Universal Display Corporation (OLED) Q2 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Universal Display's Second Quarter 2018 Earnings Conference Call. My name is Rob, and I will be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

Thank you and good afternoon everyone. Welcome to Universal Display's second quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer. Before Steve begins, let me remind you 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 Web site. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, August 9, 2018. All statements in this conference call that are not historical are forward-looking statements within the meaning of 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. Our second quarter 2018 revenues were $56.1 million, operating profit was $10.9 million, and net income was $10.8 million, or $0.23 per diluted share. Without the impact of ASC606, our second quarter results would have been $73.6 million in revenue, $28.4 million in operating profit, and $25.1 million in net income, or $0.54 per diluted share. As we outlined in May, the first quarter was the bottom for material shipments for the year. In the second quarter, material sales began to improve as expected. With anticipated new OLED product launches from leading OEMs around the world, including Apple, Google, Huawei, Oppo, Samsung, and Vivo, we continue to believe that we will see an additional pick up in orders and revenues in the second-half of the year. And in 2019, we continue to anticipate it to be a meaningful year of growth. 2019 is poised to be a pivotal year for the OLED industry. As Samsung continues to lead the OLED mobile market, a number of other panel makers, including LG Display, BOE, Tianma, Visionox, and EDO are slated to commence production in their new OLED launch. As a result, the landscape of capacity will significantly widen fueling broader adoption of OLEDs across the consumer electronics market. This new wave of capacity build is expected to drive significant growth in the OLED industry. Additionally, the long-awaited introduction of the world's first foldable OLED product next year will pave the cutting-edge and innovative foreign factor path for portable [ph] to foldable to rollable, exciting and enlarging the consumer electronics industry with new applications and new markets, the imagination is yet to devise. One of the key players leading the path to foldable is Samsung. Samsung recently announced that unbreakable smartphone panel has been verified by Underwriters Laboratories, an official testing company for OSHA. Samsung noted that, "The fortified plastic window is especially suitable for portable electronic devices not only because of its unbreakable characteristics, but also because of its lightweight, transmissivity and hardness, which are all very similar to glass." Foldables were also a topic to Samsung's earnings call last week. The company highlighted that it believes the introduction of the foldable foreign factor will bring new energy to the mobile market. Also discussed on its conference call were fab loading rates. Samsung's rigid OLED utilization rates increased in the June quarter and in the second-half half of the year the company expects its flexible OLED panel shipments to rebound. And to top it all off, Samsung unpacked the beautiful Note 9 earlier today, and last week, the company unveiled its 2018 flagship tablet, the Galaxy tab S4 with a stunning 10.5 inch super AMOLED display. During LG Display's earnings conference call, the company reaffirmed its commitment to OLEDs, reiterating its OLED TV and mobile capacity plans, including its Gen 8.5 OLED TV plant in Guangzhou, China, its Gen 6 Mobile OLED Live and Gen 10.5 OLED TV facility in Paju, Korea. And the company shared that it's reviewing additional OLED TV capacity players, including the option of converting some LCD TV capacity to OLED, driving these additional OLED TV players' demand. LG Display is targeting approximately 2.8 million OLED TV shipments this year, 4 million units in 2019, 7 million in 2020, and 10 million in 2021. An interesting size