Universal Display Corporation
Q2 2009 Earnings Call Transcript

Published: 11 Aug 2009

[Operator:]

Good afternoon. My name is Jeremy and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Display second quarter financial results conference call. (Operator instructions) I would now like to turn the call over to. Paul Johnson, on behalf of Universal Display Corporation. Sir, you may begin.

[Paul Johnson:]

Good afternoon, everybody. Thanks again for joining us today. With us as always are Steve Abramson, President and Chief Executive Officer, and Sid Rosenblatt, Chief Financial Officer of 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 webcast of this call, August 10, 2009. 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. 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 to Steve Abramson, President and CEO of Universal Display. Please go ahead, Steve.

[Steve Abramson:]

Thank you, Paul, and thank you everyone for joining us for our second quarter first half conference call. As always, I’ll share some brief comments regarding our results and the facts of our technology in the OLED industry. Afterward, Sid will review the financial results for second quarter and six months ended June 30, 2009 in greater detail. This was an encouraging quarter for us, particularly from a revenue standpoint. Revenue will increase in a quarter-over-quarter and sequential basis to approximately $3 million and approximately $5.8 million for the first six months of the year. It appears that the global economic slowdown has simply slowed the growth of AMOLED display sales. This was made clear by Samsung SCI in recently discussing their own second quarter results. As we put in the Wall Street Journal on July 22, Samsung is expecting “strong operating profit in the third quarter and demands for active matrix organic light or AMOLEDs used in flat panel screens is looking solid.” The report highlighted AMOLEDs along with battery sales as an area of strength for Samsung. The Korea Times further clarified Samsung’s AMOLED strategy noting that Samsung SCI and Samsung Electronics joint venture, Samsung Mobile Display, is on the right track as Samsung Electronics has aggressively promoted its high end and text feature Smart Phones equipped with AMOLED panel. I want to say SCI will earn additional profit in the AMOLED sector and Samsung group’s electronic unit clarified its firm stance on AMOLED.” As demand is understandable, given the positive reviews of devices, like the Samsung impression mobile phone are receiving. Critics are paying particular attention to the quality and efficiency of the phone’s AMOLED display. This is clearly a technology that Samsung and others in the mobile display market are committed to at this juncture. We anticipate an economic recovery should only help accelerate this commitment. Based on published reports, large area AMOLED displays are also just on the horizon. With small area commercial products already in the marketplace, display manufacturers are jockeying to be the leading volume producers of AMOLED TVs. For example, in early July, LG Display CEO, Quan Yung Soo, commented to the Korea Times that he expects they will market a 32” OLED panel within three years. Published reports also indicate that LG will release a 15” OLED TV this year. As competition among AMOLED manufacturers heats up, we are continuing to develop our next generation OLED technologies and materials for use in their products. This next generation was on display at this year’s conference in Austin, Texas. During the conference, we, along with Samsung FMD, unveiled highly efficient green performance event. Replacing the green fluorescent OLED material typically used in AMOLED display with this new green FOLED, can result in up to a significant 37% power savings, also exhibiting a good operational lifetime. Over the past year, we have sold our materials for commercial uses, pre-commercial, manufacturing evaluation development work to approximately 20 different companies. That clearly bodes well for the future growth of the OLED industry and our proprietary materials. Our FOLED technology and materials are appealing to OLED display and leading manufacturers for a number of reasons, the most compelling of which is energy efficiency. FOLEDs offer a distinct advantage over competing technologies from a power use standpoint. Our red FOLED material alone can reduce display power consumption by over 25%, as compared to an LCD. Our green FOLED material replaces fluorescent green, power consumption of the great green FOLED display is reduced by over 60% compared to an LCD. As power savings increases even more as full RGB FOLED displays will be reduced. The advantages of our universal FOLED emitters are also driving our sales of these materials for evaluation. During the second quarter, we were encouraged by the growth in our development chemical revenues, which more than doubled due to increased chemical sales for customers. We consider this an encouraging sign of things to come as more and more manufacturers look to accelerate their OLED display capabilities. We have also continued working on the application of the OLED technologies to white lighting under the Department of Energy Solid State Lighting Program. As previously announced, we’re working under this program with Armstrong World Industries on a ceiling base white OLED lighting system. We recently showcased an early prototype system developed through this partnership via video that is available to be seen on U-Tube. The video shows the thinness and brightness of OLED lighting tile integrated into a ceiling system. This type of system has the potential to replace fluorescent and incandescent lighting sources. Our work in this area is a significant step toward making white OLED lighting a reality. The power savings from our FOLED technology is essential for the success of OLED lighting products. In addition to helping decrease energy consumption, OLED lighting products can reduce the environmental impacts caused by the disposal of existing lighting sources, such as SFO. We look forward to showcasing even more OLED lighting products as our work in this area continues. Finally, during the second quarter, we announced a new SPI contract from U.S. Air Force for the development of a non-glass, ejection safe, flexible OLED display prototype for use by pilots. The Department of Defense continues to believe that flexible OLED technology holds great potential for U.S. military applications and we believe they are work of flexible displays even more innovative commercial products and devices. From early stage products that are thin and unbreakable to later stage products that are bendable, rollable, and even freely manipulated like a sheet of paper, the possibilities are myriad. It is an exciting area and one that we are proud to be at the forefront of as innovation truly takes hold in the industry. As we look toward the recovery of the world economy, Universal Display remains well positioned to benefit from anticipated growth in the OLED industry. We remain dedicated to capitalizing on existing opportunities and small area OLED displays, emerging opportunities in large area OLED TVs, and future opportunities in flexible OED displays and white OLED lighting. With that, I will turn the call over to Sid for a detailed review on the financial results. 