Universal Display Corporation
Q1 2009 Earnings Call Transcript

Published: 8 May 2009

[Operator:]

Good afternoon. My name is Shennel and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display Corporation First Quarter 2009 Financial Results Conference Call. (Operator instructions) On behalf of Universal Display Corporation, I would now like to turn the call over to Mr. Paul Johnson.

[Paul Johnson:]

Thank you and good afternoon everybody. Thanks to those who are joining us today. With us as always are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Chief Financial Officer of the Universal Display Corporation. Let me start today by reminding you that this call is the property of Universal Display. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Universal Display is strictly prohibited. Further, as this call is being webcast live it 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 call – webcast of the call, May 7th, 2009. All statements in this conference call that are historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Universal Display disclaims any obligation to update any of these statements. With that out of the way, I’d like to turn the call over now to Steve Abramson, President and CEO of Universal Display. Please go ahead, Steve.

[Steve Abramson:]

Thank you, Paul and welcome everyone to our conference call and a review of financial results for the first quarter of 2009. I would like to wish all of our Japanese colleagues a happy Golden Week. As always, I’ll share some highlights from this quarter, as well as some thoughts on the state of the OLED industry. Sid will follow with a review of the specific financial results. We will then take your questions. We last spoke less than two months ago. So, my remarks will be relatively brief. We saw a modest increase in revenue during the quarter, approximately $2.8 million versus $2.7 million in the first quarter of 2008. Revenues are down from the last quarter of 2008, which is probably reflective of the impact of the global economic crisis. We have many reasons to continue to be optimistic about the future. Many new OLED products have been introduced already this year including an OLED Walkman from Sony and Touchscreen OLED from Samsung. The OLED display of one new product, the Cowon S9 60-Gigabit video MP3 player with touch screen was recently described on Amazon as follows, “The S9 boasts a 16 million color, 3.3-inch AMOLED display with a 480 x 272 pixel resolution. Thanks to the low-power display technology, the screen is viewable from virtually any angle. It looks great in the dark and even in direct sunlight. AMOLED turns electric signals into video 1,000 times faster than the speed of conventional LCDs, leaving no ghost images while playing motion pictures.” We are especially excited about the release in the US of the Samsung Impression cell phone available through AT&T. With a 3.2-inch AMOLED screen, this is the first OLED product to be sold to a national wireless carrier. It has received rave reviews since being introduced in the US and much of the attention is focused on the phone’s display quality. PC World has noted that “The Samsung Impression has an extraordinarily bright and clear display. As you might expect, video looks great on the Impression’s AMOLED screen and photos look so fantastic.” And according to Slashgear, “Whatever else this phone offers, the first thing you notice, and the biggest selling point, is the AMOLED display. It looks absolutely gorgeous in any light, including direct sunlight. The colors are vibrant and it makes details on the screen pop out.” Clearly, manufacturers are using AMOLED displays to differentiate their products and offer consumers the next generation of technology in personal electronics. At the same time, OLED manufacturers are planning for the launch of large-area commercial products. Samsung recently showcased a 23-inch OLED TV or computer monitor prototype that it is targeting for commercial release in 2010. The reviews and reports on this prototype highlighted stunning picture quality and impressive thinness, only 1.6 centimeters. Even more exciting are the reports that it uses 40% less energy than a standard LCD monitor. All of these characteristics speak to the advantages of OLED and especially, the power savings from using our phosphorescent OLED technology and materials in displays of all sizes. We are eagerly anticipating Samsung’s rollout of this product. The manufacturers continue to integrate