Good day, ladies and gentlemen, and welcome to Universal Display Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Sherry 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, Senior 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 Brian Millard, Vice President and Chief Financial Officer. Before Steve begins, let me remind you, today's call is a property of Universal Display, any redistribution, retransmission, or rebroadcast of any portion of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time in 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, 2024. 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 considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements. Now, I'd like to turn the call over to Steve Abramson.

Thanks, Darice, and welcome to everyone on today's call. We'll begin with a recap of 2023 and then provide insights into the vast array of opportunities that are fueling our and the OLED markets' strong trajectory. 2023 revenue was $576 million, operating income was $217 million, and net income was $203 million or $4.24 per diluted share. Fourth quarter revenue was $158 million, operating income was $65 million, and net income was $62 million, or $1.29 per diluted share. While soft consumer spending in the smartphone and premium TV markets tempered our 2023 financial results, we continue to foster our strong partnerships, advance our strategic and operational initiatives, enhance our corporate culture, and fortify our leadership position in the OLED ecosystem. During the year, we announced new long-term multi-year agreements with BOE Technology Group. We celebrated the grand opening of our new manufacturing site in Shannon, Ireland. The site broadens our global footprint and is designed to produce red, green, and blue phosphorescent emissive materials. We further enhanced our global IP framework with the acquisition of Merck KGaA's phosphorescent emitter portfolio of more than 550 patents and 172 patent families. 2023 was also another year of continued recognition for our company. We were named to the Wall Street Journal's list of Best Managed Companies, recognized by Newsweek as one of America's Greenest Companies, awarded a Silver rating for corporate social responsibility from EcoVadis, and recognized again by the Forum of Executive Women as a Champion of Board Diversity. As a pioneer and leader, we are at the forefront of energy-efficient OLED material solutions and best-in-class enabling OLED technologies. We continue to make excellent progress in our ongoing development work for commercial phosphorescent blue emissive system. We continue to believe that we are on-track to introduce a phosphorescent blue that meets…

Thank you, Steve. And again, thank you, everyone, for joining our call today. Let me review our 2023 results before commenting on our guidance for 2024. 2023 revenue was $576 million, a decrease of 7% year-over-year. Material sales were $322 million. Royalty and license revenues were $238 million, and Adesis revenues were $16 million. Our 2023 revenues included a cumulative catch-up adjustment of $11 million compared to $30 million in 2022. 2023 gross margins were 77% for the year compared to 79% in 2022. 2023 operating expenses were $224 million compared to $222 million in 2022. During the year, we continued to invest in a number of operational and strategic programs, including our phosphorescent emissive materials and OLED technologies, our groundbreaking OVJP manufacturing platform, growing our global team, and expanding our infrastructure, including the purchase of our Shannon manufacturing site, as well as investments in our Asia footprint, and R&D innovation center. Our 2023 operating income was $217 million, which translates into operating margins of 38%. 2023 net income was $203 million or $4.24 per diluted share. We ended the year with $800 million in cash, cash equivalents, and investments. Now moving onto our fourth quarter results. Revenue for the fourth quarter of 2023 was $158 million, down 6% from $169 million in the fourth quarter of 2022. Fourth quarter 2023 revenue includes a cumulative catch-up adjustment of $5 million compared to $13 million in Q4 of 2022. Material sales were $82 million in the quarter compared to $88 million in the fourth quarter of 2022. Green emitter sales, which include our yellow green emitters, were $63 million in the fourth quarter of 2023, which compares to $67 million in the fourth quarter of 2022. Red emitter sales were $18 million, which compares to $22 million in the fourth quarter…

Thanks, Brian. We believe we are well-positioned for long-term market leadership and long-term profitability in the growing OLED market. With our extensive experience and unwavering focus on innovation and execution, we are pushing the boundaries of what's possible, driving forward breakthroughs and advancements in our phosphorescent material and OLED technology roadmaps, fostering a corporate culture of inventiveness, integrity, inclusion, and collaboration, and are building on our robust first-mover position in the OLED ecosystem. As we approach our 30th anniversary of UDC's founding, we are excited to reach even greater heights in the future and continue to make a lasting impact in the industry. I would like 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 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. [Operator Instructions] Our first question is from Brian Lee with Goldman Sachs. Please proceed.

