Universal Display Corporation (OLED) Q4 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to Universal Display's Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Rob and I will be your conference moderator for today's call. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. [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.

Thank you and good afternoon, everyone. Welcome to Universal Display's fourth 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 that 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 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, February 22, 2018. All statements in this conference call that are not historical are forward-looking statements within the meaning of 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 would like to turn the call over to Steve Abramson.

Thanks, Darice and welcome to everyone on today's call. We are pleased to cap off the stellar year with a solid fourth quarter results. 2017 revenues for $336 million, up 69% year-over-year; operating income was $146 million, up 114% year-over-year and net income was $104 million or $2.18 per diluted share. Net income included a onetime charge of $11.5 million from the Tax Cuts and Jobs Act. Excluding the tax charge, net income was $115 million or $2.43 per diluted share, up 140% year-over-year. Revenues for the fourth quarter were $116 million, operating income was $58 million and net income was $33 million or $0.69 per diluted share. Excluding the tax charge, net income was $44 million or $0.93 per diluted share. 2017 was a year filled with tremendous growth, from record high revenues to a multitude of new agreements and new OLED consumer electronic products to approximately doubling our production capabilities at PPG. During the year, we announced new agreements with Japan Display, Ever Display, OLED and a long-term agreement with BOE Technology; and in just a past 1.5 months we announced new agreements with Sharp, Go VisionX, and last week we signed a new long-term agreement was Samsung Display. The increasing pipeline of customer's activity is indicative of the OLED industry's momentum from expanding OLED development and commercial activity to new OLED capacity plans. From a research and development standpoint, we meet significant advances with our new and next-generation red, green, yellow and blue emissive system. We also made substantial progress with our organic paper jet printing technology for the manufacturing of large area OLED TVs. On the production front, we approximately doubled our fuller production capabilities by opening a new manufacturing line in Barberton, Ohio with our partner, PPG Industries. Additionally, our subsidiary DSES purchased it's New Castle, Delaware building has opening up a new suite of labs at Wilmington, Delaware. In the consumer electronics landscape from small screens to large screens, the adoption of bright, beautiful, brilliant OLED technology continues to grow. In the smartphone market, Apple adopted OLED technology for the first time in its flagship smartphone, the iPhone10. During it's earnings call, Apple highlighted the iPhone10's innovative features including the edge-to-edge super retina display and reiterated that the iPhone10 is the basis for Apple's technology perhaps for the next decade. On the IT front, Samsung is expected to launch the Galaxy Tab S4 at Mobile World Congress next week in Barcelona which will reportedly have a 10.5 inch Super AMOLED display. This is a follow-up to the Galaxy Tab S3 which is considered one of the best Android tablets you can get right now. The Tab S3 which was launched at Mobile World Congress last year boasted ultra-crisp 9.7 inch Super AMOLED display with Samsung known as the world's first HDR ready pad on a tablet. In the OLED TV market, LG Display shipped an impressive 1.7 million OLED TVs up for approximately 900,000 in 2016. For 2018, LGD expects shipments to grow by approximately 50% year-over-year to about 2.5 million to 2.8 million OLED TV. In addition, it was reported that LG Display expects two major Chinese OEMs to jump on the OLED T.V. bandwagon which will increase the total number of OEM adoptees to 15. Form factor has been a major topic of discussion in the consumer electronics world from LG Display showcasing its jaw dropping 65 inch OLED T.V. that can roll up like a poster to Samsung unveiling its awe-inspiring 9.1 inch dynamic stretchable AMOLED display at SID Display Week, and reiterating plans to launch the world's first foldable smartphone. As layers the thin films, OLEDs are inherently conformable, foldable and rollable. With the advent of new form factors and new applications, we believe that the innovative properties of OLEDs are paving new paths of consumer electronics growth. We are in a multi-year OLED CapEx growth cycle. After an extraordinary year and a half of new capacity installs, we expect industry capacity growth to take a bit of a breather this year as the number of panel manufacturers build the framework for the next expansion wave of high volume OLED production which is expected to warp next year. For example, Samsung Display had back-to-back years of record display capital expenditures. In 2017, Samsung's Display CapEx reached $12 billion as the company fully facilitated it's A3 Fab to 135,000 plates per month and retrofitted a Gen-7 LCD Fab to a Gen-6 OLED overproduction. Samsung, the leading manufacturer of OLED mobile displays with over 95% market share is expected to unveil its new flagship smartphone, the Galaxy S9 next week at Mobile World Congress. During its earnings call, LG Display reaffirmed its robust OLED investment plan of $18.5 billion from 2017 throughout 2020 split 50-50 between mobile and TVs. On the mobile front, LG Display is expected to commence Gen6 mobile production in Pazhu [ph] in the third quarter this year. On the TV front, LG Display expects to commence production in its new Guangzhou OLED TV Fab in the second half of 2019. In Japan, Sharp began producing sample OLED displays in December and expects to start shipping OLED mobile panels in the third quarter of this year. Additionally, Sharp announced plans to introduce a new smartphone featuring an OLED screen under its own brand this summer. And in China, there is new capacity activity throughout the region. Starting with BOE Technology. BOEs first Gen6 flexible OLED plant in Chengdu is expected to start mass production this year. Construction of its second Gen6 plant in Mianyang is reportedly progressing ahead of schedule with production slated to commence next year. Additionally, there are reports the BOE has already started the planning phase for it's third OLED production fab. Tianma [ph] is currently producing small quantities of rigid OLED panels and Gen5.5 pilot line and is constructing a new Gen6 flexible fab. Production is expected to come online beginning in the second half of 2018. Ever display is reportedly constructing it's first Gen6 fab with plans to start operations next year. Royole is expected to commence pilot production of its Gen5.5 line in the second half of this year; Go Vision is currently supporting the construction of its first flexible Gen6 production line which is expected to commence operation later this year. On the lighting front we are still in the early commercialization stage. The benefits of OLED lighting which includes high power efficiency, novel and innovative form factors, beautiful natural colors and cool operating temperatures are all quite compelling. In December, LG Display announced and commenced mass production at the world's first Gen5 OLED lighting fab and launched its own OLED lighting brand Luflex. This now leads to our outlook. The vibrant and dynamic OLED market is growing. As a key innovation partner to the world's leading OLED display and lighting manufacturers, we believe we are well positioned to participate in the vast opportunities ahead. Sid will go into more details shortly but let me give you the broad strokes of our guidance. For 2018, we believe our revenues will be in the range of $350 million to $380 million. As the industry's capacity growth takes a bit of a breather after year and a half of significant expansion, and as the timing of manufacturers product cycles influenced production loading rates. In 2019, we anticipate that significant growth in the OLED industry to resume as we expect the installed capacity base as measured in square meters to increase by approximately 50% by the end of 2019 as compared to the end of 2017. On that note, let me turn the call over to Sid.