our technology into a growing number of consumer electronic devices and plans are made for large-area OLED displays to hit the market. We find ourselves well positioned to capitalize on the growth of the OLED industry. Many of our customers and partners are aggressively pursuing AMOLED opportunities in displays and lighting, some of which I mentioned earlier. Just this year in Japan, there have already been two trade shows, featuring a wide variety of OLED lighting prototypes. Our licensee Konica Minolta has released the powerful advertisement for OLED lighting accessible through CNN.com. And as we discussed last time, TV prototypes from 15 to 30 inches have been demonstrated by Sony, Samsung, LG, and Chi Mei. Display Search recently reported that the outlook for OLED revenues continues to be robust. The firm estimates that OLED revenues will grow from $600 million in 2008 to over $1 billion in 2010 and $5.5 billion by 2015. Display Search believes that growth is currently being fueled by the adoption of AMOLED displays for the primary display in mobile phones and portable media players. Display Search projects that future growth will be enabled by the expansion of AMOLED manufacturing capacity for the production of larger displays for notebook PCs, desktop monitors, and TVs. According to Display Search, “AMOLED displays have become an important differentiating factor for high-end electronic products.” Again, these emerging trends in the industry put Universal Display and our proprietary technology in a strong position as the OLED market continues to evolve. And while we believe that all of the advantages of our phosphorescent OLED technology and materials make them the best choice for small and large-area displays, their inherent energy efficiency continues to grow in importance and gain the attention of display and lighting manufacturers. Energy efficiency has always been at the core of our PHOLED technology and materials. As I’m sure you are aware, eco-friendly, energy-efficient, and green solutions are now in high demand. Sustainability and energy responsibility have become part of the global lexicon. With PHOLEDs, we offer technology and materials that truly meet this new reality for displays and lighting. The US Department of Energy has long seen the potential for our white OLED technology for lighting. In the first quarter, the DOE honored Universal Display for its research advances in white OLED lighting performance. As you may know, with the support of the DOE we have been working on developing highly efficient white OLEDs for use in a variety of lighting applications. They recognized our contribution during “Transformations in Lighting” at annual DOE Solid-State Lighting Workshop. White OLED lighting continues to be a very important area for us and represents a significant revenue opportunity that complements our work in the display area. We remain confident that OLED lighting and our PHOLED technology and materials are poised to become a key component of solid-state lighting products. We recently participated in EcoFocus/New York, an event that brought together some of the most innovative advances in energy-efficient and green technologies. We were impressed by many of the products we saw, but I must say the OLED showcase, which included products such as our wrist-worn, flexible PHOLED display, developed jointly with LG Display and L-3 Communications for the US Department of Defense, was the highlight of the event. These products clearly illustrated the inherent energy efficiency, smaller carbon footprint, and environmental benefits of our PHOLED technology and materials for displays and lighting. We also recently developed a wearable PHOLED bracelet, which is being showcased through the end of June at an exhibition titled “Neoteric Matter 2” at the Wexler Gallery in Philadelphia. This bracelet art form features a wraparound OLED display, mainly using phosphorescent OLED material deposited on a flexible metallic substrate. The resulting display is then integrated into a stunning contemporary bracelet design. As we near the end of the first half of 2009, we are encouraged by the activity we see in the OLED industry. We look for the business to grow during the second half of 2009 and into 2010. As the year progresses, I look forward to updating you on our continued progress on both the technical and business fronts. With that, I will turn the call over to Sid to review the first quarter financial results in more detail. Sid?

