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

Q2 2018 Universal Display Corp Earnings Call

Ewing Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Universal Display Corp earnings conference call or presentation Thursday, August 9, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darice Liu

* 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

* 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

* Henry Constantine Elder

Goldman Sachs Group Inc., Research Division - Associate

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* James David Medvedeff

Cowen and Company, LLC, Research Division - Associate

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Shannon Siemsen Cross

Cross Research LLC - Co-Founder, Principal & Analyst

* Shek Ming Ho

Deutsche Bank AG, Research Division - VP

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Presentation

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Operator [1]

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

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

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

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Darice Liu, [2]

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Thank you, and good afternoon, everyone. Welcome to Universal Display's Second 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, August 9, 2018.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as those relating to Universal Display Corporation's technologies and potential applications of those technologies, the company's expected results as well as the growth of the OLED market and the company's opportunities in that market. These include, but are not limited to, statements regarding Universal Display's beliefs, expectations, hopes or intentions regarding the future.

It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities.

Universal Display disclaims any obligation to update any of these statements.

Now I'd like to turn the call over to Steve Abramson.

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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 second quarter 2018 revenues were $56.1 million, operating profit was $10.9 million and net income was $10.8 million or $0.23 per diluted share. Without the impact of ASC 606, our second quarter results would have been $73.6 million in revenues, $28.4 million of operating profit and $25.1 million in net income or $0.54 per diluted share. As we outlined in May, the first quarter was the bottom for material shipments for the year. In the second quarter, materials sales began to improve as expected. With anticipated new OLED product launches from leading OEMs around the world, including Apple, Google, Huawei, Oppo, Samsung and Vivo, we continue to believe that we will see an additional pickup in orders and revenues in the second half of the year. And in 2019, we continue to anticipate it to be a meaningful year of growth. 2019 is poised to be a pivotal year for the OLED industry. As Samsung continues to lead the OLED mobile market, a number of other panel makers, including LG Display, BOE, Tianma, Visionox and EDO are slated to commence production in their new OLED lines. As a result, the landscape of capacity will significantly widen, fueling broader adoption of OLEDs across the consumer electronics market. This new wave of capacity build is expected to drive significant growth in the OLED industry. Additionally, the long-awaited introduction of the world's first foldable OLED products next year will pave the cutting-edge and innovative form factor path from conformable to foldable, to rollable. Exciting and enlarging the consumer electronics industry with new applications and new markets, the imagination has yet to devise.

One of the key players leading the path to foldable is Samsung. Samsung recently announced that its unbreakable smartphone panel had been verified by Underwriters Laboratories, an official testing company for OSHA. Samsung noted that its "fortified plastic window is especially suitable for portable electronic devices, not only because of its unbreakable characteristics, but also because of its lightweight, transmissivity and hardness, all of which are very similar to glass."

Foldables were also a topic during Samsung's earning call last week. The company highlighted that it believes the introduction of the foldable form factor will bring new energy to the mobile market. Also discussed on its conference call were fab loading rates. Samsung's rigid OLED utilization rates increased in the June quarter. And in the second half of the year, the company expects its flexible OLED panel shipments to rebound. And to top it all off, Samsung unpacked the beautiful Note 9 earlier today. And lastly, the company unveiled its 2018 flagship tablet, The Galaxy Tab S4, with a stunning 10.5-inch super AMOLED display.

During LG Display's earnings conference call, the company reaffirmed its commitment to OLEDs, reiterating its OLED TV and mobile capacity plans, including its Gen-8.5 OLED TV plant in Guangzhou, China, its Gen-6 mobile OLED lines and Gen-10.5 OLED TV facility in Paju, Korea. And the company shared that it's reviewing additional OLED TV capacity plans, including the option of converting some LCD TV capacity to OLEDs, driving these additional OLED TV plans is demand. LG Display is targeting approximately 2.8 million OLED TV shipments this year, 4 million units in 2019, 7 million in 2020 and 10 million in 2021.

An interesting side fact, while 10 million units is less than 5% of the total TV market of approximately 250 million units, those 10 million OLED TVs in square meters is equivalent to over 60% of the total smartphone market of approximately 1.6 billion units. That is a lot of glass to coat with our materials.

