Good day, ladies and gentlemen, and welcome to Universal Display's Second Quarter 2017 Earnings Conference Call. My name is Don, and I will be your conference moderator for today's call. 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.

[Audio Gap] President and Chief Financial Officer. Before Steve begins, let me remind you today's call is a property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being web cast live and will be made available for a period of time on Universal Display's web site. This call contains time-sensitive information that is accurate only as of the date of the live web cast of this call, August 3, 2017. All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as those relating to Universal Display Corporation technologies and potential applications of those technologies, the company's expected results as well as the growth of the OLED market and the company's opportunities in that market. These include, but are not limited to statements regarding Universal Display's beliefs, expectations, hopes or intentions regarding the future. It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now, I'd like to turn the call over to Steve Abramson.

Thanks Darice and welcome to everyone on today's call. We are pleased to report an across-the-board record quarter. Revenues in the second quarter of 2017 were $102.5 million, operating profit was $60.5 million, and net income was $47.2 million or $0.99 per share. In the past three months, additional datapoints have materialized, that reinforce the sustainability, strength and longevity of this exciting multiyear OLED CapEx growth cycle, that we are in the beginning stages of. From new product announcements, to new fab and capital expenditure plans, to a flourishing amount of OEM design activity, OLED momentum continues to build. With this growing momentum, we are raising our 2017 revenue guidance range to $285 million to $300 million, reflecting approximately 40% to 50% year-over-year growth. Sid will provide further details shortly. Our solid performance is due to the talent, dedication and hard work of the entire UDC team. I would like to take a moment to thank our employees and our partners for their commitment to excellence and innovation. With the OLED ecosystem continuing to grow, so are the announcements from news reports. Samsung, according to reports, is expected to build the world's largest OLED plant with a capacity output of 180,000 to 270,000 Gen-6 substrate starts per month. If those estimated outputs materialize, then the new plant would more than double Samsung's current and total capacity. Timing is still to be determined, but if construction starts later this year, production is expected to begin sometime in 2019. Additionally, Samsung is reportedly looking to expand its OLED offerings further into the IT market for tablets, laptops and monitors. With a total available market in excess of 430 million units, according to Gartner, penetration in the OLED IT market could significantly expand the square meters of production capacity. Last week, LG Display…

Thank you, Steve. And again, thank you, everyone, for joining our call today. Revenues for the second quarter of 2017 were $102.5 million compared to second quarter 2016's $64.4 million. Our total material sales were $46.8 million in the second quarter, sequentially flat from last quarter's $46.6 million and up year-over-year from the second quarter 2016's $22.3 million. For the second quarter of 2017, commercial material sales were $30.9 million and development material sales were $15.9 million. With a number of new materials being introduced into the marketplace, we saw our development revenues grow quarter-over-quarter. Since the vast majority of these developmental sales are materials that are being scaled up for high-volume commercial production, we think discussing total material sales, which consists of both development and commercial, provides a better picture of our overall results. Consequently, we will provide total material sales by color going forward. Now for the second quarter of 2017, total green emitter sales, which include our yellow-green emitters, were $32.1 million, down 4% sequentially from first quarter's $33.3 million and up 110% from the comparable year-over-year quarter's $15.3 million. Total red emitter sales were $13.7 million in the second quarter, up 7% sequentially from the first quarter's $12.8 million and up 104% from the comparable year-over-year quarter's $6.7 million. As we have discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors to this can include consumer product and demand cycles, capacity ramp schedules, production-loading rates, contractual volume pricing reduction, 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. As a result, quarter-to-quarter forecasting remains difficult. Moving to royalty and licensing. Our second quarter 2017 royalty and license fees were $53.7…