Thank you, Steve, and again, thank you everyone for joining our call today. Let me review our 2017 results before commenting on our 2018 guidance. 2017 was an extraordinary year of growth; revenues for 2017 were $336 million, up 69% year-over-year. Material sales were $200 million, up 102% year-over-year and royalty and license revenues were $127 million, up 32% year-over-year. 2017 operating expenses excluding cost of materials was $135 million, up 29% from $104 million in 2016. Operating income was $146 million compared to operating income of $68 million in 2016, up 114% year-over-year. Net income was $104 million or $2.18 per diluted share compared to net income of $48 million or $1.02 per diluted share in 2016. Excluding the Tax Cuts and Job Act charge, net income in 2017 was $115 million or $2.43 per diluted share, up 140% year-over-year. We ended the year with $435 million in cash and equivalents or $9.29 of cash per diluted share. Now moving on to our fourth quarter results; revenues for the fourth quarter of 2017 increased 55% year-over-year to a new record high of $116 million from fourth quarter 2016's revenues of $75 million. Our total material sales were $60 million in the fourth quarter, up 105% from the comparable year-over-year's quarter of $29 million, and up 27% sequentially from the last quarter's $47 million. Green emitters sales which include our yellow-green emitters were $40.9 million, up 25% sequentially from the third quarter's $32.8 million, and up 109% from the comparable year-over-year's quarter $19.6 million. Red emitter sales were $18.3 million in the fourth quarter, up 35% from the third quarter's $13.6 million, and up 135% from the comparable year-over-year's quarter $7.8 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 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. For example, let's take a look at the recent fourth quarter. Typically, the fourth quarter is seasonably soft but the recent quarter was a record high quarter. Based on our current order activity and prior projections we believe that about $15 million to $20 million of phosphorescent emitters purchased in the fourth quarter of 2017 maybe the result of pull-in activity from the first quarter of 2018. This estimated pull-in which we believe may be related to inventory building is anticipated to weigh on first quarter results and therefore impact our 2018 guidance. Moving to royalty and licensing; our fourth quarter 2017 royalty and license fees were $53.8 million, up 23% from $43.6 million in the fourth quarter of 2016. Cost of sales which includes Adesis cost of sales for the fourth quarter of 2017 were $16.9 million, up year-over-year from the fourth quarter 2016's $9.1 million. Cost of material sales which only relate to OLED materials and does not include Adesis cost of sales were $15.5 million translating into material gross margins of 74.1% compared to third quarter 2017 material gross margins of 75%, and fourth quarter 2016's material gross margins of 71.9%. We expect our overall material gross margins for 2018 to be in the 70% to 75% range. Fourth quarter operating expenses excluding cost of sales was $41.1 million, up from the last quarter's $32.4 million and up year-over-year from the comparable quarter's $30.7 million. Operating income was $57.9 million for the fourth quarter of 2017, up 67% from $34.8 million for the fourth quarter of 2016. The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a onetime charge of $11.5 million in the fourth quarter of 2017. The charge includes two elements; a tax on accumulated overseas profits, and the reevaluation of deferred tax assets and liabilities. Net income for the fourth quarter was $32.8 million or $0.69 per diluted share, up from the comparable year-over-year as quarter of $25.8 million or $0.55 per diluted share. Included in the fourth quarter 2017 was a onetime charge of $11.5 million from the Tax Cuts and Jobs Act. Excluding the tax charge, net income was $44.3 million or $0.93 per diluted share. Now looking to 2018, based upon our current forecast we expect 2018 revenues to be in the range of $350 million to $380 million. Our revenue guidance reflects a softer first quarter 2018 with growth expected to pick up in the second half of the year. We would note, as we have in the past a shift in the industry's momentum in either directions 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 gross margins to be in the 70% to 75% range which is consistent with the past 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 the next two years with a majority of the capacity ramping in 2019. In addition, on January 1, 2018, we adopted a new accounting rule; ASC606 which impacts revenue recognition, various estimates will need to be relied upon to recognize revenue under the new guidance for the Company's material supply and license agreement. As a result of ASC606, total contract consideration must first be estimated for the various material fees, licensee fees and royalties within a contract from which the revenues will be derived. The Company will estimate total royalty and license revenue considerations to be received from the customer and then record such revenue based on the amount of emitters sold in a given period in proportion to the anticipated total amount of emitters to be sold over the contract term. The Company will no longer recognize license revenues based upon when payment is made nor will the Company recognize royalty revenues one quarter in a rear [ph]. For materials revenues, it will be based upon the contract selling price per emitter sold applied to the estimated total amount of emitters to be sold over the contract term from which an average selling price will be determined. Material revenue in a given period will then be determined using this average selling price applied to the actual emitter sold to the customer during that period. We understand that the new accounting standards sound very complex and it is what we believe in ASC606 essentially means for material revenues will be using an average selling price which shipments to recognize revenues; and for licensing and royalties, we will use estimated long-term growth rates and proportionally record revenues throughout the term of the agreement. And lastly, we are pleased to announce that the Board of Directors has approved an increase in Universal Display's cash dividend. A dividend payment of $0.06 per share will be paid will March 30, 2018 to stockholders of record as of the close of business on March 15, 2018. The dividend increase reflects last year's outstanding results and confidence in our robust future growth opportunities expected to continue positive cash flow generation and commitment to return capital to our shareholders. With that, I will turn the call back to Steve.