[Sid Rosenblatt:]

Thank you, Steve and again, thank you everyone for joining us on the call today. I will begin today with a detailed look at revenues for the first quarter of 2009. Then I will review other key financial results including net loss, operating expenses, and cash used in operating activities. We will then turn the call over to the operator for your questions. Revenues for the first quarter of 2009 totaled approximately $2.8 million compared to $2.7 million for the first quarter of 2008. Total commercial revenue during the quarter was approximately $1.4 million compared to $1.6 million for the first quarter of 2008. Commercial chemical revenues and royalties and license revenues for the quarter were $686,000 and $516,000 respectively compared to $986,000 and $570,000 respectively for the first quarter of 2008. The majority of these revenues for the first quarter of 2009 were from Samsung SMD. The decline in these revenues is mainly attributable to a decrease in material shipments to Samsung during the first quarter. These revenues also include sales of small amounts of our materials to another customer in the quarter. Chemical shipments volumes and related revenues remain difficult for us to predict on a quarter-to-quarter basis. We generated royalty revenues during the quarter under our patent license agreement with Samsung. Under that agreement, we received royalty reports within a specified period of time after the end of the quarter in which royalty-bearing products are sold by Samsung. Consequently, the royalty revenue from Samsung for the three months ended March 31st, 2009, reflects royalties for products sold by Samsung during the fourth quarter of 2008. License revenue for the first quarter of 2009 totaled $238,000 compared to $302,000 for the same period in 2008. We received these revenues under our patent license agreement with Samsung, as well as cross-license agreement we executed with DuPont Displays in 2002. License revenue also includes amounts received during the quarter as a result of our patent license agreement with Konica Minolta, signed in August 2008. In connection with each of these agreements, we received upfront payments that have been classified as deferred license fees and deferred revenue. The deferred license fees are being recognized as license revenue over the term of the agreement with Samsung and over ten years with DuPont and Konica Minolta. We also recorded a $167,000 in commercialization and systems revenue during the quarter under a business support agreement executed in the fourth quarter of 2008. There were no corresponding revenues in the first quarter of 2008. Total development revenue was approximately $1.5 million for the quarter versus $1.2 million for the first quarter of 2008. We saw an increase in developmental revenue as compared to the first quarter of 2008 due to primarily to an increase in technology development revenue. Contract research revenue totaled $896,000 for the first quarter of 2009 compared to $886,000 for the same period in 2008. Our government contract growth has remained relatively constant on a quarter-to-quarter basis. Sales of developmental chemicals totaled $280,000 for the first quarter of 2009 compared to $253,000 for the same quarter of 2008. The timing and frequency of developmental purchases remains difficult to predict on a quarter-to-quarter basis due to our customers deferring OLED technology development and product launch strategy. Technology development revenue totaled $289,000 for the first quarter of 2009 compared to $23,000 for the same period in 2008. The increase quarter-to-quarter was attributable to revenue we recorded under two joint development agreements that we entered into in the second half of 2008. The net loss for the first quarter of 2009 totaled approximately $5.6 million or $0.15 per diluted share compared to a net loss of approximately $4.2 million or $0.12 per diluted share for the same quarter of 2008. The rise in the net loss was attributable to an increase in operating expenses and a decrease in interest income, partially offset by an increase in revenue and a gain on stock warrant liability during the quarter. Operating expenses were consistent with our expectations on a quarter-to-quarter basis, increasing to $8.8 million for the first quarter of 2009. This compares to operating expenses of $7.8 million for the first quarter of 2008. The increase in operating expenses during the quarter was primarily attributable to an increase in costs under our agreement with PPG Industries, which was a result of our scale-up in acquisition of long lead-time raw materials for our OLED materials supply business. Cash used in operating activities totaled approximately $4.5 million for the first three months of 2009 compared to approximately $2.6 million for the same period of 2008. The increase was attributable to an increased loss during the quarter, as well as a reduction in accounts payable and accrued expenses. In addition, during the first quarter of 2008, we received approximately $1.6 million in proceeds from the exercise of common stock warrant options and warrants. There were no corresponding proceeds received during the first quarter of 2009. Although the cash received from these exercises did not affect cash used in operating activities, it did impact our cash position at March 31st, 2009 compared to March 31st, 2008. Our balance sheet remained strong with cash, cash equivalents, and investments of approximately $72 million as of March 31st, 2009 compared to approximately $77 million at the end of 2008. We continue to place a high emphasis on cost control and prudent use of our cash as revenues continue to transition and our technology gains commercial attraction. With that, we will now open the lines up for questions. Operator, would you please compile the Q&A roster, please?

[Operator:]

(Operator instructions) Your first question is from the line of Jim Ricchiuti with Needham & Company.

[Jim Ricchiuti:]

Hi, good afternoon.

[Steve Abramson:]

Hi, Jim.

[Sid Rosenblatt:]

Hi, Jim.

[Jim Ricchiuti:]

The question first on the operating expenses. Sid, maybe this one’s for you. Are you breaking out patent cost now from R&D, is that where it had been?