In Japan, Sharp started pilot OLED production in June and plans to launch a company-branded OLED smartphone in the fourth quarter of this year. And in China, OLED activity continues to grow. BOE Technology's Gen-6 flexible OLED plant in Chengdu, which opened last year, is ramping production and its efforts are paying off. It has been reported that BOE has successfully secured its first large OLED design win with Huawei's flagship smartphone the Mate 20 Pro, which will be launched later this year. Construction of BOE's second Gen-6 OLED plant in Mianyang is reportedly progressing ahead of schedule for production next year, and BOE's third OLED fab in Chongqing is expected in the second half of 2020.

Tianma held an opening ceremony for the first phase of its Gen-6 OLED line in June. And just the other week, the company approved the construction on the second phase, which is scheduled to commence production in the second half of 2020. The combined capacity of these 2 lines will total 37,500 plates per month.

Visionox with whom we signed long-term license and material agreements in the quarter, recently opened its Gen-6 flexible OLED plant. With an investment of approximately $4 billion, mass production of its 30,000 plates per month line is expected to commence by the end of next year.

Last month, EDO announced that it completed the construction of its Gen-6 flexible OLED fab in Shanghai. And it's targeting trial production in 2019, and mass production in 2021.

Royole made quite the splash when the company unveiled its flexible OLED shirt and flexible OLED top hat at the recent World Cup finals in Moscow and plans to start commercial shipments of their flexible wearables attire in November.

And in automotive OLEDs, during its Singapore Investors Forum Samsung Electronics highlighted automotive OLED displays as the segment of high growth. Samsung noted that while it expects the automotive display market to grow at a 9% CAGR from 2018 to 2022, it forecasts automotive OLEDs will grow at a much faster rate, at a 134% CAGR from 100,000 units in 2018 to 3 million in 2022.

At SID DisplayWeek, Samsung demonstrated many automotive OLED displays, including curve, rollable, unbreakable, transparent and lightfield OLED displays. And unveiled what it calls unbreakable 6.22-inch display with an all-plastic design that has additional durability for the automotive environment.

Also with respect to the automotive market, on the OLED lighting front, LG Display is reportedly in discussions with 10 car manufacturers to utilize OLED lighting. Announced adoptees already include BMW, Mercedes-Benz and Audi. Speaking of Audi, last month Audi released the specs of its 2019 TT and 2019 flagship A8, and both have OLED tail lights as an available feature.

OLED lighting is still a small market, but it has a big and bright future. UBI market research forecasts that the OLED lighting market will grow to approximately $1.6 billion by 2020. On the internal R&D front, we are working closely with our customers and continue to invent and commercialize higher performing, cost-effective next generation emissive materials systems and technologies, including new reds, greens, yellows and hosts. With respect to blue, we believe that we are making excellent progress in our ongoing development work for commercial phosphorescent blue emissive system. Additionally, an important component to our growth strategy is developing groundbreaking technologies that can help advance the OLED market. And one of our major R&D initiatives is OVJP, organic vapor jet printing for large area TVs. We are making advancements with this novel maskless, solventless, dry direct printing technology.

To help further our progress, we will be installing our pilot prototype system next month.

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 second quarter financial results, I want to remind you that revenues prior to 2018 are under the old accounting standard, ASC 605. Beginning in January 2018, we adopted a new accounting standard, ASC 606.

Revenues for the second quarter of 2018 were $56.1 million, up quarter-over-quarter from Q1's $43.6 million, but down year-over-year from Q2 2017 $102.5 million.

Please note that last year's second quarter revenues included Samsung's license payment of $45 million. As we stated in the first quarter, there has been a slowdown in the premium smartphone market from last year, which caused weaker OLED panel demand and therefore, weaker OLED material purchasing. In the second quarter, we believe that the sluggish environment improved. And as a result, we saw a sequential increase in revenues. Additionally, ASC 606 impacted Q2 revenues by $17.5 million. Without the impact of ASC 606, our second quarter revenues would have been $73.6 million.

Our total material sales were $36.8 million in the second quarter compared to material sales of $25.3 million in the first quarter of 2018 and $46.8 million in the second quarter of 2017.

Green emitter sales in the second quarter of 2018, which include our yellow-green emitters were $25.7 million. This compares to $17 million in the first quarter of 2018 and $32.1 million in the second quarter of 2017.

Red emitter sales in the second quarter of 2018 were $10.9 million. This compares to $8 million in the first quarter of 2018 and $13.7 million in the second quarter of 2017.

