.

Before Steve begins, let me remind you, today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the express written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, May 2, 2019.

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. We are pleased to report first quarter 2019 revenues under ASC 606 of $87.8 million, operating profit of $34.4 million and net income of $31.5 million or $0.66 per share. Under ASC 605, the prior accounting standard, our first quarter 2019 revenues would have been $101.6 million, operating income of $48.2 million and net income of $42.5 million or $0.90 per diluted share.

As we look to the year, we continue to see solid momentum in the OLED industry and, combined with better than anticipated first quarter results, we are now raising our 2019 revenue guidance. Our new 2019 revenue forecast under ASC 606 is in the range of $345 million to $365 million. Under ASC 605, 2019 revenues are expected to be in the range of $405 million to $425 million. Sid will provide further details shortly.

Since our last earnings call, OLED activity continues to broaden in this multiyear CapEx growth cycle. At Mobile World Congress, form factor was a hot topic of discussion with foldables being the major theme. Samsung kicked things off just before Mobile World Congress with the unveiling of the Galaxy Fold. Less than a week later at the Barcelona show, Huawei showcased their foldable Mate X, which is expected to launch in June. TCL unveiled a new foldable OLED phone prototype using a 7.2-inch AMOLED display that folds inwardly. And Nubia demonstrated its Alpha foldable device that turns a smart band into a smartphone, which begins shipping this week. Driven by a robust pipeline of activity from both panel makers and OEMs, we believe that the flexible, foldable consumer electronic path is expected to lead to a myriad of new products, designs and applications.

Earlier this week, Samsung announced strong Galaxy S10 sell-through in the first quarter and highlighted that OLEDs make up approximately 75% of its display revenue mix. Looking forward, Samsung forecast flexible OLED panel demand to rebound in the second half of the year as multiple companies are designing plastic-based OLED displays into their smartphone portfolios, including key flagship products by major customers. Additionally, the company expects to see increased demand for its rigid OLED panels as it leverages its fingerprint on display and Infinity Display technologies. Samsung is also launching OLED display products for new applications such as notebooks and foldable displays. And last week, Samsung began shipment of its new S5e OLED tablet. It is Samsung's latest and thinnest 10.5-inch tablet ever and its $399 price tag enters it into the midrange IT segment.

During its recent earnings call, LG Display reiterated its commitment to OLEDs as the company continues its shift towards a more OLED-focused business structure. During its earnings call, the company reported that OLEDs will account for over 30% of its total TV panel revenues this year, up from 20% in 2018. Its new OLED TV fab in Guangzhou, China is on track for operations this year, which will help LG meet its 3.8 million to 4 million TV shipment target. Additionally, LG Display is expanding into new application opportunities such as wallpaper TV, rollable TV, sound display integration of Crystal Sound OLED and transparent OLED. And with customer orders already on hand, LG expects to begin volume plastic OLED production for automotive applications in the second half of this year.

According to reports, BOE is planning to start construction of its fourth Gen 6 flexible OLED fab, B15, soon. With an investment close to $7 billion, this fab, located in Fuzhou, is expected to have 48,000 plates per month of install capacity when completed. As you may recall, only 5 months ago, BOE held a groundbreaking ceremony for its third flexible OLED plant, B12, in Chongqing. If you add up all 4 OLED fabs, Chengdu, Mianyang, Chongqing and Fuzhou, BOE is expected to have monthly production capacity of 192,000 Gen 6 sheets by 2023.

In addition, it has been reported that Tianma, Visionox and China Star are also making progress in terms of technology and capacity to support China's goal of being an OLED leader.

Tianma is currently ramping production of its first phase at its Gen 6 flexible fab in Wuhan. The company is also building its second phase and when completed, Tianma is expected to have a combined capacity of 37,500 sheets per month by the end of 2020.

Visionox is also ramping production at its first Gen 6 flexible OLED plant, which has an install capacity of 30,000 plates per month in Hebei. A second line in Hefei, with an additional 30,000 sheets per month, is expected to begin production late 2020, early 2021.

China Star, with whom we announced an evaluation agreement in March, is reportedly scheduled to start production of its first Gen 6 flexible OLED plant in Wuhan this quarter. The initial production line is set for 50,000 panels per month with a second line slated to start operations early next year.

