Universal Display Corporation (OLED) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to Universal Display's Third Quarter 2019 Earnings Conference Call. My name is Sherry, and I will be your conference moderator for today's call. At this time, all participants are in a listen-only mode. A 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 third 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 the 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, October 30, 2019.During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone concerning 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 another quarter of solid results. Our third quarter 2019 revenues under ASC 606 were $97.5 million, operating profit was $40.8 million, and net income was $37 million or $0.78 per diluted share. Under ASC 605 the prior accounting standard, our third quarter 2019 revenues would have been essentially the same as $97.7 million, operating income of $41 million and net income of $37.1 million or $0.78 per diluted share.During the quarter, OLED activity continued to gain strength on a global scale. As a result, we are raising our 2019 revenue guidance. Our new 2019 revenue guidance under ASC 606 is in the range of $400 million to $410 million. Under ASC 605, 2019 revenues are expected to be in the range of $435 million to $440 million. Sid will provide further details shortly.As panel makers continue to shift more of their focus to OLEDs as the future of displays, we are seeing a corresponding increase of OLED investment momentum. Earlier this month, Samsung announced an $11 billion investment in hybrid QD-OLED TVs. As part of this CapEx plan, Samsung is slated to commence operation of a Gen 8.5 production line in 2021 with an initial monthly capacity of 30,000 panels.On the mobile side, earlier this month Samsung showcased the trend of 5G displays at the IMID exhibition with OLED products. OLED displays allow users to enjoy high capacity, high resolution multimedia content seamlessly while supporting HDR high dynamic range and its rapid response rate. Moreover with many other advantages such as relatively low power consumption and a slim light design, OLED is garnering praise worldwide as the most vivid mobile display with a highest degree of portability.At the end of August, I visited Guangzhou, China to attend the grand opening ceremony of LG Display, the second OLED TV fab. This impressive Gen 8.5 facility will mainly manufacture large size, high resolution OLED products, including 55 inch, 65 inch and 77 inch TV panels. The initial monthly capacity of this plant was 60,000 sheets and by 2021 it will be expanded to 90,000 sheets per month.In conjunction with the opening ceremony, LG Display announced that it expects to produce over 10 million OLED panels a year by 2022. LG Display also announced Vizio as its newest OEM customer. In 2020, Vizio, a leading global brand, well known in the mid range TV market will be joining the OLED TV bandwagon, which already includes LG Electronics, Sony, Philips, Hisense, Skyworth, Changhong and Conca. BOE’s investment in OLED has been translating into market share gains. According to IHS market research, in just one year BOE’s share in the OLED market has increased from negligible market share in the second quarter of 2018 to 10% in the second quarter of 2019. BOE is currently ramping capacity at B7 Chengdu facility as well as its recently opened B11 fab in Mianyang. Additionally, there’s two other Gen 6 OLED fabs in the works. It's B12 fab in Chongqing which is in the midst of construction and B15 fab at Fuzhou which was announced at the end of last year. Tianma recently announced plans for a new Gen 6 flexible OLED fab in Xiamen. This $6.8 billion plant is expected to be completed by early 2022 and will produce 48,000 sheets per month.And Visionox announced it is investing approximately $1.6 billion in OLED module factory in Guangzhou, China. In lighting, at last month’s 13th International Symposium on Automotive Lighting, Audi presented its digital OLED technology, a new enabling technology that involves providing the OLED light sources into a much greater number of individually energized segments for a wide variety of customizable lighting designs and communication using exterior lighting.Audi highlights that the benefits of OLED include perfect contrast, high homogeneity and minimal spacing between segments. OLEDs also maintain high system efficiency as a flat lighting element that can be as thin as just 1 millimeter. The proliferation of OLED acrosss the consumer electronics spectrum is fueling the multiyear CapEx cycle we are in.We have previously forecasted that year end 2019 installed base of OLED square meter capacity will increase by approximately 50% over year end 2017 and we believe the industry is well on track to meet that target.As we look out, we see a long runway of growth for the OLED market and for us. In 2020, we expect to see continued revenue and earnings growth and we will provide more color during our February earnings call. And in 2021, we estimate that year end installed OLED capacity base as measured in square meters, will increase by approximately 50% again over year end 2019.On the R&D front, innovation remains at the core of UDC’s DNA and we are continuing to advance our robust OLED materials and technology leadership. On the materials front, we are investing, innovating and commercializing new emissive materials and technologies, including the red, greens, yellows and hosts.With respect to blue, we continue to make excellent progress at our ongoing development work for our commercial phosphorescent blue emissive system. We also continue to advance our work in organic vapor jet printing, our novel manufacturing process for mask-less, solvent-less, dry direct printing of large area OLED panels.Additionally, we are expanding our customer programs to support our growing base, boosting our research investments and broadening our local presence and service offerings with new corporate and laboratory facilities in Korea and Hong Kong. These new sites will serve as a central point of UDC's South Korea and Chinese technical operations, include a state-of-the-art PHOLED application server with laboratory space for device fabrication and testing.Expanded footprint will enable a wider range of process development, testing and evaluation activities to support our customers’ growth. UDC Hong Kong's new site is complete and operational and we expect the new UDC Korea site to be completed in the coming months.With respect to the OLED materials ecosystem, as we noted during last quarter's earnings call, as a leader in the industry we want to help enable our customers’ OLED product pipelines. This includes helping to accelerate the design pace of millions of recipes for a multitude of OLED specs. We have been establishing a network of OLED material partnerships. These partnerships will center on our proprietary phosphorescent emitters to ensure high performing, highly efficient and cost effective OLED solutions.Since our second quarter call, we now have technical collaboration with Merck KGaA, where we will be leveraging the expertise of our phosphorescent OLED emitters and their transport materials to develop higher performing OLED stacks. We also announced host partnership agreements with EMT in China and LG Chem in Korea. We expected that these local partners will be volume manufacturers of hosts that are complementary to our phosphorescent emitters for direct sale to specific customers, translating into a win-win outcome for all, our partners, our customers and for us.On that note, let me turn the call over to Sid.