As we had discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors to this can include: consumer product demand cycles, capacity ramp schedules, production loading rates, product mix, material ordering patterns and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us.

Before we discuss Q2 royalty and license revenues, we want to remind you that under ASC 606, irrespective of when billing occurs, we will recognize license revenue on a quarterly basis in proportion to corresponding OLED material shipment. Second quarter 2018 royalty and license fees were $15.5 million. This compares to $15.9 million in the first quarter of 2018 and $53.7 million in the second quarter of 2017.

Cost of sales, which include Adesis cost of sales for the second quarter of 2018 were $11.6 million. This compares to $7.5 million in the first quarter of 2018 and $11.3 million in the second quarter of 2017.

Cost of material sales, which only relate to OLED materials, does not include Adesis' cost of sales, were $9.3 million, translating into material gross margins of 74.8%. This compares to 77.5% in the first quarter of 2018 and the comparable year-over-year's quarter material gross margin of 78.9%. Second quarter operating expense, excluding cost of sales, was $33.6 million, up from last quarter's $31.6 million and up year-over-year from the comparable quarter's $30.7 million.

Operating income was $10.9 million for the second quarter of 2018, up from last quarter's $4.5 million, but down year-over-year from the comparable quarter's $60.5 million. Without the impact of ASC 606, Q2 operating income would have been $28.4 million.

Second quarter 2018 income tax expense was $1.9 million or a tax rate of approximately 15%. Without ASU 2016-09, our second quarter 2018 tax rate would have been approximately 18%.

Net income for the second quarter of 2018 was $10.8 million or $0.23 per diluted share, sequentially up from last quarter's $6 million or $0.13 per diluted share, but down from the comparable year-over-year's quarter of $47.2 million or $0.99 per diluted share. Without the impact of ASC 606, our second quarter net income would have been $25.1 million or $0.54 per diluted share.

For the first half of 2018, revenues were $99.7 million, operating income was $15.4 million and net income was $16.8 million or $0.35 per diluted share.

Without the impact of ASC 606, our first half 2018 revenues would have been $141.8 million, operating income would have been $57.6 million and net income would have been $51 million or $1.09 per diluted share. This compares to first half of 2017 results of $158.1 million of revenue, $72.6 million in operating income and $57.6 million in net income or $1.21 per diluted share.

Now looking to 2018. Based upon our current forecast, our 2018 guidance is unchanged from last quarter. We expect 2018 revenues to be in the range of $280 million to $310 million. We would note, as we have in the past, a shift in 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 last few years.

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

For 2019, we anticipate significant industry growth to resume. We expect the installed base of OLED square meter capacity to increase by approximately 50% over 2017, 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 the 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 September 28, 2018, to stockholders of record on September 15, 2018. This dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.

With that, I'll 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. In this multiyear CapEx growth cycle, the landscape of OLED capacity is broadening. With more OLED panel makers building pilot and production lines, the further proliferation of OLED should follow. Today's OLED market is driven primarily by smartphones, but we see an increasing amount of OEM OLED activity across the consumer electronic spectrum, including applications such as TVs, wearables, IT, virtual reality and augmented reality as well as for emerging opportunities, including automotive OLED displays and lighting. The disruptive nature of OLED is paving a new and exciting path of design possibilities in the display and lighting markets.

The team at UDC continues to do an incredible job of creating and delivering the most innovative technology in the industry. The increasingly exceptional value of our OLED technology and phosphorescent materials has resulted in our UniversalPHOLED being found in virtually every AMOLED product around the world.

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 market 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) First question is coming from the line of Sidney Ho with Deutsche Bank.

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Shek Ming Ho, Deutsche Bank AG, Research Division - VP [2]

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I understand you did not guide on the quarterly basis, but your second quarter results came in a little better than our model, especially on the material sales side. Do you believe the inventory at your customer is mostly depleted by now and that they are starting to restock, or do you think the build activities for this year's high-end films started a little earlier or maybe there is some other factors you can talk about?

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

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We believe that the pre-purchasing of materials that occurred at the end of the last year will no longer impact our material shipments. And going forward, we do not expect any impact.

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Shek Ming Ho, Deutsche Bank AG, Research Division - VP [4]

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Okay. My follow-up question is, your implied second half guidance would suggest revenue will be up about 10% versus second half of last year. And if you want to compare ASC 605, it seems the number is closer to 5%. Given the expected ramp of high-end films with 2 OLED [skews] this year, your guidance seems a little conservative. Is there anything else that we should consider? And also, how do you think about the unit shipment of high-end smartphone production in the second half this year versus last year?