fact, while 10 million units is less than 5% of the total TV market of approximately 250 million units, those 10 million OLED TVs in square meters is equivalent to over 60% of the total smartphone market of approximately 1.6 billion units. That is a lot of glass to cope with our materials. In Japan, Sharp started a pilot OLED production in June and plans to launch a company branded OLED smartphone in the fourth quarter of this year. And in China, OLED activity continues to grow. BOE Technology's Gen 6 flexible OLED plant in Chengdu, which opened last year, is ramping production and it's efforts are paying off. It has been reported that BOE has successfully secured its first large OLED design win with Huawei's flagship smartphone, the Mate 20 Pro, which will be launched later this year. Construction of BOE's second Gen6 OLED plant, in Mianyang, is reportedly progressing ahead of schedule for production next year. And BOE's third OLED fab in Chongqing [ph] is expected in the second-half of 2020. Tianma held an opening ceremony for the first phase of its Gen6 OLED line, in June. And just the other week the company approved the construction on the second phase, which is scheduled to commence production in the second-half of 2020. The combined capacity of these two lines will total 37,500 plates per month. Visionox, with whom we signed long-term license and material agreements in the quarter recently opened its Gen6 flexible OLED plant, with an investment of approximately $4 billion, mass production of this 30,000 plates per month line is expected to commence by the end of next year. Last month, EDO announced that it completed the construction of its Gen6 flexible OLED fab in Shanghai, and is targeting trial production in 2019, and mass production in 2021. Royole made quite the splash when the company unveiled its flexible OLED shirt and flexible OLED top hat at the recent World Cup finals in Moscow, and plans to start commercial shipments of their flexible wearables attire in November. And in automotive OLEDs, during its Singapore investor's forum, Samsung Electronics highlighted automotive OLED displays as a segment of high growth. Samsung noted that while it expect the automotive display market to grow at a 9% CAGR from 2018 to 2022, it forecasts automotive OLEDs will grow at a much faster rate, at 834% CAGR, from 100,000 in 2018 to three million units in 2022. At SID Display Week Samsung demonstrated many automotive OLED displays, including curved, rollable unbreakable transparent and light-feel OLED displays, and unveiled what it calls an unbreakable 6.22 inch display with an all-plastic design that has additional durability for the automotive environment. Also with respect to the automotive market, on the OLED lighting front, LG Display is reportedly in discussions with 10 car manufacturers to utilize OLED lighting. And as adoptees, already include BMW, Mercedes Benz, and Audi. Speaking of Audi, last month Audi released the specs of its 2019 TT and 2019 flagship A8, and both have OLED taillights as an available feature. OLED lighting is still a small market, but it has a big and bright future. UBI market research forecasts that the OLED lighting market will grow to approximately $1.6 billion by 2020. On the internal R&D front, we are working closely with our customers, and continue to invent and commercialize higher-performing cost-effective next generation emissive material systems and technologies, including new reds, greens, yellows, and hosts. With respect to blue, we believe that we are making excellent in our ongoing development work for a commercial phosphorescent blue emissive system. Additionally, and important component to our growth strategy is developing groundbreaking technologies that can help advance the OLED market. And one of our major R&D initiatives is OVJP, Organic Vapor Jet Printing for large-area TVs. We are making advancements with this novel mask-less solvent-less dry direct printing technology. To help further our progress we will be installing our pilot prototype system next month. On that note, let me turn the call over to Sid.