Thanks, Sid. To recap, we are excited and confident of our upward trajectory in this multi-year CapEx growth cycle. Industry momentum, as well as our customer pipeline activity is growing. New form factors driven by OLED innovation such as conformable, bendable and rollable are showing further opportunities in the immense addressable markets of display and lighting. The OLED markets growth story and our growth story are still in its early chapters. We are extending our leadership position and accelerating our innovation. At Universal Display, we believe that we have the largest, deepest and strongest team in the world focusing on phosphorescent OLED emissive layer technology. On the materials front, we are investing, innovating and commercializing new emissive materials and technologies including new red, green, yellows as hosts; with respect to blue, we believe that we are making excellent headway in our ongoing development work for commercial phosphorescent blue emissive system. Building on the depth of our experience we are continually innovating and creating the best OLED emissive layer materials while also expanding our global IP matrix. The future of OLED is bright and Universal Display is well positioned to benefit from the OLED market's growth potential. With an expanding pipeline of customers, over 20 years of experience and know-how, and infrastructure and vast technology in materials portfolio built from over $0.5 billion in investments, backed by an increasingly strong balance sheet; all of which continues to differentiate us as a leading player in the OLED ecosystem and provides a robust foundation for our continued long term success. I would like to thank our employees for their exceptional work and continued commitment to excellence and innovation. I would also like to recognize our customers, partners and value shareholders for your ongoing support. And with that, operator, let's start the Q&A.