At the recent China Information Technology Expo, TCL's Chairman and CEO noted in his keynote speech that, "Flexible OLED will become the mainstream display technology" and that "China will accelerate technology development to be the world-class leader in the next few years." TCL is a majority shareholder of China Star.

Japan Display will reportedly begin supplying OLED panels for a leading consumer electronic company's wearable series later this year.

And last month, Sharp held a media event in Tokyo and unveiled a 6.18-inch foldable OLED smartphone prototype. According to the company, this screen can be folded 300,000 times without sustaining damage. Sharp also previewed a 12.3-inch OLED panel for automotive dashboards. The company is expected to begin supplying these panels as soon as fiscal 2021.

With respect to OLED solid-state lighting, we continue to believe that its benefits, including energy efficiency, novel and innovative form factors, beautiful natural light that best replicates sunlight, no glare and cool operating temperatures, are all quite compelling for the commercial, residential and niche markets, including automotive.

We believe that we are in a multiyear OLED CapEx growth cycle. We continue to expect year-end 2019 installed base of OLED square meter capacity to increase by approximately 50% over year-end 2017. This growth cycle is fueled by the proliferation of OLEDs across the consumer electronics landscape, including AR/VR, smart watches, smartphones, tablets, laptops, automotive and TVs.

As OLED activity continues to grow, we are working diligently to broaden our core competencies to further expand our market opportunities. Our brilliant teams of scientists, engineers and technicians are continually discovering and developing new emissive materials and technologies, including new reds, greens, yellows and hosts to meet new customer, new application and new product road map needs. On the blue front, we continue to make excellent progress in our ongoing development work for our commercial phosphorescent blue emissive system.

We also continue to advance our work in Organic Vapor Jet Printing, our novel manufacturing process for mask-less, solvent-less, dry-direct printing of large-area OLED panels. We are making progress towards our next technological milestones on our path to commercialization. We believe that OVJP can revolutionize the manufacturing of large area RGB side-by-side OLED TV panels.

The future of OLEDs is bright. With product and investment momentum growing, OEM activity expanding and consumer adoption broadening, we are excited about the growth path ahead for the OLED industry and for us.

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 first quarter of 2019 under ASC 606 were $87.8 million, sequentially up from fourth quarter 2018's $70.1 million and Q1 2018's $43.6 million. Under ASC 605, our first quarter revenues would have been $101.6 million. This compares to fourth quarter 2018 revenues of $92.9 million and Q1 2018's $68.2 million.

Our total material sales were $54.5 million in the first quarter compared to material sales of $39.9 million in the fourth quarter of 2018 and $25.3 million in the first quarter of 2018. Green emitter sales in the first quarter of 2019, which include our yellow-green emitters, were $41.6 million. This compares to $27.9 million in the fourth quarter of 2018 and $17.1 million in the first quarter of 2018. Red emitter sales in the first quarter of 2019 were $12.8 million. This compares to $11.8 million in the fourth quarter of 2018 and $8 million in the first 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 Q1 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.

First quarter 2019 royalty and license fees were $30.3 million. This compares to $25.9 million in the fourth quarter of 2018 and $15.9 million in the first quarter of 2018.

First quarter 2019 Adesis revenues were $3 million. This compares to $4.4 million in the fourth quarter of 2018 and $2.4 million in the first quarter of 2018.

Cost of sales, which include Adesis cost of sales, for the first quarter of 2019 were $15.8 million. This compares to $18.3 million in the fourth quarter of 2018 and $7.5 million in the first quarter of 2018.

Cost of material sales, which only relate to OLED materials and does not include Adesis cost of sales, were $13 million, translating into material gross margins of 76.2%. This compares to 63% for the fourth quarter of 2018 and the comparable year-over-year's quarter's material gross margins of 77.5%.

For the year, we continue to expect our 2019 material gross margin to average approximately 70%. As we have noted in the past, material gross margins can vary quarter-to-quarter.

First quarter 2019 operating expense, excluding cost of sales, was $37.6 million, up from last quarter's $36.5 million and up year-over-year from the comparable year's quarter $31.6 million.

Operating income under ASC 606 was $34.4 million for the first quarter of 2019 compared to last quarter's $15.3 million and the year-over-year comparable's quarter of $4.5 million. Under ASC 605, first quarter operating income would have been $48.2 million. This compares to last quarter's $38 million and the year-over-year comparable's quarter of $29.2 million.