Hey, good afternoon, everyone. Thanks for taking the questions. Had a question I guess just on the blue commercialization trajectory that sounds like it's on-track with your targets for some time this year, can you kind of give us a sense of, '24, it seems like a pretty critical year in terms of the blue becoming a bigger part of your business model going forward, what are some of the milestones, targets you'd like to achieve this year beyond just hitting commercial specs? Would that include like a contract with the customer? Would that include getting pricing sheets out, like what are other milestones that could be achievable or that you're targeting beyond just getting to the commercialization specs?

The performance of our blue material, we've seen over the course of last year continued performance each generation of material that we've introduced to our customers. So we're on the right path. We feel very confident with the progress that we've made to date and where we see ourselves going over the course of this year. But I think it's really continuing to improve upon those performance specifications. There is -- as you said, there was contracting details and pricing details, but we're confident that at the time those need to be sorted out.

Okay, fair enough. And then just embedded in your guidance, I know it's still a wide range of $625 million to $675 million. Presumably, you're not embedding a lot of blue revenue in that guidance range, is that fair, and is -- I mean, are you even assuming any growth of the kind of high-single-digit millions of revenue you did in blue for 2023, any growth that all in your guidance embedded for blue for '24?

There is growth assumed in blue development. We had $5.6 million in revenues in 2023 and we do expect growth off of that number in 2024, but as you said, it's not a significant component of our guidance overall.

Okay, great. And then last one from me, I'll pass it on. I might have missed it, but -- two questions on gross margin. I guess, Brian, can you kind of walk us through the mechanics of how the $5 million catch-up revenue in the quarter impacts the gross margin reported by as much as it did? And then secondly, presumably, it wouldn't continue to repeat unless you have catch-up revenue later in this year, so what sort of the targeted range of gross margin for materials we should expect in 2024?

Yeah, good questions. Our 2024 guidance, so that we just stated on in our prepared remarks was 76% to 77% for total gross margin, so that assumes essentially zero cumulative catch-up revenue. And so there was a period-over-period flip in cumulative catch-up revenue between 2022 and 2023. And as you said, in Q4 of '23, we did have $5 million of cumulative catch-up revenue and so those are the pieces to think about.

All right, fair enough. Thanks a lot.

Thanks.

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

Yeah, hi, thanks for taking my question. I have a couple of them. Brian, I'm just kind of curious on your gross margin guidance. And if I look at it over the last few years, your gross margin has been higher, like I would say, it's been coming down, is this a function of some of your Chinese customers' deals getting better or is there something else going on? Why is gross margin kind of more in the mid-to-high 70s versus historically been well above that?

Yeah. Hi, Krish. So, on gross margin. there is a couple of factors at play. One is from a topline perspective, as we sell more units and material to our customers, there's volume pricing dynamics incorporated in each of our customer contracts. So some of it is just the fact that as the industry grows, we're selling more volume, the per unit price does come down just based on this volume pricing dynamics. As well as some of our materials are more -- becoming more complex in nature, so some of the cost structure elements are also changing. So that's -- I think some of what you've seen over the last few periods is really as the industry scales and we can scale with it. There has been a slight pressure on gross margin, but it's something we spend a lot of time as a management team, focusing on both the top-line aspects as well as the cost structure and making sure that we're being as disciplined as we possibly can.

Got it. Brian, and then one other question, just wanted to follow up. I understand the visibility is limited, but your spread in your FY '24 revenue guide is a growth of 8% to 17%, is it a way to help us understand the puts and takes like, what is baked into the lower-end versus what is baked at upper-end or in the $50 million, what could surprise us?