Thanks, Sid. We are at a very exciting stage in OLED adoption. With its unique form factor, manufacturability on plastic and brilliant picture quality, OLED is providing a vast range of opportunities, including unprecedented applications. As the OLED market continues to expand, should do the pathways of our top line and bottom line growth. Over a span of 2-plus decades, we have consistently invested to build the critical mass and sustainability for our strong leadership position in the OLED ecosystem. Like any business platform, leveraging first-mover advantage in scaling investments and resources creates strong long-term market leadership positioning. For our first 17 years, we were an R&D company, so we understand how long and how difficult it is to go from idea to lab, lab to fab, fab to meeting the ever-changing commercial specs, to scalable high-volume production. Through those 20-plus years, we have accumulated an insurmountable wealth of knowledge and know-how; expanded our extensive IT matrix; and built up our R&D prowess to innovate, develop and deliver new materials and technologies for our growing customer pipeline. Fortifying our innovation engine is our operational flexibility and strength to streamline and scale our proprietary phosphorescent technology from invention, to pilot, to mass production. In summary, the OLED revolution is gaining momentum, and so are we. With our tremendous experience, unwavering focus on execution and expanding OLED product portfolio of new materials and technologies, we are and will continue to be well positioned to leverage the vast opportunities in this thriving market; drive profitable growth; and deliver the most energy-efficient, high-performance and cost-effective emissive layer solutions to our customers and partners. On that note, operator, let's start the Q&A.

[Operator Instructions]. And we'll take our first question from Brian Lee with Goldman Sachs.

[Technical Difficulty] New emitter starting in Q4 of last year. And then based on your results, the volumes have clearly been strong year-to-date. So wondering if they've started to get pricing discounts on those new emitters and if that happened in Q2 or if you expect that to happen in Q3?

Brian, we missed the very first part of your question. It didn't come through. Can you just repeat the first part?

Yeah. Sorry about that. So just on the largest customer, they started buying new materials, new emitters from you starting in Q4 of last year. Clearly, they bought a lot, based on your results here year-to-date, so wondering if they got pricing discounts on those new emitters this quarter or if that will happen in Q3.

We do expect some discounts to kick in, in Q3, that -- because we have been selling quite a bit of material, developmental materials in the first and second quarter, but as you are aware, we do provide volume price breaks.

Okay, fair enough. The China revenue, $5 million, it looks like, in the quarter, which is well and above the run rate over the past year. Two questions on that, is that predominantly one customer still? And then secondly, what kind of buying patterns are you guys expecting out of that region?

Well, it's predominantly one customer. However, it is starting, but they have not really built any high volume facilities that are kicking in yet. So we're seeing more and more materials being purchased, but they still are not in production.

Okay. The comments Steve made on just getting closer to an all phosphorescent stack, any color, no pun intended, you can provide on that in terms of potential incremental developments that you can speak to? And then I'll follow up with one last housekeeping one and pass it on.

We'll continue with the color puns, Brian; but our confidence in developing a commercial phosphorescent blue does continue to grow due to significant R&D progress that we're making. We were getting closer to initial commercial specs, but we are not yet able to provide a time frame.

Okay, fair enough. And then just last one from me, Steve -- or sorry, Sid, on the tax rate, 25%. Is that apples-to-apples versus the original 30% target you guys had provided earlier? And then with the ASU treatment, what will that tax rate actually end up being? And then just lastly, is 25% the rate for 2018 and going forward, or should it even be lower than that? Thank you.

The 25% is comparable to the 30%. There are a few things that occurred that reduced that rate in terms of some deferred tax issues. But we expect that 25% to be their going-forward rate. The accounting for stock ops or -- and stock-based comp, I don't think it'll have much of an effect in Q3 and Q4. There would be some, but I don't expect it to be very much. And I would think that, for 2018 and beyond, our target is to be in the 20% range.

We will go next to Mehdi Hosseini with SFG.

It's Mehdi Hosseini from SIG. I noticed a spike in host materials sale. Is that due to China or how should I think about it? And I have a follow-up.

There are some developmental host materials. It is -- we sample different host materials to customers. There are no customer wins and I do not expect host materials to grow significantly in the foreseeable future.

Perhaps, as a follow-up to Brian's question that could be tied into the development of the blue material, correct?

We do develop hosts for all of our materials and we are working on blue, so we will be working on blue host materials also But these are samples, customers ask us for different materials with different emitters, and we do sample them.

Okay. And then just going back to the prepared remarks. You talked about the increased visibility with your customers' capacity plans because they have been more specific, especially over the past couple of weeks. A couple of months ago, you announced an increase in your own internal manufacturing capacity, so it seems like the scaling of the revenue is going to gain momentum into 2018 given these developments externally and internally. Is that the right way to think about this?