[Operator Instructions] Our first question is coming from the line of Brian Lee with Goldman Sachs.

Maybe just to be crystal clear on this point, I know you addressed it in the prepared remarks but in your view is this all timing because Q4 sales came in about $15 million better than expected and now the high end of your guide for 2018 looks like it's about $15 million shy of what the consensus expectation was? Or is there anything on the Samsung contract you signed last week or anything else you're seeing with customers pushing out or maybe less aggressively adopting OLED that's leading to the lower year-on-year growth rate here?

Clearly, the $15 million to $20 million we believe has impact on the 2018 guidance. But as you're well aware, we always provide our best guidance and our best estimates. In 2018, based on customer conversations, their forecasts, ordering patterns and taking into account our tops-down and our bottoms-up model; we believe that the revenues will be in the range of $350 million to $380 million. And there is some impact but we don't think it's significant from ASC606.

May be just digging into it a little bit deeper here; when we think about the mix of materials versus royalty and licensing -- I mean, materials revenue I think given the commentary around pull-in and weaker first half, I'm guessing it's fair to assume that in the guidance materials revenue is down year-on-year but royalty and licensing we can still assume is up here year-on-year. I guess the first question would be that. And then secondarily, when you say growth in the second half after a weaker first half; does that mean you're expecting materials revenue to start growing on a year-over-year basis starting in the second half this year or were you referring more to this sequential growth versus first half run rate? Thanks.

One thing is our business with ASC606 is going to be -- a lot of our revenues are going to be based upon the grams or kilograms of material that's being sold. And our material business is clearly driven by capacity, so we believe that based upon -- new capacity translates into new revenue opportunities for us and utilization rates do impact to some extent but we believe that the second half of the year based upon what we've seen to date and the pull-in activity, we think that based upon all the estimates that are material business will clearly be stronger in the second half of the year. And with the new ASC606 rules, the way that we recognize royalties and licensee fees are based upon us doing essentially estimate of what we will sell over the life of the contract; and then in any given quarter whatever the actual sales are in quantity then will be of that percentage will be applied to whatever it is, whether it's license fees or royalties based upon our estimate. And so, we really do know our material business really drives both of our revenues and license fees. And our license and royalty revenue is now based on our material business and therefore our revenue recognition is now really detached from billings. I know that was a long-winded answer but hopefully it helped.