First quarter 2019 income tax rate was 16%. Without ASU 2016-09, our first quarter 2019 tax rate would have been approximately 20%. For the year, absent the effect of ASU 2016-09, we expect our tax rate to be approximately 18%, plus or minus a few percentage points.

Under ASC 606, net income for the first quarter of 2019 was $31.5 million or $0.66 per diluted share. This compares to last quarter's $19.2 million or $0.40 per diluted share and the comparable year-over-year's quarter of $6 million or $0.13 per diluted share. Under ASC 605, our first quarter net income would have been $42.5 million or $0.90 per diluted share. This compares to last quarter's $45.2 million or $0.95 per diluted share and the comparable year-over-year's quarter of $25.9 million or $0.55 per diluted share.

We ended the quarter with $527 million in cash and equivalents or over $11 of cash per diluted share.

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 revenues under ASC 606 to be in the range of $345 million to $365 million. Under ASC 605, 2019 revenues are expected to be in the range of $405 million to $425 million.

And lastly, the Board of Directors approved a $0.10 quarterly dividend which was to be paid on -- at the close of business on June 14, 2019. 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. As we approach the 25th anniversary of the company's founding, I would like to take a moment to reflect on the past 2.5 decades. We were founded in June 1994 with a vision of creating the next generation of energy-efficient displays back when TVs were still CRTs. That pioneering technology was energy-efficient phosphorescent OLEDs.

For most of our history, we were an R&D start-up, investing significant resources to discover, develop and deliver innovative solutions to enable our customers and the OLED market. Today, our proprietary technologies and materials can be found in virtually every consumer OLED product around the world, which is forecasted to be approximately a $28 billion market this year.

The proliferation of OLEDs continues in the marketplace. OLEDs are the display of choice for premium smartphones and TVs and the only display technology that is substrate-enabling and inherently conformable, bendable and rollable. Additionally, broadening market penetration into the midrange smartphone segment and with new OLED tablets, laptops and automotive applications emerging, we believe that the OLED industry has tremendous momentum.

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 C.J. Muse, Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [2]

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I guess first question, as you think about the upside in Q1, it looks like it's primarily Korea and materials. And so curious if you could provide some more details on the drivers there, in particular around how you're seeing inventory levels at those 2 key customers?

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

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That's a great question, C.J. So we -- with our customers' inventory levels, we don't see a lot -- we don't get a lot of visibility regarding that, but we are a just-in-time supplier so as we get orders, we ship the same day or within 24 hours. So there's not a lot of -- our customers don't give us a lot of visibility into their inventory. Clearly, we had more material sales because material sales drive our revenue under 606 today as opposed to in the past, under 605, it was not. It was driven by when you got the cash. So it is a little different today the way that the accounting works. And we believe we are still in the middle of a multiyear OLED CapEx cycle. And how each quarter plays out, it's not always predictable.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [4]

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Got you. All right. And I guess as my follow-up, how should we think about linearity of revenues as we proceed through the year, particularly as you think about some of the, I guess, non-Korean customers as they ramp into the second half of 2019?

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

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Again, quarter-to-quarter are difficult to predict, but Q2 is tracking in line with our guidance. With our short lead times, we expect to see -- we still expect to see significant growth, which is why we raised our guidance, but quarter-to-quarter, it's still really difficult for us.

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Operator [6]

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Our next question comes from Brian Lee, Goldman Sachs.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [7]

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I just had two, maybe as a little bit of a follow-up to the prior question. In general, I think most people appreciate that smartphone demand and utilization rates across the industry have been kind of weak to start the year. So maybe just a point-blank question on do you think you're over-shipping actual demand right now? And if that's the case, just given the short lead time, it doesn't feel like customers necessarily need to build inventory for materials. So is there any recipe or something else that we might be missing as to why your specific growth seems to be much better than the trends some of your customers are generally seeing? Any thoughts there would be appreciated.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [8]

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Well, as you said, sometimes production and sell-through by customer doesn't really relate directly to our revenues, but it's been -- it's up across the board, so all of our customers are up. So production and sell-through are really different and they're not always linear. And so if you look historically back in Q3 of last year, our top customer had a strong quarter and then a few days afterwards, we had to report lower guidance. So it's difficult to put those 2 together because there's inventory bills, there's lots of things that impact revenue by our customers as opposed to demand for our materials.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [9]