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 second quarter of 2009. Then I will review some other key financial results, such as net loss, operating expenses, and cash used in operating activities. We’ll then turn the call over to the operator for your questions. Revenues for the second quarter of 2009 totaled approximately $3 million compared to $2.1 million for the second quarter of 2008. Total commercial revenue during the quarter was approximately $1.2 million compared to $1.4 million for the second quarter of 2008. Commercial chemical revenues and royalties and license revenues for the quarter were $570,000 and $503,000 respectively, compared to $938,000 and $547,000 respectively for the second quarter of 2008. The majority of this revenue in the second quarter of 2009 was from the sale of our proprietary OLED materials to our licensee, Samsung SMD. A portion of this revenue was from a small amount of material with other customers during the quarter. The revenue decline corresponds to a decrease in material shipments to Samsung during the second quarter. It is our understanding that this decline was due to Samsung’s implementation of manufacturing process efficiencies and improved device structures and material utilization. Shipment volume and revenues remain difficult for us to predict on a quarter-to-quarter basis. Royalty revenues were generated under our patent license agreement with Samsung SMD. During our agreement with Samsung, we received royalty reports at a specified period of time after the end of the quarter in which the royalty-bearing products are sold by Samsung. Consequently, the royalty revenue from Samsung for the three months ended June 30, 2009, reflects royalties for products sold by Samsung during the first quarter of 2009. License revenue for the second quarter of 2009 totaled $245,000 compared to $229,000 for the same period in 2008. These revenues received under our patent license agreement with Samsung SMD, as well as cross-license agreement we executed with DuPont Displays in December of 2002. Also included in our revenues received as a result of our patent license agreement with Konica Minolta, signed in August of 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. Commercial revenue for the second quarter of 2009 also included $67,000 in commercialization assistance fees received under a business support agreement executed in the fourth quarter of 2008. Total development revenue was approximately $1.7 million for the quarter versus $750,000 for the second quarter of 2008. We saw an increase in developmental revenue during the quarter due primarily to new contracts received from the DOE and DOD, increased development revenue chemical revenue and increased technology development revenue. Contract research revenue totaled $908,000 for the second quarter of 2009 compared to $345,000 for the same period in 2008. This significant increase was driven by our research contracts with the U.S. Departments of Defense and Energy. Our work under those contracts increased by nearly 50% on a quarter to-quarter basis. Sales of developmental chemicals totaled $628,000 for the second quarter of 2009 compared to $305,000 for the same quarter of 2008. The increase was primarily attributable to increased sales of development chemicals during the quarter to four customers. We believe this is an encouraging sign for the future of our business. The timing and frequency of development chemical purchases remains difficult to predict on a quarter-to-quarter basis due to our customers differing OLED technology development and product launch strategy. Technology development revenue totaled $181,000 for the second quarter of 2009 compared to $100,000 for the same period in 2008. The increase year-over-year was attributable to revenue we recorded under two joint development agreements that we entered into in the second half of 2008. Net loss for the second quarter of 2009 totaled approximately $6.4 million or $0.18 per diluted share compared to a net loss of approximately $5.2 million or $0.15 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 during the quarter. The operating loss for the second quarter of 2009 was $6.3 million compared to an operating loss of $5.9 million for the second quarter of 2008. Operating expenses were consistent with our expectations on a quarter-to-quarter basis, increasing to $9.3 million for the second quarter of 2008. This compares to operating expenses of $8.1 million for the second quarter of 2008. The increase in operating expenses during the quarter was primarily attributable to an increase in costs associated with subcontractors and consultants under our government contracts and increased employee costs at our Ewing, New Jersey facility. Cash used in operating activities totaled approximately $8.8 million for the six months ended June 30, 2009 compared to approximately $5.5 million for the same period in 2008. The increase was attributable to an increased loss during the six month period. For the six months ended June 30, 2009, revenues totaled approximately $5.8 million compared to $4.9 million for the first six months of 2009. Commercial revenue totaled approximately $2.6 compared to $3 million for the same period in 2008. Developmental revenue totaled approximately $3.2 million compared to $1.9 million for the same period of 2008. Net loss for the first half of the year was approximately $12 million dollars or $0.33 per diluted share versus a net loss of $9.4 million or $0.26 per diluted share in the first half of 2008. Our balance sheet remained strong with cash, cash equivalents, and investments of approximately $68 million as of June 30, 2009 compared to $77 million as of 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 traction. With that, we will now open the lines up for questions. Operator, would you please compile the list of the Q&A roster, please?