That is helpful. I mean -- I guess, it brings up another question Sid. If you had applied and I know you didn't have to and you didn't but if you had applied ASC606 for 2017 given the materials revenue was so good in that year, I mean how would have that impacted your rhetoric [ph] on the licensing payments and royalty payments that you saw in '17 because you're saying ASC606 is having a negligible impact but the way you just described it would seem to suggest that the pull-in for '17, materials revenue which hurts your '18 number actually is dictating your '18 licensing and royalty revenue recognition as well. And so I'm just trying to reconcile how that may not be more of a way down impact than the way you described it here.

I don't mean it to be negligible but we don't think it is a significant impact. And going back to 2017, you literally would have to go back to when all those contracts were signed and do an estimate of a lifetime. So I don't think it really helps to help us move forward, we do believe it did have an impact. The impact of the inventory pull-in is one that is much more easy to explain and because we can see the numbers.

The 50% capacity growth a year you guys threw out, that's helpful. Maybe just to put it into some context; can you give us a sense for what you would have estimated or you're estimating it to have been in '17? And then you're also saying it's much more weighted to '19 versus '18. If it had been or if it ends up being more linear between '18 and '19, where do you think you would settle out on the revenue guidance of $350 million to $380 million? Just trying to get a sense for how much more weighted it is to '19 versus '18. Thank you.

It's a difficult question. Clearly in 2017, our material revenue doubled and it seemed that capacity at Samsung and others grow quicker than we had anticipated or yearlong because we raised our guidance each time. So we know that -- for example, we believe that Samsung is a three facility was at 135,000 plates per month by the end of the year, we don't see a lot of growth in that, they've got the LCD fab that they converted but we don't really see a significant amount of growth there, you do have some coming from BOE and some from others but we believe the installed capacity by the end of 2019 will be up by 50% but 2018 is really, we expect it to be modest and exactly when things will ramp or when they won't ramp is really difficult for us to predict. Clearly, last year things ramped faster than we would have anticipated in the beginning of the year. And then, you still have some impact of ASC606, and to be honest, that's a quarter-by-quarter analysis that we have to do and we'll have to do that every quarter.

Our next question is from line of Jim Ricchiuti with Needham & Company.

I wonder can you talk a little bit Sid about the visibility you have with customers outside of your large customers. Clearly, there is expectations about the inventory pull-in at large customer but what are you hearing from your other customers as you look out at 2018?

Well, in terms of looking at the other customers and clearly Steve talked about a number of capacity builds that are in process now; you've got BOE and estimates that you read -- when they will start and when they actually will start shipping products or we think it's probably the second half of the year which is based upon what's been reported. LG's TV's -- I mean LG's expected TV's to go up to 2.5 million to 2.7 million or 2.8 million units; that number is something that we believe that those numbers make some sense and they're built-in, right. Some of those -- some of that increase will be based upon their yields going up because they are getting better and better, so some of those incremental sales that you'll see all went up be generating new materials from us, there are some yield improvements which we think is good for them because it will help their bottom-line.

The agreement with Samsung, congratulations on that, the new agreement. Is there anything that you can say about the agreements and put it in a context, is agreement in broad strokes more favorable than the agreement that you signed back in 2010-2011?

We believe it was a win-win contract. We've been partners with Samsung for 20 years and this recent agreement really illustrates the strength that we've had and the continued strength that we have with Samsung. Unfortunately due to confidentiality, we are no longer providing license fee information.

The increase in OpEx; I wonder if you could talk a little bit about -- in particular, about the higher R&D spend. It was up quite a bit in Q4 sequentially and it sounds like you're expecting it to be up by a decent amount in 2018. What can you say about number one progress on blue? And just in general about that R&D spend? Thank you.

I mean, we're looking to expand our R&D efforts across the Board. We've been building up our team at Adesis and we intend to continue building up that team at Adesis because a lot of the work down there is being done on our technology, so we're going to do that. We also have historically worked with a number of CROs and we are continuing to do that. We believe that all of this work is going to help us to develop better and newer emissive systems whether it's red, green or blue; so that a lot of this effort is going to help us because as Steve said, we think we are getting closer to a commercial blue.