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

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We expect a pickup in the second half of the year, obviously, based upon our guidance and quarter -- it's really difficult for us to predict quarter-to-quarter. And the number of units are not really our business. So what's important is, we expect smartphone market to recover. And if it does, and we believe it is in the process of recovering, and with the new product launches, we do see a pickup in the second half of the year.

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Shek Ming Ho, Deutsche Bank AG, Research Division - VP [6]

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All right. Maybe I can squeeze in one longer-term question. Understand you don't want to disclose too much about your blue-emitter development, but can you give us an -- your updated view on the alternative emitter material that seem to be making some noise at the display conference a couple of months ago? And how did those specs compare to yours?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [7]

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Well, we haven't disclosed specs on blue for quite some time. But we're making significant progress on our blue, on both color point -- on all -- on color point efficiency and lifetime, all in one device. And we are -- we believe, we're significantly ahead of anybody else.

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Operator [8]

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Next question is from the line of Mehdi Hosseini with Susquehanna.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [9]

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Just as a follow-up to Sidney's question, but I'm going to rephrase it differently. Over the past several months, there have been several press reports suggesting that Samsung may have changed their TV strategy and increasingly focusing on developing quantum dot OLED TV. And I'm just wondering, how you see those opportunities materializing? And I have a couple follow-ups.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [10]

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Sure. Mehdi, you know that we can't speak for our customers. We do believe that OLED TVs are spectacular and every review about them has been spectacular. And we're here to help collaborate with our customers for all OLED displays from wearables to smartphones to TVs. And in addition to other markets, which are automotive VR, AR. And we work closely with our customers on product roadmaps, but we really can't speak for them.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [11]

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Sure. When you talk about the [50% square inch] installed capacity growth '17 through 2019, does that include any additional player in the OLED TV?

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

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This is really industry data. And right now, obviously, the OLED TV business is dominated by LG. And I don't -- I have not seen any additional plans from anybody to enter the OLED TV market over the -- by the end of 2019 in any real volume.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [13]

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Okay. Great. And just I want to better understand the thought process. How you come up with your year-end revenue guide. When you look at the inventories, at your customers' smartphone, material inventory -- material inventory at the smartphone players versus the TV manufacturers. Which type of customers are you comfortable with that they're going to come back and refresh inventory? In other words, which end-market you feel more comfortable with the sell-through looking to the second half?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [14]

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It's difficult for us to break it down. I mean, we -- as you're well aware, we get estimates from our customers. And we use that to determine our inventory levels, and how much material we're going to produce. And you are hearing that LG expects to sell 2.8 million OLED TVs this year and then going up next year. And it's 4 million next year. So there clearly is going to be more OLED TVs sold this year than last year.

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Operator [15]

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Next question is from the line of Brian Lee with Goldman Sachs.

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Henry Constantine Elder, Goldman Sachs Group Inc., Research Division - Associate [16]

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This is Hank on for Brian. So there has been some reports through the first half of this year about delayed capacity expansion, but it seems like there's been also some recent optimism that Samsung could be inching forward or moving ahead with A5. Can you detail what you base case for your 50% capacity expansion and what impact A5 has on that?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [17]

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Well, obviously we can't speak for our customers regarding A5. And the 50% increase is based upon industry estimates. But it's mainly, to be honest, in China, mobile and OLED TV.

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Henry Constantine Elder, Goldman Sachs Group Inc., Research Division - Associate [18]

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Okay. Fair enough. And then you mentioned, Sharp, what is the relationship there? Seems like they're moving forward with the small scale OLED panel production. Are they clearly using [your IPM] materials, where would you rank them, I guess, in terms of customer potential?

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

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Well, we announced an extended evaluation agreement with them. They're just starting up. And there's not a lot of capacity there for in the near term.