[Sid Rosenblatt:]

That is correct. It had been included in our R&D expenses and we decided this year to break it out separate.

[Jim Ricchiuti:]

Okay. Has it been roughly at these – the $700,000 level or does it tend to vary quarter to quarter?

[Sid Rosenblatt:]

It has actually been close to that for the past four to six quarters. It has been, for the past couple of years, somewhere around $3 million on an annual basis.

[Jim Ricchiuti:]

Okay, that’s helpful. I have a question about the royalty reports that are generated. And the question is – I’m just wondering when you get a report from Samsung, how much information is there? Is it broken out by product line, is it broken out by geographic region?

[Sid Rosenblatt:]

These reports we get are confidential, but our royalties essentially are based upon direct gross revenues that – of the AMOLED or the OLED products that they sell, but anything in the report is really confidential, but our license fees are based upon gross revenues.

[Jim Ricchiuti:]

Okay. But it is possible for you – what I’m getting at, I’m just wondering if it’s possible for you to get some better sense as to how some of the products are selling based on now what we know where they are going in certain – for instance, the phone is now available here in the US.

[Sid Rosenblatt:]

We – if we had the – a couple of things. Anything that we get from them through these reports will be confidential. Display Search and some of the other folks actually get more information and publish that information about the specific products and press releases. So, that is the place that we actually look to get some corroboration of the information that we get, but they get more information because I think they speak more to the marketing folks and stuff like that and get information about the specific products. To be honest, we are a technology provider and a material provider and looked at as a vendor.

[Jim Ricchiuti:]

Fair enough. So, I mean it looks just based on the number of phones that we are seeing that are either in the market now or planned to be introduced, I mean the list seems to include as many as 15 to 20 different phones or portable devices. So, I guess you alluded to the fact you think the economy is having some impact on this. Is that – do you have any further color on that or is it just based on what we are hearing at a macro level, just from a lot of different manufacturers?

[Sid Rosenblatt:]

I believe it’s at a macro level. I mean – I think that there are more and more products that are coming out. You keep reading about more, I believe as they are getting more customers, I would expect to – that trend to continue.

[Jim Ricchiuti:]

Okay. And switching gears, on the contract research revenue side, is it okay to assume roughly a $4 million or so in revenue? Do you guys – do you have some visibility into that area for this year? Is that a decent number to use?

[Sid Rosenblatt:]

Yes, I think we’ve said that in the past that that looks like pretty consistent. So, for this year I think if you use that number, this year a couple quarters are a little bit lumpy based upon some timing issues, but I think for this year if you use that number pretty equally for the year, it should be okay.

[Jim Ricchiuti:]

Okay. That’s it from me for now. Thank you.

[Sid Rosenblatt:]

Thanks, Jim.

[Operator:]

(Operator instructions) Your next question is from the line of Yair Reiner with Oppenheimer & Company.

[Yair Reiner:]

Hi, good evening. So, most handset OEMs and other OEMs don’t really like to source any product including the display from single source. Right now, it seems like Samsung is the one provider out there who has some volume capabilities. Do you see anyone coming up and maybe filling up some slack in that business and giving OEMs out there some more confidence that there is more than one person to go to?

[Sid Rosenblatt:]

You can republish reports from LGD who is increasing their OLED capacity. Chi Mei has capacity for small-area displays. So, at least those two capacities today and LG is going to increase its capacity this year and there are – Sony is talking about having small-area displays in some of its (inaudible) and they also obviously are making the 11-inch TVs and talking about additional larger sizes. So, there is more capacity today, but clearly the largest manufacturer out there is Samsung SMD.

[Yair Reiner:]

Now, in terms of commercial chemical, I guess given all the new products that are out there, surprising that that didn’t grow more than it did in the first quarter. Do you have any visibility into the inventory that’s being held at your customers and are you able to know if – what the inventory levels are now compared to where they might have been three months ago?

[Sid Rosenblatt:]

We really don’t have a lot of visibility into that. I mean, it – Samsung at one point was SDI – when Samsung mobile displays was really SDI, they would have a breakout on their conference calls of the AMOLED and give a little more color, but now it’s joint venture owned by Samsung Electronics and Samsung SDI and I have not seen any published reports with any visibility into any of the details.