Our next question is from the line of CJ Muse with Evercore.

I guess first question, just to clarify on the $15 million to $20 million pull-in; was that from just one customer? And if you think through it, was that related to potentially securing material in advance of the negotiation on the renewal of license?

We can't specifically talk about our customers, and clearly Samsung is one of our largest customers but in general, material purchasing activity can vary quarter-to-quarter for lots of reasons. As we've previously noted, based on what we shipped in the fourth quarter, earlier forecasts and 1.5 months of order activity we believe was really pulled-in. What the reasons were is -- it's speculation to be honest.

I guess as a follow-up; given all the moving parts around this accounting change, I'd love to hear if possible, could you share with us what your revenue guide would have been without this change?

We did not do that -- I mean, we clearly have looked at it; we don't think it is significantly different. With ASC606 our revenue guidance is going to be detached from billings. So to give you an example; in those quarter that our products mix is weighted heavily on higher priced emitters, our billings will be higher than our revenue. In quarters that our product mix is weighted heavily on lower priced emitters going through cumulative volume discounts, our billings will be lower than our revenues. And we've faced similar results with our licensing and royalty revenue today with that -- our emitters are based upon an average sale price over the life of the contract.

Now that you no longer are in a one quarter accrual, I believe you said in the royalty and licensing; what happened to those were revenues that were going to come in office shipments in calendar Q4 and your Q1? And then the second question would be; in terms of materials, what are the terms of the contracts? How should we think about the timing of renewals there? Thank you.

In terms of the royalty payments, the fourth quarter royalty payment which we would get in Q1 -- historically, we would report in Q1 that amount goes directly to retained earnings; you never get to pick up that revenue on your income statement. So under 606 you have to estimate what the royalties in Q1 would be and then you report that revenue based upon your estimates in Q1. If it comes out higher or lower in the next quarter when you do your calculation you essentially true it up; bit it is now all based upon company estimates of what it would be. As you look at what it was in the past, you look at other data, you look at what we believe -- to some extent we look at material sales, we'll look at lots of different things but it is based upon essentially on a royalty base. If you look at the entire contract, you use a number of different assumptions, you come up with what you believe the value of royalties you will get over the entire contract; and then to that number you then use your material sales in any given quarter compared to what you expect to sell and that percentage is what the percentage is that you recognize as royalties. Again, I think it's -- I'm not -- it is complicated and I think it will take a few quarters for our results to be out there for people that really understand what's going on.

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

Under ASC606 you mentioned that -- I mean the ASP and royalty and patents are based on over the life of the contract. To calculate patent revenue for Samsung, I'm wondering how difficult it is to estimate material sales but through to year 2022? How should we think -- can assess the magnitude of Samsung license payment, let's say when Q1 numbers are out?

Well, as we've said, the way that this works if -- if what you have is a fixed license fee contract, I'm not saying which is which; you take the total payments, you add that up and you get the total amount that you've receive over the life of the contract. And that number is what you use your percentage against. If it's a royalty based contract, you then have to make your own estimate of what the royalties will be, we do it using top-down and bottoms-up, we would do an analysis based upon where we believe all the capacity builds will be and what you can sell out of it. We then will use industry data to say what we think the top -- what the number will be, we will then come up with what we believe to be a reasonable estimate of what we will receive over the life. And again, your actual emitter sales in quantity in any given quarter will determine how much you get.

And then there is speculation that Samsung is considering re-entering OLED TV; would you be able to indicate whether your new Samsung agreement factored in all patents, in other words, inclusion of blue and future materials and OLED TV into consideration? I know I'm asking -- I may have asked for too much but I'll try anyway.

We believe that OLED TV's are great and spectacular and we want to help all of our customers and collaborate with them; from wearable's to TVs. And as we've stated in the past, our license agreement and agreements with customers include all the products that they sell.

Our next question is from the line of Rob Stone with Cowen & Company.