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Operator [20]

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The next question comes from the line of Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [21]

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Sid, I wonder if you can give us a little bit of help not asking for a specific guidance for Q3, but is there anything that we need to be mindful of in terms of the seasonality relative to Q3, Q4?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [22]

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Quarter-to-quarter forecasting, as you're well aware from us is really difficult. But we believe there is going to be, obviously, a significant pick up in the second half of the year over the first half. And whether it's one quarter or the other, things move up and things slip and things pull in. So this is really, we look at the last 6 months of year as one group.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [23]

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Okay. Fair enough. The other -- couple of other questions. Looks like you showed very strong growth year-over-year in China. And so I'm wondering first off, is the -- is Customer C the same customer that you have had over the last couple of quarters?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [24]

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If you look, you can see that this Customer C was only 1% in prior quarters. So the market is expanding, the landscape in OLED panels is expanding and Customer C is a Chinese panel maker, but it is not the same one.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [25]

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Okay. And is there -- how would you characterize your overall line of sight to without speaking specifically about customers in China, but just in the aggregate, in terms of what you're seeing? Do you feel that -- what's your daily or weekly interaction with these display makers? And maybe it's not daily or weekly, I'm just trying to get a sense as to how closely you're tracking. We have the press reports, but I'm just wondering what you guys see?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [26]

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We've been building up our team in China. And we have people with just about every panel maker who is visiting them on a constant basis. And we have very frequent interactions with them.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [27]

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And last question. And Steve, this is for you. I don't recall maybe you did use the word excellent to describe the progress you're making with blue emitters before. But I guess, what I'm wondering is, is there another adjective that you would use before to describe this progress, before we're at a stage of this -- the blue emitters commercially ready for the market?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [28]

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Good question. I've actually been using the adjective excellent for last few quarters. And I'll tell you next quarter whether there is a different adjective.

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Operator [29]

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Next question is from the line of Christopher Muse with 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 [30]

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First question, you reiterated your guidance for 2018, curious though in the last 3 months how things may have changed, whether it's rigid versus flexible, TVs versus smartphones, changes in your assumptions around material pricing, would love to hear your thoughts there?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [31]

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Thanks for the question, C.J. It is -- we've -- the guidance has been the same for the last quarter to this quarter. And whether things get pushed in a little bit or pulled out a little bit are difficult. But we're seeing activity or on the TV side. Obviously, you're seeing on the Samsung side. You've got all these rumors about whether there is going to be 2 iPhones with OLED screen. So it's a combination pretty much across all of our customers that we're seeing increases in the second half.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [32]

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Okay. And as a follow-up. As you think about the revenue opportunity with foldable, is that simply a square area type of benefit? Or is there a mix/ASP benefit that you guys would see there?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [33]

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No, it's really the larger the surface area the more material we use. So the formula essentially is the same, whether it's on glass or plastic. If it is the customer that pays us a royalty, then there's probably a premium price that's going to be charged, but [effective].

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Operator [34]

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Next question is from the line of Shannon Cross with Cross Research.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [35]

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I'm just curious, you talked about there is a lot of opportunity in 2019. And so I'm curious as you think about the timing for the launches. Do you think 2019 will be another, sort of, backend loaded year or do you think given the momentum you're seeing in or you're expecting in the second

(technical difficulty)

It should be perhaps more of a balanced strong year across the board. I'm trying to figure out how you're thinking about when things are launching and

(technical difficulty)

be ordering from you?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [36]

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It's -- 2019, obviously, is -- our estimates for 2019 being a significant year is based upon the installed base that we see. And it is a great leading indicator for us, but lines get turned on sooner or some lines get turned on later, which will impact it. But we see new fabs coming online, and we see -- we expect multiple customers, new customers and expanding customer base. That really will help 2019 be significantly better year than 2018.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [37]

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Okay. And then you obviously just announced continuation of the dividend. But I'm curious from a cash perspective, what you're seeing in terms of acquisitions, maybe in some, sort of drive next -- I'm sorry.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [38]

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No, go, I'm sorry.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [39]

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Okay. Thinking about maybe some fill-ins, especially as you're expecting and anticipating the strength in 2019?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [40]

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Well, we believe that the quarterly cash dividend is the best way to return money to shareholders. And the board really every quarter reviews our capital allocations. And the other things that they look at all different options. We want to keep -- obviously, we want to keep our powder dry in case there are any opportunities on the M&A side. But obviously, as our cash continues to grow, we believe that as you start a dividend, you need -- as your cash flow continues to grow, then the dividend needs to grow.

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Shannon Siemsen Cross, Cross Research LLC - Co-Founder, Principal & Analyst [41]

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Right. But I'm just curious on the -- from an acquisition perspective what you're seeing out there are prices high? Should we anticipate maybe a more aggressive focus on acquisitions going forward?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [42]

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We're constantly looking at acquisitions within our space and related spaces. Prices are still pretty high out there right now.