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Okay. No, that's fair enough. I appreciate that. It's not been historically correlated as tightly as we would all like. And second question, then I'll pass it on. The ratio of green materials to red materials revenue spikes this quarter quite a bit. And just looking back at the model, it's never been this skewed toward green relative to red. Just wondering, is there anything to read into this? Has there been newer recipes or maybe some new adoption of green amongst any of your customers that maybe hadn't been using it before, historically were just red-only customers?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [10]

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It's not really that. I mean you can see customer B was up quarter-over-quarter and customer A, I mean, was -- we don't really disclose it, but you can figure it out. But it's our yellow-green materials that really increased that number in the quarter, and that's customer B.

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Operator [11]

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Our next question comes from Mehdi Hosseini, SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [12]

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It's actually Mehdi Hosseini from SIG. Congrats on a great quarter. Last quarter, you had constructive commentary on the blue material. This time I didn't really hear much, and I don't want to make a big deal. Perhaps if you could put things in perspective and give us how we should be thinking about the progress in commercialization of the blue emitter, and I have a follow-up.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [13]

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Okay. Fair enough, Mehdi. We continue to make excellent progress in our commercialization of the blue emitter or blue emissive system. As you know, we're focusing on color point, efficiency and lifetime. And the progress, sometimes there's more progress on one of those 3 elements. The object is to get all of those 3 elements into a commercial product and that is what we're focusing on. Sometimes we continue to make strong incremental progress, sometimes we'll have a significantly leap up in progress, but the progress is continuing to be there. We still cannot predict when it will be commercially available.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [14]

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Fair enough. And for the purpose of modeling, how should we think about the ratio between material and licensing royalty under ASC 606? I think last quarter you talked about a ratio closer to 1.5 if I'm not mistaken. If you just could give us an update, it would be great.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [15]

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Yes. Each customer's ratio is a little different. We believe the average is between 1.5:1 and 2:1 for this year, and that's where it is. And I think this quarter, it came in the middle.

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Operator [16]

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Our next question comes from Atif Malik with Citi.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [17]

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Good job on the quarter. Your sales at the Chinese panel maker increased quite nicely in the March quarter by, I think, about $10 million or so. There have been news that the yields are progressing better with some of these Chinese projects. Can you just provide us a sense on where you think the yields are with these Chinese panel makers? And how should we expect the trajectory of the growth in -- with the Chinese panel makers?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [18]

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Yes. We're very happy with the progress that's being made by Chinese manufacturers. And we've got a number of customers in China, which includes BOE, Tianma, Visionox, China Star, all investing in OLED capacity. So we're very happy. I mean we think that, as Steve said, when you look at BOE's [dart's end] capacity, they are going to have a significant amount of capacity in 2021 to 2022. So we're very pleased with what they're doing and we're working closely with them.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [19]

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Great. And then on foldable phones, there have been delays in some of the phone launches because of the panel bending and the what not. Is it fair to assume that the impact from the foldable phones in terms of units is very small to your full year outlook?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [20]

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Yes. It has a small output -- impact, but we are very excited about the future of foldable phones and the whole foldable market. And as you heard, Samsung talked about this and they delayed the launch, but we really expect this product to be a game-changer as we move forward.

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Operator [21]

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(Operator Instructions) Our next question comes from Shannon Cross, Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [22]

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I'm curious given the strength in material sales and something we saw, I think, from Samsung a year or 2 ago, any break points in terms of the contracts from a volume standpoint that we should be aware of as some of your customers really start to ramp their volumes?

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

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We -- as we've said, all of our contracts have cumulative volume discounts. When you reach a terminal value, it is there. So it isn't -- it's -- we've just had a strong quarter from them when you compare it to last year when Samsung purchases were very low. And obviously, the difference between 605 and 606, under 606, it's the average selling price over the life of the contract versus 605, the actual price.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [24]

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Okay. And then I guess when you think about the guidance that you gave for the -- back in January or early February, what's really changed? I mean it's -- I guess what I'm trying to figure out is I know you sold more, which makes sense, but you didn't take up numbers dramatically beyond the upside that we saw in the quarter this time. So I'm -- you're typically pretty conservative, but I'm just trying to understand sort of what behavior you saw specifically with your customers that led you to raise your numbers and maybe led you not to raise them as much as one might have thought given the upside?