That is correct. I mean we are scaling up our production capacity at PPG Industries, and that is going as planned. We expect to complete the construction of that in this quarter. And we will ramp our new capacity as demand requires it, but we do expect it to increase our material sales, as this CapEx cycle continues to cause our demand for our materials to grow, and we will have the capacity to meet all of that demand.

Okay. Thank you.

Thank you.

We'll take our next question from Nam Kim with Arete Research.

Hi guys. Good quarter. Congratulations. Question on your revised guidance. Based on your midpoint of the new guidance, you're expecting 15% revenue decline in second half versus first half. However, Samsung will be ramping for their external customers big time, and then LG Display plan to ramp up flexible OLED along with increased TV capacity in second half. So in that sense, number looks fairly conservative, but can you explain what assumption you build into your new guidance? And I have a follow-up.

That's a fair question, Nam. With respect to new capacity coming online, although there's quite a bit of capacity expected to be installed this year, it's expected to be installed in phases. And while install capacity is a great indicator of our revenue opportunities, what really fuels our materials sales is running capacity. And exactly when and how much each line will ramp, we believe, is still a moving target.

Okay. One longer term question. I think there's a lot of talk about inkjet printing in OLED TV panel. And LG Display, they said that they're considering using inkjet in P10 fabs on their announcement in the future. So I'm just curious, what would be the impact to UDC when supplier change their material to [indiscernible] from small marker or from open-mask evaporation to inkjet printing? I know [indiscernible] may not change much, but what would be the key impact to your material like revenue or margin? Whatever you can provide color would be great.

Well, vacuum deposition is currently the only commercially viable process for OLED manufacturing. Solution processing methods have been in development for almost as long as we've been around, and they are still in development. The reason is there are a number of significant challenge with this and we believe that, even if solution printing ever does become commercially viable, we do have T-squared OLED materials that would be available for use. As you're aware, we're working on OVJP technology, organic vapor jet printing, which essentially takes vacuum thermal evaporation, which is the process that's being used today and allows you to print those materials without adding solvents and having mass. So that is something that we have been working on, because it does work in using vacuum thermal evaporation, and we still expect that to be the method that's going to be used for the foreseeable future.

Okay. Okay. Thank you guys.

Thanks Nam.

We'll go next to Jagadish Iyer with Summit Redstone.

Yeah, thanks for taking my question, Sid and Steve. It's kind of reference to the earlier question. But if I take -- your materials sales were somewhat flattish quarter-over-quarter, which is surprising given that your key customer is trying to ramp for Apple. I understand that there is a quarter-to-quarter variation, but slightly on a little bit bigger picture, if I take your updated guidance at the top end and back into the licensing for second half, your material sales should decline. Am I right with my math, or is your guidance reflecting conservatism? We'd love to hear your thoughts.

Well, as we stated a little bit earlier, there are volume pricing discounts that impact our revenues. It's product mix, loading rates, material ordering patterns, customer production, efficiency gains. So a number of these are moving targets for our customers, and a number are moving targets for us. While we believe that the trajectory for the year is up, we also believe it's too early to say whether or not our revenues will exceed 40% to 50% year-over-year as we currently project. I mean we will look at the guidance every quarter and revaluate. And you are correct, if you do the math, it looks like that's the case. But we do expect that our material volume trend is clearly up. But some of the other things that I said will affect that.

Okay. So that's fair enough. Just on a bigger picture question, Sid and Steve; so how are we supposed to look at licensing agreement with Samsung as the first one comes to an end at the end of this year? Clearly, your first agreement did not see the benefit from rising units, so how should investors think about the second licensing agreement, and especially if they start to be a very pivotal player in terms of panel makers, not only for Apple but for others? How should we think about it going forward?

Well, we did have increasing fixed license fees from day one, when we signed that contract. It went from $20 million to $30 million, to $40 million, to $50 million, to $60 million, to $75 million, to $90 million. So we have seen a significant rise in our license fees. And we've had a longstanding partnership with Samsung for almost 20 years and we've signed multiple agreements and we plan to continue to work with them, and we fully expect to sign another license agreement with Samsung.

Okay, fair enough. Just one quick last question is on the red material sales, it was pretty nice to see the progress, so how should we think about volumes for red going into second half of this year? Thank you.

As we stated, that we do expect to see some pricing discounts kick in and -- but we do expect the volume to grow. But to some extent, it's really dependent on then how quick some of the new capacity comes online.