Further to your comment about the pull-in of orders potentially from the first quarter is backed up by the order pattern that you've seen in Q1 to-date. Can you give any color -- I know you've said in the past that -- what a quarter turns out to be is difficult because you could ship or not even in the last couple of weeks of the quarter. But how have shipments been trending so far through the quarter; is that backup the pull-in theory?

Based upon current estimates, we believe that the first quarter sales will be down due to pull-in activity. We expect to see a pickup in the second half but we also stated that we believe that purchases in the fourth quarter result in pull-in activity from the first quarter and this is based upon the current order activity that we see.

With respect to capacity growth and market activity and so forth in your guidance for the year; at the midpoint the revenue growth is slightly under 9% but you're going to grow expenses 10% to 15%. Do you feel like you need to invest ahead? Are you being more confident about the expenses than the revenue or sort of how are you thinking about managing expenses if at all relative to revenue?

Well, we try to manage expenses all the time but it's very thoroughly in the industry we believe that we need to continue pushing the envelope on developing new emitters and new technologies because this year as we said is the year where the industry may be taking a breather, we see significant growth in 2019 and we want to make sure that we always are getting what our customers need, when they need it. And we're doing a lot of work on a number of areas, one includes blue technology, another area that we're putting effort in this year is OVJP. So it is as I said weighted heavily towards R&D and if we think we don't need this spending we won't but we have never tied our R&D efforts to any metric such as revenue at this point in our stage because we think it's too early to do that.

On the subject of OVJP, I think you were planning on getting the next larger piece of equipment for your OVJP development into the lab late last year or early this year. Can you give us any update on where that stands?

We still think it will probably come in early this year and we're really excited about the progress in that program and we're also talking to a number of industry players about we could commercialize this technology.

You mentioned LG Display turning on their larger lighting facility for the first time late last year; how much does lighting just relatively speaking contribute to how you're thinking about revenue for 2018?

It's a Gen5 sized facility and we believe it will probably ramp up slowly. It is -- it will not be a significant number in 2018, I think it will take some time before it really moves the needle.

[Operator Instructions] The next question is from the line of Sidney Ho with Deutsche Bank.

Sorry to beat a dead horse; given the change in revenue recognition it may make sense for some of us to look at the free cash flow instead of earnings per share. Can you provide us some guidance how we should think about free cash flow this year? And would you consider disclosing billing information as a supplemental information going forward?

Well, I mean we generated $133 million of cash last year and we expect to generate that probably plus. It's a very profitable business, our margins are 70% to 75% on our material business and licensing is higher than at -- our expenses, we believe are in-line with our business objectives. So we do think that this business will generate significant cash flow as we move forward. One of the things that though we did is, it doubled our dividend from -- that we just announced, so that is something that we think is important to do to get some of our capital back to shareholders.

My second question is, if you look back at last year your material sales grew more than 100% and even if you back up the pull-ins that we talked about earlier, that's clearly got an increase in the number of OLED films that shipped last year which is maybe like 30%. Can you walk us through what's driving those increases? And just to follow-up on that, I don't know if you have talked about it earlier in the call; how much material sales growth are you baking into your 2018 guidance? And how should we think about ASP versus units?

Well, clearly the capacity that came on in 2017 exceeded our expectations. So the material sales in 2017 were much higher than we anticipated. And there is lots of things that occur, customers build inventory, it may not get sold until 2018; so there is -- you can tie our material sales to the number of units that they sell over a long period of time, it's difficult to do it from quarter-to-quarter or month-to-month. And we will recognize our material revenues based upon shipments using an average selling price. So to some extent some of the lumpiness having to do with sales of material where there is higher priced materials or lower priced materials; giving billing information I think is -- to some extent you could look at receivables and deferred revenue and things like that and do some of your own calculations, I don't think that's meaningful. If we don't believe that there's -- that difference is significant, so we don't believe that information was going to help.

Our next question is from the line of [indiscernible].