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

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Sure. If you're asking if, as you said, if we're being a bit cautious, then the answer is yes. Given our forecast history, where we are in the year, which is early, and the dynamic nature of the consumer electronics industry and the impact that has on OLED panel makers, we believe that the new range is a prudent forecast.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [26]

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Okay. The last question I have though is on incremental manufacturing capacity. I realize you haven't raised it that much, but just to make sure. I'm sure PPG has plenty of space given the investment you made last year, but is that correct? And at what point do you think you need to add more?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [27]

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That is correct. And as I think we may have discussed, as soon as we finish one project of added capacity, we are looking at when we need to add the next one. But we believe where we are today is we are in great shape for 2019 through 2020.

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Operator [28]

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Our next question comes from Jim Ricchiuti, Needham & Company.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [29]

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This is Mike Cikos on for Jim Ricchiuti. Just wanted to get a better understanding of the R&D dynamic that you guys have going on. Is there anything we should be mindful of as we're looking out across the rest of the year, especially as you guys are investing in blue?

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

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We've talked about R&D and our R&D growing year-over-year. I mean blue is clearly one of the areas that we're focusing on. In addition to that, it's OVJP, which is another one of our major R&D products that's going forward. In addition to our ongoing R&D, in terms of our business with red emitters, green emitters, yellow emitters, so that's really what we do and we focus on what we think is necessary over the next 12 to 24 months. So we do expect it to go up about 10% to 15%.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [31]

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And then you may have gone through this earlier, I might have missed it, but can you help me understand the year-on-year decline that we're seeing in the materials gross margin?

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

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Let me just -- historically, our R&D has gone up about 10% to 15%. This year, we actually expect it to go up by a much more significant amount because of the effort that we're putting into blue and into OVJP. So it's more like 20% to 25% for this year over last year.

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Michael Joseph Cikos, Needham & Company, LLC, Research Division - Associate [33]

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20% to 25%. Okay.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [34]

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And our gross margins change quarter-to-quarter. There's lots of things that impact our gross margins, whether it's new materials or some materials have higher costs. And we expect it to be around 70% for the year, but historically, you've seen it go up and down quarter-over-quarter depending on products mix.

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Operator [35]

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

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Hendi Susanto, G. Research, LLC - Research Analyst [36]

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If I may ask two questions. First, with regard to foldable phones, how similar are the materials and how transferable existing high manufacturing yield can be transferred and implemented for foldable displays?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [37]

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Foldable phones for us, there is no difference between glass and plastic. I mean, we've been making -- Samsung has been making plastic substrates in A3 for a number of years, and it's a plastic substrate. So from a substrate standpoint, there's not very much different. So for us, it's pretty much the same, whether it's glass or plastic.

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Hendi Susanto, G. Research, LLC - Research Analyst [38]

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Got it. And then, Steve or Sid, can you share more info about UDC's ventures? I've read that it will fund products and technologies that may be synergistic to your company. First, I would think that synergistic area to OLED display are somewhat limited by nature. Can you define what areas that are synergistic and of your interest in investing? And second, may I inquire how much capital it has to invest?

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

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I'm sorry. Can you repeat what you said in the first part?

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Hendi Susanto, G. Research, LLC - Research Analyst [40]

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About the synergistic areas that will be of interest for UDC's ventures?

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

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Well, we've always looked at different opportunities, and we've said that when we purchased Adesis. And we are always out looking for opportunities that either enhance or are in areas that surround our OLED development. So we were always -- as we've said, we keep a lot of cash on hand, one that, as a licensing company, you need to have it; and two, if there are opportunities that we think are synergistic to what we do, then we will look at making an investment.

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Hendi Susanto, G. Research, LLC - Research Analyst [42]

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So is it by nature? Is it more on the materials side?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [43]

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We've always been looking at a wide variety of opportunities and we're looking at things opportunistically.

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Hendi Susanto, G. Research, LLC - Research Analyst [44]

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And then my second question was that -- whether you can share like how much capital it has to invest?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [45]

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We don't talk about how much we have available to invest in different opportunities at this time.