For our next question, we will go to Andrew Abrams with Supply Chain Market Research.

Hi guys and congratulations also on a great quarter. Just a point of clarification, Sid, understanding the red and green numbers that you gave. Were those for the second quarter just commercial or were they total numbers? And if they are total numbers, can you give us a comparison against first quarter total numbers?

They are total numbers, and I will throw up the first quarter total numbers. For yellow green, total emitters were $32.1 million, down 4% sequentially from the first quarter's $33.3 million. And for red emitters, it's $13.7 million, and it's up 7% from the first quarter's $12.8 million.

Got it, okay. Thank you very much. And also, as far as OVJP goes, have you guys partnered yet with anyone? Or are you still in the -- in your development stage?

We're still in our development stage and we're talking to a number of people in the industry to see how we might best be able to commercialize the technology.

And my assumption is that you will not produce any equipment, you're just going to license the technology to an equipment manufacturer, assumingly?

Well, at this point, the exact parameters of what the relationship might be hasn't been determined, but I strongly doubt that we will become an equipment supplier [indiscernible].

Got you. And lastly, on Samsung's license or the contract renewal, if for some reason you do not come to an agreement with Samsung on a long-term prospects for both materials and licensing, would your agreement that's in place now stand through 2018? Is that a renewable agreement, if you don't come to a long-term agreement right away?

We're focusing on signing the agreement by the end of this year. If the agreements do lag, we'll notify you.

Okay. Thank you.

We'll go next to Shannon Cross with Cross Research.

Thank you very much for taking my question. I guess my first -- and I'm going to back to sort of the guidance comment. I'm just trying to figure out, you've beaten significantly in the last two quarters. You are guiding, it appears quite conservatively. So I'm just trying to figure out how much of the guide is the concerns around pricing and breakpoints versus just we don't know the timing exactly of when the production is going to ramp and therefore, we don't necessarily want to get out ahead of our skis on it. So just if you can give us anything, sort of how you're thinking.

Shannon, that's a good question. We believe it's still early in the OLED multi-CapEx cycle and how it plays out quarter-to-quarter is really not always predictable. And some of the key factors are consumer product demand cycles, contractual volume discounts and product introduction and sell-through. There is something that gets pushed in, pushed out. Run rates, pricing discounts, it is a mix of all of the above that gives us the confidence in our $285 million to $300 million guidance for the year.

Okay. So we will look forward to be taking it probably next quarter as well, but that's fine. And then, I guess, Steve, can you talk a bit about lighting, automotive? I mean obviously everybody is focused right now on smartphones and rightly so and TVs, but I'm just curious if there has been any notable developments or things we should focus on with regard to a couple of these emerging markets?

Sure. On the lighting market, we're working with a number of different companies, and we're selling our materials to them. And they're working on ways of getting the materials cost effectively into the lighting market and the specific products that may work. So you've seen a number of products over the last few years, QED [ph] selling through Home Depot. Now you're seeing rear tail lights and the like in some automotive applications. I think OLED lighting has tremendous potential, and right now they're experimenting with which products that's going to be able to apply to and the manufacturing processes that can apply to them.

Okay, great. Thank you.

Thank you.

[Operator Instructions]. We'll go next to James Medvedeff with Cowen and Company.

Hi good evening guys and girls.

Good evening, how are you?

Great, great. Fantastic quarter. Congratulations. So most of mine have been answered, but could you just talk a little bit about trends in expenses?

Sure. In expenses, we expect the overall OpEx to grow in the 10% to 15% range over this year, over last year. That excludes the amortization expense for the IP that we purchased. We are continuing to grow. We are continuing to ensure that we have everything we need to meet all the demand of our customers as this market continues to grow at an accelerating pace.

Do you have a medium-term sort of target for operating margin over the next three years, let's say if --

We have extremely high operating margins. Our target, to be honest, is to ensure that we do everything we need to do to make sure that we meet all of the demands of our customers. So it's in the 40% to 50% range, and we fully expect it to stay in that range.

Okay. Thanks. And then just one final one, on that breakdown of margins. I believe you said -- I just want to verify that you said emitter -- I'm sorry, material costs of goods sold would have been $9.9 million, excluding the Adesis business. With that record?

That's correct. Yes, that's correct.

Great. Thank you.

Thank you.

We will take our next question from Hendi Susanto with Gabelli & Company.