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Operator [43]

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(Operator Instructions) The next question is from the line of James Medvedeff with Cowen and Company.

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James David Medvedeff, Cowen and Company, LLC, Research Division - Associate [44]

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Let's see, I had a couple -- I'd like to delve a little bit more into this ASC 606 impact, not because I just think it's a complete mess for the accounting purposes. But I'm trying to understand material sales up like 45% or 46% sequentially and yet no increase in the royalty and license fee line, in fact, a slight decrease. So I was under the impression that the -- something like the Samsung license, for example, would be prorated according to material sales. So can you work through or help me work through that math a little bit?

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

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Sure. When we adopted ASC 606, we had some adjustments that occurred in the first quarter and going forward, we expect a sequential correlation between material sales and royalty and licenses. And as we go deeper into it, and we get more experience and history with it and going forward, we'd see that actually the mix, which we talked about 60-40 is probably going to be closer to a 2:1 ratio, as we move forward of material to royalty and license fees.

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James David Medvedeff, Cowen and Company, LLC, Research Division - Associate [46]

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Okay. And just kind of on expenses. So expenses came in below what we had modeled. And that's obviously great. But the question is, so going forward are these run rates something we can count on? Or is there some reason that they should go -- start to go back up or go up and continue rising?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [47]

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They should continue to rise. We do expect it for the year or year-over-year to be about 10% to 15% increase. And we believe it is going to be weighted towards R&D. And its -- the fourth quarter of the year is usually the highest, but I think that we are in this range. And I expect to be in this range for the full year.

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James David Medvedeff, Cowen and Company, LLC, Research Division - Associate [48]

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Okay. And if I could squeak in one more on the guidance. So you beat our model by $8 million or so. And without so -- the question is with strong quarter, did you pull something in that you may have been expecting in the second half. I understand you don't guide to quarters, but did you pull something in that might have been anticipated in the second half? Or does this raise confidence in the second half or in the full year numbers in any way?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [49]

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We are a just-in-time supplier of materials. We get a purchase order and we ship it out within 24 hours, unless the customer gives us a specific date to ship it. But overall, that's the way we work. So there's really no pull-ins or push-outs because we maintain inventory here, and we actually always maintain excess inventory to ensure that we could meet any unexpected orders.

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James David Medvedeff, Cowen and Company, LLC, Research Division - Associate [50]

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Let me just ask that a different way. What would be a circumstance that might make you go to -- fall to the low end of the revenue guidance? And what might be a circumstance that would take you to the high end?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [51]

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It is really based upon our customers and its fab utilization rates. Whether -- we've talked about LG's talked about 2.8 million OLED TVs and Samsung noted that they expect a rebound in utilization rates, particularly on the flexible side. So and it just depends when these occur. Just they occur -- if these things just don't occur as fast as we expect, you would be at the low end and sometimes things get pulled in based upon sell-through by the customers, and we would be at the higher end.

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Operator [52]

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The next question is from the line of Mehdi Hosseini with Susquehanna.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [53]

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Just one quick follow-up. In R&D, well, OpEx is going up by 10% to 15%, and you said majority of this is driven by R&D. I'm just trying to [better] think through priorities. How much of this growth in R&D is for blue material? And outside of that can you just remind us the key areas that you are investing to make sure that your growth rate is sustainable into the next decade? Any color would be really helpful as to -- as we think about beyond 2019.

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [54]

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Well, our R&D is principally directed to phosphorescent materials, blues, reds, greens, yellows and hosts. The other additional R&D project that we've been focusing on is OVJP, Organic Vapor Jet Printing, which is a methodology to make side-by-side RGB TVs. We are focusing with some our university research partners on additional farther out ideas, but basically it's phosphorescent materials and technologies.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [55]

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Sure. Should I assume that on the phosphorus side, the initial R&D needed to develop the blue is already done and you're just into the testing for life expectancy and additional R&D in phosphorus for new recipes? Is that how I should think about...

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

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We continue -- we are -- I'll just say, a little bit differently. We're continuing to improve our materials on efficiency and lifetimes because our customers continually demand improved materials on efficiency and lifetime. As the customers gain more experience with our products, their product roadmaps are growing and they are focusing on different color points. So each color point may require additional R&D to meet their color efficiency and lifetime goal.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [57]

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I see. I see. Does that mean that they already have blue samples?