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Operator [46]

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Our next question comes from Andrew Abrams, SCMR.

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Andrew Abrams, [47]

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Congratulations on the quarter, a lot better than the last quarter. And I was just wondering if you could give us a little bit of information on your soluble material research and any of those type of materials that you might be sampling to or providing to some of the other panel producers?

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

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We've talked about p-squared OLEDs for a number of years, which would relate to printing technology. We had a relationship a number of years ago with Epson Corporation on printing. We are focusing our efforts today on OVJP because we believe that a dry printing process is one that you're essentially are using proven technology, which is vacuum deposition and being able to print the materials. If folks need printable materials, p-squared OLEDs, we have them. That is not a focus on us because we spent a lot of time and we really believe that the answer for printed OLED large area displays is OVJP.

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Andrew Abrams, [49]

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And in that regard with OVJP, have you guys gotten to the point where you are selecting a manufacturer for the device or at least an R&D type of device?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [50]

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We expect a third chamber of our tool so -- in the next couple of months. We are doing a lot of basic science to make sure that the design is what we think it is, and we are not at a point where we're going to start looking at a manufacturer today. We have a lot of work that we still need to do internally.

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Operator [51]

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Our next question comes from Nam Kim, Arete Research.

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Nam Hyung Kim, Arete Research Services LLP - Senior Analyst [52]

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Congratulations, great quarter. You said your customers that do a number don't correlate with your business, but in terms of their OLED production, they stated about low utilization in Q1 during earning call, and in Samsung's case, they guided another tough quarter in terms of utilization this quarter before picking up in second half, and LG Display doesn't seem to ramp E6 line anytime soon. There's not much difference in TV panel production sequentially last quarter. So your material sales increased a lot. So aren't you worried about some inventory situation next quarter? I mean, yes -- I mean not necessarily inventory, maybe revenue growth next quarter given this cautious guidance with your customer. I just try to reconcile this connection between your customers' utilization and your material revenue growth.

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [53]

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I mean production and sell-through are different, obviously, and revenues aren't always linear, but we ship based upon what our customers need. And they obviously had a strong quarter across the board and we don't believe that there is any inventory build -- significant inventory build, but there could be some and that's one of the reasons why our guidance is where it is. We are still cautious because it is still very early in the year.

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Operator [54]

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Our next question comes from Sidney Ho, Deutsche Bank.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [55]

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I have a few. The first one is like looking at the full year outlook, you raised the ASC 606 revenue by $15 million to $20 million, but your ASC 605 is only up -- I think it's less than that. Is that because the upside is primarily from your largest customer? Or is there other factors that we should think about?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [56]

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Well, it's really due to customer and product mix.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [57]

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Okay. Staying on with the guidance, I appreciate your answer to an earlier question that you may be a little bit more cautious in the past. But from a high level, how much of that upside comes from higher smartphone versus TVs or maybe preproduction sales? And have you changed your forecast for foldable phones based on what we've seen today? And maybe on the TV side, are you expecting any meaningful revenue outside of your largest customer today?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [58]

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I -- from -- to answer your question backwards, LG is the largest supplier of TVs. So they are the only one that makes OLED TVs today. So I don't see anybody coming into the market this year making OLED TVs. There is new capacity that's coming on for LG in the second half of this year. So in terms of TVs, that's where we'd be. We also have new capacity coming on for mobile devices from BOE and LG. So we see increases across the board.

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Shek Ming Ho, Deutsche Bank AG, Research Division - Director & Senior Analyst [59]

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Okay. Last question for me. If I look at your revenue in China outside of customer C, which I believe is BOE, it's been relatively stable in the past 3 quarters. And I understand there are a lot of new capacity being built and tested that Steve alluded to, maybe not in full production yet, but when do you expect that part of the business outside of BOE to grow more meaningfully?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [60]

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The ones that Steve specifically talked about in his remarks are still small capacity facilities. I think it's -- they're really early in the ramp. And they talk about production in 2020, 2021, and I think they reach like 15,000 substrate starts.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [61]

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Yes.

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

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But -- so I don't see a big ramp outside of BOE for the -- for this year.

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Operator [63]

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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 have a good night. Thank you.

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Operator [65]

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