Good evening Steve, Sid and Darice. There is speculation that one new giant adopter of OLED may postpone its OLED-display version of its new product. How should we think about that? How much flexibility do you have in your supply chain capacity?

We can't comment on this one big customer. That's all discussed. We can do whatever our customer wants. We can accelerate. We are sole sourced. We ship within 24 hours, and we can do whatever our customers want.

And Sid, should we expect that inventories may increase, given the CapEx cycle, from the current level?

Inventories, we will continue to build up inventory. As we continue to expect the capacity of our customers to grow. So we are going to build inventory. We always will ensure that we hit excess inventory. My cost of capital is not that high and we will make sure that we always have enough product to ship within 24 hours.

Okay, let me squeeze one more. Is it reasonable to assume that flexible OLED display is more likely to use your newer version of materials and therefore the initial pricing will be favorable to you?

Well, whenever -- the customers are using newer materials. The materials that were in the Galaxy S1 are not the materials that were in the five or six and not the ones that -- so they're constantly looking at new materials and improving their products. So as they introduce new products, they will give us new specifications and new requirements for us to develop materials to meet their specifications. And that's what we're able to do. We've got the largest OLED phosphorescent development team in the world, and we have got 20 years experience. And we do what our customers ask us to do.

Okay. Thank you.

Thank you.

We'll take a follow-up question now from Shannon Cross with Cross Research.

Thanks. Just a quick question. On cash flow, assuming that the ramp continues and obviously the leverage in your model is significant, and you have a pretty big cash balance right now and you've initiated a dividend. How are you thinking about balancing the uses of cash maybe a year or two out? I know I just gave you a lot of assumptions, but just holistically, how are you thinking about cash given this model should be something that generates a significant amount of cash over the next few years?

Well, Shannon, we're really looking to grow this company sustainably on into the future. We're opportunistic when opportunities come along. So if you looked at last year, we spent over $130 million buying the BASF OLED IP portfolio as well as Adesis. And we're continually on the lookout for acquisitions or opportunities that would make sense given our business model placed in the OLED ecosystem. So we continue to look for those opportunities and if they come in on an appropriate basis, we'll then secure them.

Okay. Thanks.

And next, we'll take a follow-up from Brian Lee with Goldman Sachs.

Hey guys, just with all the focus here on the guidance; and perceived either conservatism or cautiousness, depending on how you're interpreting it, just would be curious if you guys could provide a little bit of commentary. I think, last quarter, you had talked about the consistency of orders you were seeing. And that, I think, was a big part of why you started out the year with a lot of confidence around the outlook. And if you look at the numbers, your largest customer did buy materials at a pretty similar, slightly better rate in Q2 than Q1. And so when you look at this point in the quarter, what type of consistency are you seeing in orders, and how is at all playing into your outlook for the rest of the year? Thanks guys.

It is somewhat consistent, but there still are -- buying patterns are still, from quarter-to-quarter, a little lumpy. The factory utilization rates are lumpy, so we still see differences quarter-to-quarter and month-to-month. So it isn't -- clearly, it's getting better and our ability to predict is getting better based upon the installed base. But there are still capacity constraints that need to have the equipment turned on and, when they turn on, will have a big impact on what our revenue is in the second half of the year.

We'll take our next follow-up from Hendi Susanto with Gabelli & Company.

Hi Sid. R&D is sequentially lower. Any color on that? And should we expect that to go up again in Q3?

R&D. R&D is -- I would expect it to go up again. There are some issues in terms of quarter-to-quarter spending. We do have a number of contract research organizations that we work with, that we worked with Adesis last year. And the timing of and the amount of work that they do from quarter to quarter is lumpy, so when we may have one task that's completed and we're starting a new task, it may just take some time to get it up and running. I do expect it to go up in Q3.

And then any advice on modeling the CapEx? I'm wondering whether the large CapEx in Q2 represent the largest portion and then therefore there's little left for the second half.

Well, that has to do with the expansion at PPG Industries. We still have a little more to spend there, but it should not be quite as high that it was in the prior quarters.

Thank you. Well, this concludes the question-and-answer session. I would like to turn the program to -- back to Sid Rosenblatt for any additional or closing remarks. End of Q&A

Thank you for your time today. We appreciate your interest and support. And good night, everyone.

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