[Yair Reiner:]

Do you have any intuition about whether there was some inventory reductions on their part during the first quarter?

[Sid Rosenblatt:]

I really don’t have an answer for you. I would – to be honest, I would not be surprised, but I don’t have an answer for you.

[Yair Reiner:]

Okay. OpEx was down sequentially. Is that kind of the right level moving forward?

[Sid Rosenblatt:]

Yes, it should be. The fourth quarter number historically has been a little bit higher because you do your year-end audit and you keep the books open for a lot longer and you get everything possible in there. So, historically the fourth quarter number has been a little bit higher than the other ones. I think the number, $8.8 million to $9 million is probably a good number based upon our internal estimates and we have said that at this level, we pretty much have everybody that we need except for a few folks and we don’t tend to hire like we did last year.

[Yair Reiner:]

Okay. One final question from me. Then I’ll get back into queue. Any progress on the green that’s in trials now with various AMOLED makers?

[Sid Rosenblatt:]

It is still in the process. We are working with a number of customers and it’s being evaluated. It is a long process to go through, there is a lot of steps and then there is a lot of testing that is done, sampling products, getting production scale-up issues, all looked at. So, it is a long time, I think we have said in the past that we thought in the second half of this year we would be able to really know more about it and talk more about it, but it is going through the process.

[Yair Reiner:]

Great. Thank you very much.

[Steve Abramson:]

Thanks, Yair.

[Operator:]

Your next question is a follow-up from Jim Ricchiuti with Needham & Company.

[Jim Ricchiuti:]

Yes, I wanted to just look at the opportunity in the lighting side of the business and maybe you can give us a little bit of color on how that’s developing. If you look at the technology development line and the development chemicals line, are you seeing more interest, more revenue associated with light applications in that area?

[Sid Rosenblatt:]

It is a bright spot in our future. I think that make a bad joke. On the revenue – we are seeing a lot more interest across the board on lighting, you are reading more about different companies having lighting expectations and looking at where the opportunities are, the lifetime and the CRI coordinates are getting better and better. Obviously, we signed the agreement with Konica Minolta and we are working with a number of other customers on the developmental side. We think that this year and early next year you should start to see some commercial lighting products. There is a lot more activity in that area and there is a lot more interest across the board.

[Jim Ricchiuti:]

You did $2.8 million of revenue this quarter. Is lighting any kind of meaningful – is there a way for you to just let us know what percent of that $2.8 million might be from lighting?

[Sid Rosenblatt:]

The DOE programs from the government are all related to lighting. So, of the almost $900,000, a lot of that has been DOE funding. We don’t specifically break out all the different contracts, but we have a number of different contracts that we are working on. And we are seeing more and more from that side and we would actually expect that to continue to grow, particularly with the administration’s push for energy-efficient solid-state lighting, we would expect this year for that to continue. But on the commercial side, there really is not commercial revenue being generated for lighting at this time.

[Jim Ricchiuti:]

And then as we think about the business model developing a few years out, it’s obviously – it’s probably hard to call, but I’m wondering if you have any sense how that revenue might break out between display and lighting?

[Sid Rosenblatt:]

You are correct. I mean, we have our own estimate internally. We are focusing today on the business that is generating revenue and working with our customers on the – obviously the display side for small area and working on the material systems for large-area displays because we think that’s coming. I do believe that is a number of years out before you see any significant revenues from us from the lighting side. I think you will start to see it grow, but I don’t think – we don’t anticipate significant amounts of revenue over the next two years.

[Jim Ricchiuti:]

Okay. Thank you.

[Sid Rosenblatt:]

Thanks, Jim.

[Operator:]

There are no further questions at this time. Now, I will turn the call back to management.

[Sid Rosenblatt:]

Again, we’d like to thank you all for participating on the call and we are available for any of your questions. Most of you know us pretty well, so please feel free to contact us directly. And with that, thank you and see you later.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.