Yeah. I mean, I think we obviously have a base case that assumes growth across a number of segments. We certainly expect the IT segment to grow in '24 based on some of the factors that play there, as well as TV, mobile and automotive and others. So it's kind of across-the-board growth that we're projecting, and I think the high-side and the low-side of that are really just based on potential other factors that might cause things to vary.

Got it. Thanks, Brian.

Thank you.

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

Hi, thank you for taking my questions. I have a question on the full-year guide. If I look at your high-end of the guide, it's still below the high teens OLED material growth at some third parties, like DSCC are projecting. So I'm wondering if you can pull the curtain a bit on what goes into your guidance? Why is it below the industry growth for OLED materials and are you just being conservative?

Yeah, so, I wouldn't say there is necessarily conservatism baked into our forecast, we think it's a balanced guidance range and balanced forecast that we have. So it's really based on the feedback that we get from our customers in terms of what their expected demand is going to be, as well as we look at the similar industry reports as you in terms of where the industry is going and also layer that intelligence on top of what we're hearing from our customers and our teams in the field. So when we kind of roll all that up this year, we got to the range that we published in terms of our guidance for '24. We certainly hope you're right and it's higher, but at this point, this is what we're seeing as we roll up our forecast from our field teams.

Great. And as my follow-up, we hear noise around some of your Chinese customers working with domestic private companies like Summer Sprout Technology in Shangxi, and I understand you guys have long term agreements with your Chinese customers, but can you just talk about the competitive dynamics in China and is there a risk of these domestic suppliers are getting qualified?

Well, we are seeing some localizations coming from the Chinese government. They're trying to get some localization in the OLED industry. But what we're seeing is that customers want our full suite of current and next-generation OLED materials and technology solutions, which is one of the reasons why all these major panel makers are working with us and has signed long-term agreements, because we work closely with our customers to understand all the specification requirements that they have today and into the future.

Thanks, Steve.

Our next question is from Nam Kim with Arete Research. Please proceed.

Hi, thank you for taking my question. A couple of questions on blue. Can you also explain about the timing of your commercial production this year? And also do you expect customer qualification to kick-off this year or next year? And then I also wonder, do you expect your blue material to be adapted in IT first or across the segment at the same timing?

Thanks, Nam. So, in terms of the commercialization timeline, I think our team is really focused right now on making sure that we continue to increase the performance of our material and get closer to those commercial specifications, where, again, as I said earlier, very pleased with the progress that we've made to date. Continuing to feel like we're moving in the right direction. In terms of what our customers may introduce that into their product portfolios, that's really up for them to determine, but we continue to feel like we're moving much closer toward the mark that our material will be considered commercial performance. So I think that's kind of as much as I can say at this point based on where things sit.

Okay. And then, I see some momentum picking up in China, because Chinese OLED suppliers increasing their production for local smartphone vendor, can you share your view on Chinese business? How much growth do you expect from Chinese customers this year versus last year? Thank you.

Yes, so we're certainly projecting growth. We -- as Steve just mentioned, we have longstanding partnerships with our customers in China. We provide best-in-class materials to our customers, also with the Next-Gen platforms, as well as access to our current materials. We think that there is a strong partnership between us and our Chinese customers that we expect to be longstanding.

Okay. Thank you.

Thanks.

[Operator Instructions] Our next question is from Jim Ricchiuti with Needham and Company. Please proceed.

Hi, this is Chris Grenga on for Jim. Did you -- I'm sorry, I cut out earlier, but -- did you mention any progress updates with respect to discussions you're having around OVJP with potential partners?

We did not, but as we've talked about previously, we're certainly open to partnerships with OVJP, that could help us advance the project forward. We continue to believe that OVJP is the solution for large area television, large area displays on TV sized, and so we're open to various discussions and have had it, and continue to have various discussions with potential partners.

Got it. And SG&A stepped down sequentially year-over-year, could you provide any color on that?