Sid, I wanted to clarify your comment on capacity growth this year. You said modest growth but -- I mean if you look at A3 line, yes, you said I won 31K, 35K now but when they start 2017, to us like 15K, 20K; so if you compare 2017 versus 2018, I don't see a substantial growth there. But you said, not much growth, does it mean you are looking at fairly low utilization throughout the year?

Well, as you're aware and you are correct, we did go from the lower base to 135,000 at Samsung. Well, our material business is primarily driven by capacity and new capacity translates into new revenue for us. Utilization rates and production lines also impact us, and if utilization rates go up or down -- if they go up, that means more material, if they go down, that means less material. And based upon current ordering patterns and based upon a lot of the industry chatter, we expect the first half of this year to see a slowdown. We expect to look up in the second half.

Second question related to the recent news on Samsung's and turning into OLED TV plant production. News say Samsung is trying to adopt a blue OLED technology versus white OLED of LG Display. However, I don't think Samsung can use current blue material because the blue lifetime is fairly short today. And you said your phosphorescent blue is coming soon; and I think that even if Samsung make TV OLED panel, it will be beyond the 2020-2021, by that time you will have a [indiscernible]. So my question is; I know this is maybe too early to estimate -- now what is potential impact on blue OLED business versus white OLED you are currently doing with LG Display?

It's difficult for us to comment one on the number of different speculations on the Samsung and TVs and we can't speak for our customers. We are working to get a commercial blue and we are working very hard to get a commercial blue and as we have said, we do expect it and that we are close. So even if somebody was looking at making OLED TV's in 2020 or 2021, there is a lot of development going on on the material side that we believe should be able to meet whatever their customers need in two or three years.

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

Given your assumption for shipment by your customers and the new revenue recognition; how should we think about the change in the revenue mix by customer A, B and C?

Well, we still will report revenue by customer A, B and C. I mean that's -- that is the SEC requirement. We will still do that, it will -- but that revenue will be based upon the 606 guidance and which is now GAAP. So we always -- we report based upon Generally Accepted Accounting Principles; so whatever it is we report, we still will break it out between our customers A, B and C because that's the requirement.

I guess I was more interested to hear from you how the percentage mix is going to change; should we assumed that the mix -- if we were to look at the entire '17 and revenue mix by customer A, B, C; would that remain the same or would there be a change from '17 to '18?

To be honest; A) we don't break it out between customer -- between revenue, we do list material sales and we do list our licenses, we don't break it down between customers. It will also end upon how much material customers order in 2018 since that is -- it's a new measurement that we would have.

The reason I'm asking is, I think -- and so far the confusion is to what extent the cautions that was expressed by Samsung under earning conference call is applied to customer B and C because customer B is very positive on the demand for OLED TV and customer C or China is also very upbeat but what I hear from you is a broad-based cautions and driven by low utilization rate; and I'm just trying to reconcile the cautious view that customer A express under earnings conference call, would the rest of the customer mix that sounds very upbeat.

You are correct and since we can't -- we don't speak for specific customers, however, Samsung is our largest customer and as they stated they are being very cautious and we have to -- we base this upon customer forecasts and information we get from our customers; so that Samsung -- we are cautious. And as Steve said in his prepared remarks; we see LG TV's growing from 1.8 million from 2.8 million, we see BOE. So it built into our increase is -- there is pushes and pulls, and there is ups and downs, and you've got some customers are talking about low utilization rates and we've got other customers that are going to grow. We still -- our revenues are still growing in 2018 over 2017 and the specific piece is, we really can't comment on.

And then regarding the new accounting mechanism for licensing on royalty; why wouldn't you audit your customer book to have a better way of matching billing or revenue?

I think they are two different things. I mean, when you have customer contracts that have royalties or fees, you always have contractual rights to audit. That's not going to impact what we believe while we do our determination of revenues under user license fees or royalties, that wouldn't matter. I don't think -- we're talking about our billings, we're talking about our billing to customers, not the customers billings.

Thank you. This concludes the question-and-answer session. I would like to turn the program back to Sid Rosenblatt for any additional or closing remarks.

Thank you for your time again today. We appreciate your interest and your support and wish you all a good night.

Thank you.

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