Thank you, Steve. And again, thank you everyone for joining our call today. Revenues for the third quarter of 2019 under ASC 606 were $97.5 million, compared to second quarter 2019’s $118.2 million, which included an estimated $15 million to $20 million of sales to Chinese panel manufacturers, which we believe were pulled in from the second half of 2019 due to trade related concerns, and Q3 2018’s $77.6 million.Under ASC 605, our third quarter revenues would have been $97.7 million. This compares to the second quarter 2019 revenues of $119.8 million and Q3 2018’s $91.6 million. Our total material sales were $51.8 million in the third quarter compared to material sales of $76.3 million in the second quarter of 2019 and $51.2 million in the third quarter of 2018. Green emitter sales in the third quarter of 2019, which include our yellow green emitters were $40.2 million. This compares to $60.2 million in the second quarter of 2019 and $36.4 million in the third quarter of 2018.Red emitter sales in the third quarter of 2019 were $11.4 million. This compares to $16 million in the second quarter of 2019 and $14.6 million in the third quarter of 2018. 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, device recipes, product mix, material ordering patterns, customer inventory levels and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us.Before we discuss Q3 royalty and license revenue, we want to remind you that under ASC 606 irrespective of when billings occur, we will recognize royalty and license revenues in proportion to corresponding OLED material shipments. Third quarter 2019 royalty and license fees were $43 million. This compares to $38.9 million in the second quarter of 2019 and $23.3 million in the third quarter of 2018. Third quarter 2019 Adesis revenues were $2.7 million. This compares to $2.9 million in the second quarter of 2019 and $3 million in the third quarter of 2018.Cost of sales, which include Adesis cost of sales for the third quarter of 2019 were $17.3 million. This compares to $24.9 million in the second quarter of 2019 and $16.1 million in the third quarter of 2018. Cost of material sales, which only relate to OLED materials were $15.2 million, translating into material gross margins of 70.6%. This compares to 71.2% in the second quarter of 2019 and the comparable year-over-year's quarter material gross margins of 73.1%.For the year, we continue to expect our overall material gross margins to be in the 70% to 75% range, consistent with the last few years. As we have noted in the past, material gross margins can vary quarter-to-quarter. Third quarter 2019 operating expense, excluding cost of sales was $39.4 million, down from last quarter's $45.4 million, but up year-over-year from the comparable quarter’s $35.4 million.Operating income under ASC 606 was $40.8 million for the third quarter of 2019, compared to last quarter's $48.7 million and the year-over-year comparable’s quarter $26 million. Under ASC 605, third quarter operating income would have been $41 million. This compares to last quarter's $50.3 million and the year-over-year comparable’s quarter $40.1 million.Third quarter 2019 income tax rate was 15.3%. Without ASU 2016-09, our third quarter 2019 tax rate would have been 16.9%. For the year, absent the effect of ASU 2016-09, we continue to expect our tax rate to be approximately 18% plus or minus a few percentage points.Under ASC 606, net income for the third quarter 2019 was $37 million or $0.78 per diluted share. This compares to last quarter's $43.4 million or $0.92 per diluted share and the comparable year-over-year quarter of $22.8 million or $0.48 per diluted share.Under ASC 605, our third quarter net income would have been $37.1 million or $0.78 per diluted share. This compares to last quarter's $44.8 million or $0.95 per diluted share and the comparable year-over-year quarter of $34.2 million or $0.72 per diluted share. We ended the quarter with approximately $597 million in cash, cash equivalents and short-term investments or $12.70 of cash per diluted share.Moving along to guidance. Based on customer discussions, current operating levels, product mix, as well as other major variables, our expectations for 2019 have increased and we are raising our full-year's guidance. We now expect our 2019 revenues under ASC 606 to be in a range of $400 million to $410 million. Under ASC 605, 2019 revenues are expected to be in the range of $435 million to $440 million.And lastly, the Board of Directors approved a $0.10 quarterly dividend, which will be paid on December 31, 2019 to stockholders of record as of the close of business on December 13, 2019. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.With that, I will turn the call back to Steve.

Thanks, Sid. Since our inception, the evolution of consumer electronic products has been driven in part by form factor, and we believe the form factors play an increasing role in the consumer landscape. And with that, so OLEDs. OLED and form factor go hand-in-hand. OLEDs are thin, lightweight and agnostic to the substrate. OLEDs can be built on glass, metal foil or plastic, and because OLEDs are film layers, they are inherently transformable, bendable and rollable. The recent introduction of the Galaxy Fold, the Royole FlexPai, and the pending introduction of the Huawei Mate X is an incredible milestone in the form factor roadmap.On a side note both Sid and have the Galaxy Fold, and we think it's awesome. Always are undoubtedly amplifying the realms of imagination and innovation and widening the world's perception of what our product can be, always are broadening the consumer market and assuring in an era of new concepts, new designs and new applications. As we fast forward into the future, we believe that OLEDs will be the ubiquitous display technology with conformable, foldable and roll-able products expected to be prevalent in everyday life and we are excited to continue to be an integral part of this market evolution.Looking to this year, we are on track to deliver record revenues and earnings, and foresee this trend to continue into 2020. Our growing success is due to the hardworking and brilliant team at UDC. I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart and elevating and shaping Universal Display’s accomplishments and advancements. We’re committed to being a leader in the OLED ecosystem, achieving superior and long-term growth and delivering cutting edge technologies and materials for the industry, for our customers and for our shareholders.And with that operator let's start the Q&A.Thank you, Mr. Abramson. [Operator instructions]. Our first question is from Sidney Ho with Deutsche Bank. Please proceed with your question.

This is Jeff Rand on for Sidney. I just want to ask about the pull-in from 2Q. Have you seen any pull-in, in 3Q or do you expect any and for 4Q from 2020 as kind of the US China trade conflict continues?

And no we have not seen anything, it appears that the pull-in that occurred last quarter was really the only one that we have seen and we have not seen anything in this quarter and we -- really it’s hard to tell what could happen in the fourth quarter.

And just as a follow up, I think recent data points have pointed to 5G phones in 2020 being a little stronger than people expected. How does that change your outlook going into 2020? Does that kind of make a pretty good upgrade cycle for smartphones?

I think it’s a little premature right now but the premium smartphone market I think is something that will continue to grow. I mean a lot of folks are talking about 5G being a push for people to switch and it might be something that will keep smartphone market moving ahead. I mean we are very positive on 2020.

Our next question is from Atif Malik with Citi. Please proceed.

I have two questions. First, if I look at the implied revenue number for Q4, $102 million, up sequentially versus last year, where Q4 maybe seasonally down. And how should we look into Q4 being up sequentially this year versus last year? And are you seeing China coming back in the fourth quarter after China sales are almost half in the September quarter?

Thanks for your question. I mean, the strength we saw in the quarter, we expect to see it in the fourth quarter really due to customer pipeline activity. I can't really talk specifically about any customers but we do see the pipeline, obviously, this year better than last year.

Okay. And then, Steve, maybe one for you. I know there is quite a bit of threat that, that Korean display makers want to work more closely with local suppliers, possible post the Japan trade tension. Does this pose any kind of competitive threat to your position at those display makers?

We have very strong relationships with our customers both in Korea and in China, and we are putting more assets over into both Korea and Hong Kong. So, we believe that we will continue to have very strong relationships with our customers moving forward.

Our next question is from C.J Muse with Evercore ISI. Please proceed.

Hey, guys. This is Matt Prisco on for C.J. Thanks for taking my questions. First, material royalty split in the quarter was much more heavily weighted towards royalties than what would have expected simply boosting gross margins and tighten the gap between 606 and 605. So, can you kind of just walk us through the dynamics driving this and how should we think about that split moving forward?

What has occurred is, it really is our customer mix and each customer’s material, the royalty and license ratio is different, because essentially each agreement is very different. Therefore, and in addition to that is customer buying patterns, so one thing sort of switch from one to the other really has to do with our customer mix which then causes this -- sometimes results that look a little odd.

And then just to follow-up on the pull-in question. So, if I look at China sales excluding customer befitting in the $15 million to $20 million pull-in last quarter, they appeared to be down about $5 million quarter-over-quarter. So how much of this decline was driven by inventory digestion and have your thoughts changed at all around the magnitude and draw-down timing of the pull-in?

No, I mean, we still believe that the $15 million to $20 million is our best estimate of what was pulled in and they are currently using material and we believe that the inventory will be used up by the end of the year.

Our next question is from Hendi Susanto with Gabelli & Company. Please proceed.

Good evening, Steve and Sid. Congrats on raising the guidance again. My first question is, can you give us some insight on turnaround of device with recipes and inventory management practices in China, considering that there is still a lot of development and pre-production activities?

I mean it's still in the early stages in China, obviously we've talked about that, with BOE just ramping up and they're going through learning curves. And so we do see them -- their ordering patterns have been somewhat lumpy, but it will just take some time and I think they will -- I think as new lines open, things will flatten out a little bit as they get a little more experienced, but we believe that they will do very well.

And how about the turnaround of device recipes, Steve?

We really can't talk for our customers about recipes. It’s their proprietary information, and it's really what goes -- their pipeline is different, they have multiple products. So some of the different products have different recipes, but we really don't go into each customer’s proprietary information.

And I would like to understand more about your new strategic OLED post partnership with LG Chem. My understanding is that the right host materials can be viewed as mature market and red and green can be viewed as commodity businesses with established players. Can you go over opportunities across red, green and yellow OLED host materials and help us to digest where opportunities lies?

Well, we partner -- we work with a number of the host partners to commercialize the materials that work, that are complementary to our proprietary phosphorescent emitters. And we think that these guys -- we’re working with them so that each of these volume manufacturers of host materials can work with specific customers of ours and really be able to give each customer what it needs. So without going through red, green or yellow or any of the hosts, I mean we work with a number of different host companies and we are working trying to get a number of different host materials into our customers’ hands to give them the best stack.