Thank you, Steve, and again thank you everyone for joining our call today. Before I discuss our second quarter financial results, I want to remind you that revenues prior to 2018 are under the old accounting standard ASC 605. Beginning in January 2018, we adopted a new accounting standard, ASC 606. Revenues for the second quarter of 2018 were $56.1 million, up quarter-over-quarter from Q1's $43.6 million, but down year-over-year from Q2 2017 $102.5 million. Please note that last year's second quarter revenues included Samsung's license payment of $45 million. As we stated in the first quarter, there has been a slowdown in the Premium smartphone market from last year which cause weaker OLED panel demand and therefore weaker OLED material purchasing. In the second quarter, we believe that the sluggish environment improved and as a result, we saw a sequential increase in revenues, additionally ASC 606 impacted Q2 revenues by $17.5 million without the impact of ASC 606, our second quarter revenues would have been $73.6 million. Our total material sales were $36.8 million in the second quarter compared to material sales of $25.3 million in the first quarter of 2018 and $46.8 million in the second quarter of 2017. Green emitter sales in the second quarter of 2018 which include our yellow green emitters were $25.7 million, this compares to $17 million in the first quarter of 2018 and $32.1 million in the second quarter of 2017. Red emitter sales in the second quarter of 2018 were $10.9 million, this compares to $8 million in the first quarter of 2018 and $13.7 million in the second quarter of 2017. As we 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 the number of these factors is moving variables for our customers, they are also moving variables for us. Before we discuss Q2 royalty and license revenues, we want to remind you that under ASC 606 irrespective of one billing occurs we will recognize license revenue on a quarterly basis and proportion to corresponding OLED material shipments. Second quarter 2018 royalty and licensees fees were $15.5 million. This compares to $15.9 million in the first quarter of 2018 and $53.7 million in the second quarter of 2017. Cost of sales which included Adesis cost of sales for the second quarter of 2018 was $11.6 million. This compares the $7.5 million in the first quarter of 2018 and $11.3 million in the second quarter of 2017. Cost of material sales which only relate to OLED materials does not include Adesis cost of sales or $9.3 million translating into material gross margins of 74.8%. This compares the 77.5% in the first quarter of 2018 and the comparable year-over-year quarter material gross margins of 78.9%. Second quarter operating expenses, excluding cost of sales was $33.6 million up from last quarter's $31.6 million and up year-over-year from the comparable quarter is $30.7 million. Operating income was $10.9 million for the second quarter of 2018 up from last quarter's $4.5 million but down year-over-year from a comparable quarter $60.5 million without the impact of ASC 606 Q2 operating income would have been $28.4 million. Second quarter 2018 income tax expense was $1.9 million or a tax rate of approximately 15% without as 2016-09 our second quarter 2018 tax rate would have been approximately 18%. Net income for the second quarter of 2018 was $10.8 million or $0.23 per diluted share sequentially up from last quarter $6 million or $0.13 per diluted share but down from the comparable year-over-year quarter of $47.2 million or $0.99 per diluted share without the impact of ASC 606 our second quarter net income would have been $25.1 million or $0.54 per diluted share. For the first half of 2018 revenues were $99.7 million, operating income was $15.4 million and net income was $16.8 million $0.35 per diluted share. Without the impact of ASC606, our first half 2018 revenues would have been a $141.8 million, operating income would have been $57.6 million and net income would have been $51 million or a $1.9 per diluted share. This compares to first half of 2017 results of $151.1 million or revenue, $72.6 million in operating income and $57.6 million in net income or $1.21 per diluted share. Now looking to 2018, based upon our current forecast, our 2018 guidance is unchanged from last quarter. We expect 2018 revenue to be in the range of $280 million to $310 million. We would note as we have in the past a shift in industry's momentum in either direction can impact our financial results. Moving along to gross margins, while quarterly material gross margins can vary quarter to quarter, we expect our overall 2018 material gross margins to be in the 70% to 75% range which is consistent with the last few years. Operating expenses of SG&A, R&D and patent costs are expected to increase in the aggregate in the range of 10% to 15% year-over-year driven primarily by R&D. We expect the effective tax rate to be approximately 20% give or take a few basis points. For 2019, we anticipate significant industry growth to resume. We expect the install base of OLED square meter capacity to increase by approximately 50% over 2017. With the majority of the capacity ramping in 2019, while the timing of capacity installed and ramped during the year are fluid, we believe that the new capacity translates into additional revenue opportunities for us. And lastly, the Board of directors approved a $0.06 quarterly cash dividend, which will be paid on September 28, 2018 to stockholders of record on September 15, 2018. Dividend reflex are expected to continue positive cash flow generation and commitment to return capital to our shareholders. With that, I'll turn the call back to Steve.