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

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I can't speak to that.

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Operator [59]

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

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Hendi Susanto, G. Research, LLC - Research Analyst [60]

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Hopefully, this will bring some smiles. In foldable OLED display, how different are your emitter materials? How will the opportunity be different from today's OLED display? And then furthermore, are you developing host materials and encapsulation technology to address foldable OLED display?

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

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We are -- we -- the materials depends on the products used from the customer. So depending on what color points a customer needs, what efficiency requirements and lifetime requirements that may or may not require different materials. When you're looking at foldables, you'll have more square meters for each of the displays, and it's also creating new path in the consumer electronic market with these new form factors. We are also focusing on emissive systems so yes, we are focusing on hosts as well as emitters.

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Hendi Susanto, G. Research, LLC - Research Analyst [62]

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Okay. And then do you have any estimate, how many display makers are planning to commercialize foldable displays in 2019?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [63]

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We've got a number of our customers -- our top 3 customers, which are Samsung, LG, and BOE that we talked about they're all working on flexible substrates.

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Hendi Susanto, G. Research, LLC - Research Analyst [64]

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That's helpful. And then, Sid, I'm trying to analyze and get some revelation on your royalty and license fee from your largest customer. If I look at pro forma revenue without ASC 606, royalty and license fee was $71 million in the first half of 2018 versus $61 million in the second half of 2017. And then royalty and license fee under ASC 606 is spread across material units sold and your material sales in the first half is lower also. And based on those numbers and historical trend, is it reasonable to conclude that your largest customer royalty and license fee is bigger this year than last year?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [65]

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There are a number of customers that are into -- that are counted into that number. So I can't -- obviously, we cannot talk about how much we get paid by -- the question is how much is the Samsung license. And we, obviously, are not allowed to talk about that. So in deferred revenue and the difference between 606 and 605, it is not just Samsung, there are other customers in that.

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Hendi Susanto, G. Research, LLC - Research Analyst [66]

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Okay. Like, I'm not asking the exact numbers. I'm wondering whether you are able to quantify whether Samsung royalty and license fee is larger this year?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [67]

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We are not allowed to comment at all about the license fee from Samsung.

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Operator [68]

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The next question is from the line of Andrew Abrams with Supply Chain Market Research.

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Andrew Abrams, [69]

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And one question on China. The new C, would you consider that a kind of a onetime event, where you've got a relatively new customer that's going online, and they're taking a substantial amount of material? Or is this kind of a new run rate for China?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [70]

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Well, this customer opened up new line. And a lot of times when you open up a new line, you do buy more material, [receive] it and get it going. But we do see significant growth in China over the second half of this year and next year.

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Andrew Abrams, [71]

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Okay. And if you look at LG or let's not call it LG, OLED TV, and a change in the way the TV is being built, meaning RGB versus white OLED or yellow and blue, has that made any appreciable difference to your material sales for OLED TV generally?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [72]

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Well, we can't talk about which materials we sell and do not sell that go into an OLED TV, specifically. But we are seeing a pickup in their production. So we are selling more material to them.

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Andrew Abrams, [73]

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And lastly, is there a backplane change? That I'm assuming there was a backplane change that's necessary for foldable, will that give you the opportunity to sell the next generation of materials into the folded market at the beginning? Or is this, sort of, an evolutionary the same way that the rigid and flexible market was?

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Sidney D. Rosenblatt, Universal Display Corporation - Executive VP, CFO, Treasurer, Secretary & Director [74]

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Yes. I think it's evolutionary. They're going to use what they know works because this is a new technology.

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Operator [75]

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

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Henry Constantine Elder, Goldman Sachs Group Inc., Research Division - Associate [76]

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Still Hank here. Just one question -- one follow-up on the quantum dot blue OLED potential. Can you just speak to the technical feasibility of this approach? I mean, do you believe it would require a phosphorescent blue or could a commercial OLED TV with fluorescent blue work? And could they be swapped easily?

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [77]

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We can't really speak for our customers or what goes into their product. I think all of our customers are waiting for a commercial phosphorescent blue. Whether it's for TVs, whether it's for mobile, efficiency is important and phosphorescent blue is efficient material.

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Operator [78]

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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 [79]

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

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Steven V. Abramson, Universal Display Corporation - President, CEO & Director [80]

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Thank you.

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Operator [81]

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