[Operator:]

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

[Jim Ricchiuti:]

Question on the commercial revenue stream. I think we all recognize how difficult it is to forecast this portion of the revenue, but do you have any sense, you know, we’ve had now I guess about five or six consecutive quarters of sequential declines in the commercial revenue stream. Would you anticipate that this would be up quarter-over-quarter in Q3?

[Steve Abramson:]

That obviously as we said is difficult to predict. We are encouraged by what’s going on so far in the quarter. What we believe has occurred as we said is they’ve incorporated a number of manufacturing process efficiencies, material utilization, as you’re probably well aware has been very low and the fact that they are now we believe running the tool at a much more efficient level, has allowed them to be much more efficient in terms of the material utilization. Initially, a few years ago, utilization was very, very low and these materials are fairly expensive, even though when you look at a bill of materials, they are above pennies for the material content. They still are trying to increase their yields and their utilization. So it’s difficult to predict, but we believe eventually this will turn around and start to go up.

[Jim Ricchiuti:]

A couple of follow-up questions. On the increase you saw in development chemical sales, for customers, were they all display related customers?

[Steve Abramson:]

I believe so. I can’t tell you for sure, but I believe that is yes.

[Jim Ricchiuti:]

Last question. If you could just provide an update on where you guys stand with the green organic material and whether or not you can comment on Samsung potentially beginning to use those in their displays going forward.

[Steve Abramson:]

As we have said, we are very encouraged by all of the work. We are going through their manufacturing qualification process. We have always believed the second half of this year is when they would start to incorporate it. We are continuing to provide quantities of materials for them to test. So we believe that and we still are on track for the end of this year.

[Jim Ricchiuti:]

Okay. Thank you.

[Operator:]

Your next question is from the line of Yair Reiner with Oppenheimer & Company.

[Yair Reiner:]

In terms of the cost of chemicals, for the first time I think in a long time, your gross margins fell below 80% and I think the cost of chemicals was quite a bit higher than it’s been in the recent past. Can you explain what’s gone into that?

[Sid Rosenblatt:]

Yes, interestingly enough, the mix between commercial and developmental chemical sales through development chemicals this quarter were higher and our developmental chemicals that we sell are early stage and they are all not in full production scale. So when we sell commercial chemicals that are in full production, they cost us less than our developmental chemicals do. So as we sell developmental chemicals, and in this case that number was higher, our cost of the developmental chemicals is higher. If it was all commercial, it would be back where it was before.

[Yair Reiner:]

Then a question on industry capacity. Samsung has clearly been investing in ramping up its ability to produce more AMOLED panels. Do you see LG Display stepping up and making it a similar commitment and if so when do you think they might become a more substantial part of your revenue mix?

[Steve Abramson:]

LG has stated that they intend to introduce some limited quantities of TVs by the end of the year. We know that they have a, it’s been announced, a Gen 3.5 line that they expect to start shipping product the end of this year. We would expect them to be a customer of ours and we expect them to start ramping up and eventually spend more money. So yeah, we do believe that LG will be a customer of ours and that it will impact our revenue.

[Yair Reiner:]

One final question and then I’ll get back into line. For a commercialization assistance, am I correct in remembering that that contract goes through September. I was wondering if you have any visibility into the extension of that contract beyond September?

[Steve Abramson:]

At this point, we really don’t have anything that we could talk about. It does run out the end of this quarter. We clearly would like to be able to continue to working with the customer and it will really depend on what happens over the next couple of months.

[Yair Reiner:]

Thank you.

[Steve Abramson:]

With that, I believe there are no other questions. So we appreciate you all listening and again as you’re all well aware, you can contact me directly and I’ll be happy to answer any questions that you may have. With that, thank you very much for participating and we will talk to you all soon. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines.