Good day, ladies and gentlemen. And welcome to Universal Displays’ First Quarter 2021 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. As a reminder, this conference call 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 first 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.

Thanks, Darice, and welcome to everyone on today’s call. We are pleased to report that revenue in the first quarter of 2021 was $134 million, operating profit was $63.6 million and net income was $51.7 million or $1.08 per diluted share. Since our last earnings call, momentum in the OLED market continues to grow in small, medium and large consumer electronic applications. We are seeing a growing proliferation of OLED smartphones, ranging from premium and mid-range to low end and foldable that have launched and are slated to be launched this year. OLED TV demand continues to rise. Omdia market research recently reported that the average price of a 55-inch OLED panel declined 8.1% year-over-year in the first quarter of 2021, while LCD panel prices increased 73.9% in the same period. As a result, the price delta between OLED and LCD TVs has further narrowed to $310 from $440. The OLED IT market is burgeoning with the launch of new products. Just last month, new OLED laptops including the Xiaomi, Mi Laptop Pro 15 and Dell XPS 13 9310 were unveiled. And in the gaming market, there are reports for the first time Nintendo has selected an OLED screen for the new Switch Pro due to OLED benefits of higher contrast and faster response times. The adoption of OLED continues to expand and is fueling the multi-year OLED CapEx growth cycle in which we are in. In March, Samsung Display announced it will aggressively expand its OLED presence in the gaming smartphone and laptop markets. Samsung noted that its OLED displays have valuable feature befitting premium gaming content, such as fast response times, vibrant colors and deep blacks.

Thank you, Steve, and again thank you everyone for joining our call today. Revenues for the first quarter of 2021 were $134 million compared to fourth quarter of 2020’s $141.5 million and Q1 2020’s $112.3 million. Our total materials sales were $79.8 million in the first quarter of 2021, compared to material sales of $62.5 million in the fourth quarter of 2020 and $66.6 million in the first quarter of 2020.

Thanks, Sid. Last month, we celebrated our 25th year as a NASDAQ listed company by virtually ringing the opening bell. It was an incredible milestone that we share with our employees, customers, partners and all of our stakeholders. For 27 years, of which 25 years has been as a NASDAQ listed company, Universal Display Corporation has stood for vision, innovation and reality. In 1994, our founder Sherwin Seligsohn learned about a novel technology called organic light emitting diodes or OLED and foresaw its revolutionary path in the display and lighting landscape and so began Universal Display’s story. In 1996, when bulky CRTs were still in everyone’s homes, we took the company public with just a Princeton University research contract, no full-time employees and one patent pending. It took us 17 years of breakthroughs, challenges and triumphs to achieve our first profit in 2011, and we have been profitable ever since. Since our inception in 1994, we have invested approximately $700 million in research and development to advance our company from a startup to a leading player in the global OLED ecosystem and we continue to invest heavily in a number of strategic OLED programs for our long-term growth. Our technologies and energy-efficient phosphorescent materials can be found in virtually every commercial OLED display and lighting product in the world. You can learn more about our phosphorescent technology, as well as our strong corporate stewardship and our recently published 2020 Corporate Social Responsibility Report, which can be found on our website. And finally, 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 be a 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. And with that, Operator, let’s start the Q&A.

Thank you, Mr. Abramson. Our first question is from Brian Lee with Goldman Sachs. Please proceed.

Hey, everyone. Thanks for taking the questions. Kudos on the solid quarter here. I guess, in terms of guidance, just trying to understand a little bit about the thought process in reiterating guidance. You just did $134 million in Q1 revenue. So you are basically implying flat revenue for the next three quarters to get to the low end of guidance, maybe $140 million a quarter to get to the high end and we have typically seen Q1 be on the low end of revenue seasonally for you outside of inventory build period. So I guess the question is, is the guidance embedding a lot of conservatism here, is it due to supply chain risk or is there something about Q1 results that maybe aren’t going to flow through into higher growth in the next few quarters like we typically see, so just trying to reconcile a bit here.

Mr. Abramson, Mr. Rosenblatt, do you have your lines muted?

This is Steve. My line’s okay. Is it muted?

There you go…

I am sorry, is that better?

There you go. There you go.

Yes.

Yeah.

Yeah. So, Brian, in terms of -- I apologize for that. In terms of our guidance for the year, we do believe that the %560 to -- $530 million to $560 million is in the range that we expect for the year. I know that when you do the math it doesn’t quite look like there’s -- as we said on the other call, we expect the second half to be better than the first half. But the ongoing pandemic has resulted in supply chain disruptions, including some semiconductors and we think its best right now to maintain our guidance, which we are currently comfortable with.

Okay. Fair enough. Just to be clear, there’s nothing unique about Q1 pull-forward or inventory builds like we have seen in certain periods over the past several years. You wouldn’t -- there’s nothing you called out. So I am assuming it’s -- there’s nothing notable about the sort of demand patterns you saw in the quarter?

No. There’s nothing in there, I mean, historically, as you have seen, quarter-by-quarter, it can be lumpy by customer. And as you can see in this quarter with Chinese customers being higher versus last quarter

Fair enough. And then last one for me also on the guidance and I will pass it on. Gross margin 74% of materials, I know it’s going to be lumpy and bounce around. It’s proven to be that way just if you look at Q4 to the Q1 progression. But coming into the year, it sounded like you had a bit more muted view on what the gross margin result would be for materials in 2021 versus historical and then you come right out and you are back to the historical level, so any thoughts or changes and thoughts around the gross margins that you could achieve on materials for the year?

No. I -- obviously, our gross margins were, as we stated, dependent upon our product mix and this quarter’s product mix really translated into above the 70% gross margin range. We still think that for the year. It’s going to be 65% to 70%. And as we talked about in the fourth quarter, there were some things in the fourth quarter that really affected, which are developmental materials which were sold in the fourth quarter in a larger quantity than historically and that’s lumpy also.

All right. Thanks, guys. I will pass it on.

All right. Thank you, Brian.

Our next question is from Krish Sankar with Cowen and Company. Please proceed.

Yeah. Hi. Thanks for taking my questions. I have two of them. First one, a really good sale from China, I understand your largest customers obviously expanding in China. I am just wondering as they expand and as they are efficient in inventory, do you think there is a risk that the business and that customer might slow down given that they had issues in the path which might get resolve down the road? Then I have a follow-up.

It has historically with Chinese customers been lumpy, and so, yes, it’s difficult for us to predict. I mean, obviously we spend a lot of time talking to our customers and we built in what we believe to be -- where we think we will be for the year into our guidance. But it really -- there is a number of issues that will affect the rest of the year, which this COVID-19 issues and some of the semiconductor weakness issues. So we are comfortable where we are.

Got it. Got it. Very helpful. And then as a quick follow-up, Sid, how should we think about the OpEx growth for this year? Does it seem as you reiterated last quarter?

Yeah. We gave guidance in the last quarter of OpEx growth, which we talked about it, we expect it to increase from the range of 20% to 25% year-over-year. R&D up about 25%, SG&A about 15%, which increased spending on OVJP and that developed -- developing that technology and we expect our tax rates to be about 19% give or take a few basis points. We do expect our 2021 operating margins to be approximately 40% to 45%.

Thank you very much. I will get back in the queue.

Thank you.

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

Yes, sir. Thank you. And Steve thanks so much for all the details especially with the evolving end market penetration and landscape. I just want to reconcile something, when I look at Samsung and LG it seems to me that over the past maybe three month to six months there is less of OLED CapEx and especially with China doing really well with LCD, maybe the LCD CapEx has gone up. And I am just trying to reconcile in the near-term if there is a downward pressure on OLED CapEx, how does that change your view on the end market demand or a square inch of OLED shipment in 2022? And I have a follow up.

Well, I think right now in terms of what the customers are saying and all of our customers have noted on recent calls they are committed to OLEDs and I think that there has been -- there’s obviously demand and market issues that may cause some changes. But we believe that the proliferation of OLED is really in the very beginning. And it’s a really young industry. We think that our customers are really wed to OLEDs and everything you hear about it. Will there be some things that maybe get delayed a little bit here and there? Yes. But overall, we really are very bullish on where the market is going.

Got it. Thank you. And then -- and I am just trying to better understand end market dynamics and I do think that OLED TVs offer something unique especially with Samsung trying to build up a market presence in the high end with their quantum dot OLED. But is anything other than that like in terms of a quality of display or 8K that you can offer us to better understand how OLED compares to emerging new technologies like in mini LED?

Well, mini-LED is an LCD technology. I mean OLED is -- has been is power efficient. It gives you the best picture quality whether it’s TVs or from mobile devices and it’s not a back to technology is less complicated. And as you see that for mobile devices we are almost -- we are a third of the smartphone market with OLEDs and we are moving into the low- and mid-range with OLED displays on mobile devices. So the benefits of an OLED compared to LCDs whether it’s mini LEDs or other type of LCDs is the benefits of OLED technology. It gives you a thin form factor. I think that flexibility bendable rollerball technology is something that no other technology can do. So, when you look at all the benefits of OLED that we have talked about for all these years, that’s really why it is in the mobile devices first, because of power efficiency and for TVs, it’s the best picture quality.

All right. Thank you.

Thank you.

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

Hey. Good afternoon. Thank you for taking the question. I guess first question, I am pretty surprised your deferred revenue is actually increased Q-on-Q and your LG revenues came in a little bit late at least versus our expectations. So, curious is that a result of your new agreement with LG, I guess could you expand on that?

Yeah. The new extended five-year agreement with LG and Visionox were effective on January 1, 2021, and they end at the end of 2025. The impact is under ASC 606 we expect this to continue. But the fact that we did this, this is a new agreement essentially for LG. So, you do see changes because we signed these agreements in deferred revenue.

So was there an expectation for greater revenues here in 2021 before signing that agreement and what kind of changes had -- has that had on your outlook for calendar 2021 revenues?

I mean, we were -- we are comfortable with our guidance where we are. I didn’t expect that to change our 2021 revenue guidance by signing these agreements. I mean when we gave our guidance we kind of knew what was going on with these agreements. They just weren’t executed until then, but we knew what the results would be.

Great. As my follow-up, you had big numbers from both DOE, as well as T-Online. And I guess the question here, is that supply chain risk mitigation in terms of building some inventory or is there concern in China around getting access to materials out of the U.S. given rising U.S.-China tensions?

No. The revenues in China did increase obviously. But historically they have really been lumpy. There’s nothing that we have called out specifically in this quarter as we have in the past when the customers told us that that’s what they are doing. We just think that -- it’s customer-by-customer and purchasing department by purchasing department.

Thank you.

Thanks, C.J.

Our next question is from Shannon Cross with Cross Research. Please proceed.

Thank you very much. Just a couple of questions. You said you have about I think was like 30% of the smartphone market at this point. What percent of the market do you think is addressable to you given where pricing is maybe in the next couple of years? Just trying to think of what opportunity for upside there is especially with some of the comments out of Samsung recently?

Yeah. I think that the addressable market eventually we believe over the entire smartphone market. Samsung is moving from the high-end to the mid-range and they now have some low-end phones that I think entry level phones that are in the $240 range or something like that. So, we do think that this will continue to grow.

And how are you thinking about China TV’s from an OLED perspective, not necessarily the vendors, but the market in general. I know there was some pressure on Chinese TV market, I guess, it was last year and are you expecting to see it kind of rebound when you look at the second half?

In terms of market perspective where − it’s difficult for us to talk about one area specifically and another. I mean, I think that, OLED TV are the best TV’s ever. I think that some of the pressure that you saw was pretty much across the Board on the demand side that there was weakness because of COVID-19.

Okay. My final question is with regard to inflationary pressures that people are seeing out there. Are you seeing any pressures on materials required by PPG and do you feel like you have the opportunity if you need to, I am not sure you even would need to here, but to push pricing through to some of your partners again on the materials side?

Well, there’s two answers to that question. One, as we have stated in the past, our contracts have pricing for the length of the contract. So pushing some things further would be difficult. There is one thing that we have talked about is iridium and iridium has gone up. We have actually for a number of years been managing iridium and we have been building inventory that you could see on our balance sheet of raw materials going up every quarter and that we want to make sure that, A, we have a constant supply and have a significant amount of inventory that we have and that has allowed us to manage our cost structure.

Okay. Thank you.

Thanks, Shannon.

Our next question is from Sidney Ho with Deutsche Bank. Please proceed.

Thanks for taking my question. My first question is in reiterating your full year revenue guidance, it sounds like you are being a little conservative because of the supply chain disruptions. Do you have an estimate how much that may impact your revenue guidance for this year? And if you can -- a follow-up to that is, where are you seeing the most impact of those supply chain disruptions, I have seen this not from your own supply chain. And I have another follow-up. Thanks.

Well, I mean, to be honest, I mean, and given -- we obviously don’t give quarterly guidance or give guidance in all the components that we are seeing. But one of the issues that I just talked about with Shannon was iridium. But our materials have iridium in it but that’s not the only component. So that there’s a number of -- in that is a number of other materials, overhead and a lot of other things that’s in it. So that is not going to impact, every dollar doesn’t go a dollar in increases. So -- but in terms of what we are seeing, we are still comfortable with our guidance. We were as we said on the last call, we got COVID-19 issues that still could impact what we are doing. And the demand side whether it completely recovers and how fast it does, just why we have a range of $530 million to $560 million. So we are still comfortable with where we are at this time.

Okay. Maybe my follow-up question is on the IT side of things. I know there are a number of models that companies have announced. But Apple has officially announced the mini OLED display. Does that change your view of your opportunity for OLED display and specifically in the IT market, I know you addressed the TV market a little earlier and it’s a different question. Thanks.

Well, I think, that the industry is still young. You have heard there’s a big push from Samsung on the IT market. I think talking about Apple and LEDs. Their tablets are LEDs or LCDs anyway. So -- but I think there is a big push for the benefits of OLED and we just continue -- we feel that that will continue to grow, because the IT market using OLED is really very, very small.

Okay, sir. Thanks.

Thank you, Sid.

Our next question is from Krish Sankar with Cowen and Company. Please proceed.

Hi. Thanks for taking my follow-up. I just want to check with Steve, to the extent you can talk about, obviously, there’s the Display Week coming on and then as well about the Samsung abstract and the blue. To the extent you can talk about it kind of curious your view on it. And along the same path, if and when blue gets commercialized, is it going to be plug-and-play or do you need to change some of the design, like a heat shrink or any such thing when you try to put it into a smartphone?

Well, thank you. Obviously, Display Week is coming up, and there’s a lot of chatter about what will happen. There’s really nothing we can say until the papers are presented. So regarding that, there’s nothing we can talk about what was coming up. We do obviously talk about a paper that was talking about blue that has the same author that had it in last year. In terms of commercial blue, we have stated that it’s not plug-and-play. You would need to make modifications to your drivers and your back plane in order to adopt our technology for blue because phosphorescent uses 75% less power. So it is a redesign. It isn’t new CapEx. It is really just a redesign. So as they introduce new products and new SKUs, they will design those that our technology into those. So as we stated, a number of times in the past, even if I had something that met all the commercial specs today, it would be nine month to 12 months that before you start seeing it in products. But we are continuing to make excellent progress.

Thank you very much.

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.

Again, thank you, everyone, for your time today. We appreciate your interest and your support and everybody, have a good night. Thank you.

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