Thanks, Sid. In this multi-year CapEx growth cycle, the landscape of OLED capacity is broadening. With more OLED panel makers building pilot and production lines, the further proliferation of OLED should follow. Today's OLED market is driven primarily by smart phones. But we see an increasing amount of OEM OLED activity across the consumer electronic spectrum including applications such as TVs, wearables IT, virtual reality and augmented reality as well as for emerging opportunities including automotive OLED displays and lighting. The disruptive nature of OLED is paving a new and exciting path of design possibilities in the display and lighting markets. The team at UDC continues to do an incredible job of creating and delivering the most innovative technology in the industry. The increasingly exceptional value of our OLED technology and phosphorescent materials has resulted in our universal foldable being found in virtually every AMOLED product around the world. I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a market leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting edge technologies and materials for the industry for our customers and for our shareholders. On that note, Operator, let's start the Q&A.

Thank you, Mr. Abramson. [Operator Instructions] First question is coming from the line of Sidney Ho with Deutsche Bank. Please proceed with your questions.

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

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

Okay. My follow-up question is your implied second half guidance, was that just revenue will be about 10% versus second half of last year. And if you want to compare ASC605, I think the number is closer to 5%, given the expected realm of high-end phones with two OLED SKUs this year, your guidance seems a little conservative. Is there anything else that we should consider? And also how do you think about the unit shipment of high-end smart phone production in the second half this year for this last year?

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

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

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

All right. Thank you very much.

Thank you, Sidney.

Next question is from the line of Mehdi Hosseini with Susquehanna. Please proceed with your questions.

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

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

Sure. When you talked about a 50% -- installed capacity growth, '17 through 2019, does that include any additional player in the OLED TV?

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

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

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

Thank you.

Thank you.

The next question is from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, guys. This is [indiscernible] on for Brain. Thanks for taking the questions.

How are you?

Good. So there has been some reports, through the first half of this year about delayed capacity expansion, but it seems like there's been also some reason optimism that Samsung could be inching forward or moving ahead with the five, can you detail what you basically is for your 50% capacity expansion and why in fact A5 on that?

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

Okay, fair enough. And then, you mentioned sharp but what is the relationship there that seems like they're moving forward with those small scale OLED panel production are they clearly using European materials where would you rank them I guess in terms of customer potential?

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

Fair enough. Thanks.

Thank you.

The next question comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your questions.

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

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

Okay, fair enough. A couple of other questions looks like you showed very strong growth year-over-year in China and so I'm wondering in first half is the customer see the same customer that you have had over the last couple of quarters?

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

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

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

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

Good question I've actually been using the adjective excellent for the last two quarters. And I'll tell you next quarter was the difference as if you're.

Okay, thanks a lot.

Thanks, Jim.

Next question is from the line of Christopher Muse with Evercore. Please proceed with your question.

Yes, good afternoon. Thanks for taking the question. first question we reiterated your guidance for 2018 curious though in the last three months all things may have changed whether it's builds as flexible TVs going to smartphones changes in your assumptions around material prices and would love to hear your thoughts there?

Thanks for the question. It is we've the guidance has been the same for the last quarter to this quarter and whether things get pushed in a little bit or pulled out a little bit or just called but we're seeing activity on the TV side obviously you're seeing on the Samsung side you got all these rumors about whether or not there's going to be two. iPhone's with OLED screen, so it's a combination you might across all of our customers that we're seeing increases in the second half.

Okay. And as a follow-up, and as you think about the revenue opportunity with quotable is that simply a square area type of better fit or is there a mix, let's say has key benefit that you guys would see that?

It's really the larger the surface area the more material we use, so the formula essentially is the same whether it's on glass or plastic if it is a customer that takes us a royalty than it's probably a premium price is going to be charged for the fact.

Okay, thank you.

Thank you.

Next question is from the line of Shannon Cross with Cross Research. Please proceed with your questions.

Thank you very much for taking my question. I'm just curious you talk about there's a lot of opportunity in 2019 and so I'm curious as you think about the timing for the launches you think 2019 will be another sort of back end loaded here or do you think given the momentum you're seeing then are you're expecting in the second, it should be perhaps more of a balance strong year across the board and trying to figure out how you're thinking about when things they're launching and there as will be ordering from you?