And in other words, I guess initially Universal Display may enter like red materials and increase host materials again in the future?

No. We were talking about working with these -- with our partners. We're not talking about us getting into the host manufacturing business on a commercial scale. What we're saying is that we will work with these host companies with our proprietary phosphorescent emitters and their hosts and get them into our customers, but they will be the value manufacturers, not us.

Our next question is from Mehdi Hosseini from SIG. Please proceed.

Hi. This Laurie calling for Mehdi Hosseini. We just have a one follow up question on blue emitter. Do you guys have any updates on that?

We continue to make excellent progress on blue. As it’s a work in progress, we have nothing new to announce at this time.

Yes. You guys -- R&D spend is a little bit lower than last quarter, and what's your forecast going forward next year and beyond?

I can't talk about next year. We will talk about that on our earnings call in February. But we do expect R&D for the year or year-over-year to be up 25% to 30%. The reason that it was down this quarter is that the accruals, it’s the timing of accruals in each quarter. So, that's why it was up in Q2 and then down in Q3.

Our next question is from Jim Ricchiuti with Needham & Company. Please proceed.

Hi. Thanks. Good afternoon. A question have -- and I joined the call a little bit late. So, I apologize, if you addressed this. But in raising the guidance for the year, I'm wondering, have you provided any additional color as to what drove that other than just conversations you've had with customers? Was it -- can you point to anything specific either in class of product or country or anything along those lines that would give us some indication as to what was driving that?

The strength that we saw in this quarter and expect to see in the fourth quarter is really due to customer pipeline activity. We don't talk about specific customers but we are seeing strength in many areas, which is what caused us to raise it.

Okay. So, it’s fairly broad based is what you are saying?

Yes.

And then, you gave some color on R&D, any other color you can give in terms of the rest of OpEx, how we should think about that looking at over the balance of the year for Q4?

I think, all of it is in line with what we gave as guidance. I think the SG&A, patent cost should be up somewhere between 7 -- patent costs are up 7% year-over-year and SG&A is probably 10%, 7% to 10% at both, whereas R&D is up year-over-year at 25% to 30%.

[Operator Instructions]. Our next question is from Brian Lee with Goldman Sachs. Please proceed.

Hey, guys. Thanks for taking the questions. I had a couple of here. I guess just one blue materials, now that Samsung’s QD-OLED TV spending plans have become more official, you know, Steve you alluded to that in your prepared remarks. Wondering if you're seeing any pickup in activity there with respect to driving a better blue into the materials recipe for that process and maybe just bigger picture, how you think about the mobile and TV opportunity separately when thinking about it in the context of potential blue materials commercialization for you?

When we think about blue, obviously -- and that's we’re obviously looking at broad-based blue both on portable as well as TVs because of both aid the energy efficiency and the other advantages of phosphorescent blue. On the first part of your question, we can't speak for our specific customers as you know. But in general, we just work closely with all of our customers and our R&D teams.

Sid, a more serious question, the $15 million to $20 million, it sounds like you're comfortable with that estimate for the pre-buy that you saw for China. Can you give us -- now that you're done with the quarter and you have a good view into 4Q, can you give us any sense of how much of that you think came out of 3Q versus four 4Q, was it more weighted in 3Q versus 4Q versus in terms of the magnitude of the $15 million to $20 million?

To be honest, Brian, that we do talk to our customers and we do have a very good relationship with them. But I really can't answer how much they used in one quarter or one month. We talk to them about what their needs are, we sit down and do planning for the next month and the next quarter. It’s just based upon that history and where we think they're going to be that we believe they will use it all up by the end of the year.

Last question from me, I'll pass it on and I jumped on late so maybe you did cover this. But this was the third straight quarter of materials gross margin being above 70%. Are you updating the guidance for the year here or is there some reason to expect that Q4 would be down from the year-to-date gross margin levels?

No, I think we're still comfortable that it's going to be 70% to 75% for the year.

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 your support. Enjoy Halloween and everybody have a good night.

This concludes today's conference. You may disconnect your lines at this time.