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

Okay and then obviously just announced continuation that dividend but I'm curious from the cash perspective, what you're seeing in terms of back positions meeting some sort of drive next?

I'm sorry.

Okay, I think you need to some fill-ins especially as you're expecting and to stay in the strength in 2019?

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

Right, I'm just curious on the acquisition perspective what you're seeing out there right and by should we anticipate maybe a more aggressive focus on acquisitions going forward?

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

Great, thank you.

Thanks Shannon you.

[Operator Instructions] The next question is from the line of James [indiscernible] with Cowen and Company. Please proceed with your question.

Hi, good afternoon. Congratulations on the strong quarter.

Thank you.

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

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

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

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

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

We are just in times of the supplier of materials. We're going to purchase order and we ship it out within 24-hours well let's a customer gives us a specific date to ship it but overall it does the way we work, so with that just really no pull hands or push outs because we maintain inventory here and we actually always maintain excess inventory do ensure that we could need and the unexpected orders.

Well, let me just ask that a different way, what would be a circumstance that might make you go to solve to the low end of the revenue guidance and what might be a circumstance that would take you to the high end?

It is really based upon our customers and it's fabulousation [ph] rates whether we talked about LGs talked about $2.8 million OLED TV's and Samsung noted that they expect a rebound and utilization rates particularly on the flexible side so and it just depends when these occurred, just they occur if things just don't occur as fast as we expect to be at a low end and sometimes things get pulled in based upon sell through at it by the customers and we have at the higher end.

Okay, great. Thank you.

Thank you.

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

Yes, one quick follow-up; R&D, well OpEx going up by 10% to 15% and you said majority of these by R&D and just trying to get a kind of think through priorities, how much of these growth in R&D is for blue material and outside the can you just remind us the key areas that you are investing to make sure that your growth rate the sustainable into the next decade that any color will be really helps us to as we think about beyond 2019?

Well, our R&D is principally directed to fast for us and materials, blues, reds, creams, yellows and. The other additional R&D project that we've been focusing on is OVJP, Organic Vapor Jet Printing, which is a methodology that makes side-by-side RBG TVs. We are focusing with some of our university research partners on additional farther-out ideas. But basically it's phosphorescent materials and technology.

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

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

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

I can't speak to that.

Okay, all right. I tried. Thank you.

Our next question is from the line of Hendi Susanto with Gabelli and Company. Please proceed with your questions.

Good evening Steve, Sid, and Darice. And it's good to hear your laughters.

Thank you, Hendi.

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

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

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

Well, we've got a number of our customers, our top three customers, which hare Samsung, LG, and BOE that we've talked about, they are all working on flexible substrates.

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

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

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

Yes, we're not allowed to comment at all about the license fee from Samsung.

I see. Okay, that's fair. Thank you.

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

Hi, guys. Again, congratulations. And one question on China; the new C, would you consider that a kind of a one-time event where you've got a relatively new customer that's going on mine and they're taking a substantial amount of material, or is this kind of a new run rate for China?

Well, this customer opens up a new line, and a lot of times when you open up the new line, you do by more materials that's seated, you got it going, but we do see significant growth in China over the second-half of this year and next year.

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

Well, we can't talk about which materials we are selling and do not sell that go into an OLED TV specifically, but we're seeing a pick up in their production. So we are selling more materials.

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

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

Got it. Thanks a lot. I appreciate it.

Thank you, Andy.

Thank you. Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, guys. [Indiscernible] here. Just one question -- one follow-up on the quantum dot blue OLED potential, can you just speak technical feasibility of this approach? I mean do you believe it will require a phosphorescent blue, or got a commercial OLED TV with phosphorescent blue work and could they be swapped easily?

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

Fair enough. Thanks.

Thank you.

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

Thank you.

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