Sure. The biggest factor there is, for the first half of 2022, before we operationalized our Shannon site, we were recording the cost of that site to SG&A for the first half of 2022 and that was around $5 million. And then, so from mid-'22 onward, those costs are classified in cost-of-sales. The other factor is, we had some reduced stock-compensation expenses year-over-year that are flowing through SG&A, those are the two largest factors that are contributing to the decrease.

Got it. Thank you. And maybe just one more sort of bigger picture, with the recent launch of Apple's device, the Apple Vision, and the proliferation of some use-case videos, showing -- screens plastered and augmented reality across all the surfaces now sold, it would strike me as potentially -- a potential to display some, maybe TV, and even leapfrog some of the IT use cases for OLED, I'm curious -- I mean it's early days, of course, but I'm just curious if you had any exposure to these devices or similar devices. And if there is any concern that it would -- any concern whatsoever that it would pose risks to some of the growth rates that were cited earlier.

We're watching the AR, VR market, we find it very interesting. We don't think it's going to take market share away from any of the other panel makers. We think there is many, many people, and everybody wants displays in various ways for various use cases and they all seem to want to use OLEDs in it. So we see the market growing. AR, VR is yet again an additional market that's going to grow and expand the market opportunities. We don't really think it's going to take any market share away from anybody else.

Thank you, very much.

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

Yes, thanks for taking my question, and I apologize if I'm going be repeating questions already asked, I joined the call late. One follow-up for Steven and one for Brian. Steve, how should we think about the dynamics of your conversations with key customers, especially as blue becomes commercially viable? I understand that there needs to be additional contracts to be signed. So what are the key catalysts or milestones that would trigger or help you with getting customers commitment by signing the contract for the blue supply? And I have a follow-up.

Sure. Thanks, Mehdi. So, on blue and supply of blue, we, as you said, don't have commercial pricing schemes in place with any of our customers at this point for blue. And we -- at the point that we need those in place to be supplying them commercial quantities, we're confident that we'll be able to get there. We've had varying levels of discussion with certain customers on that at this stage. And so I think that that's really the key thing is that once we get to the point where we need to have commercial pricing in place, it will be in place, but we're just not there yet since we don't yet have the commercial specification performance.

Okay. And Brian, did you discuss how much of R&D blue was recognized? Was there any revenue recognized in the quarter?

Yes, so there was $1.3 million in Q4 and $5.6 million for full year 2023 of blue development sales.

Got it. And then, just a quick follow-up for you. How should I model the OpEx in '24 relative to '23 OpEx growth?

Yeah, in my prepared remarks, I referenced 10% to 15% increase in OpEx year-over-year, so that's the best modeling assumption for now.

Okay. Thank you.

Thanks.

Our next question is from Martin Yang with Oppenheimer and Company. Please proceed.

Hi, good afternoon. Thank you for taking my question. If we adjust for the catch-up payments on revenues, did material revenues still decline year-over-year in '23? If so, what are the key factors that contributed to that year-over-year decline?

Hey, Martin. So the majority of the cumulative catch-up adjustments actually flow through our royalty and license line, not our material sales line. So that wouldn't necessarily be the way to adjust for it.

Got it. What are the key drivers for the year-over-year decline in material sales in '23?

Well, we had relatively flat volumes. Our volumes were down less than 1% period-over-period, so you can call that flat. We had -- then the remainder would be some certain price differences, customer mix also coming into play, and then that'd be offset by blue development sales, which were increased relative to 2022.

Thank you, Brian. And did any top customers hit volume pricing milestones in 4Q?

So, the way we do price -- the way that we have to estimate pricing based on our revenue accounting model is we have to estimate over the full five-year term, what the pricing is going to be on an average basis based on volumes and revenues. So there were -- every quarter, there are changes in our assumptions related to that, but in Q4 they were normal course changes and those changes in assumptions resulted in that $5 million cumulative catch-up that I referenced.

Got it. Thank you. Our last question is, is there any 10% customers in 4Q '23 other than customer A, B, and C?

No, just those three.

Thank you very much. That's it from me.

Thanks, Martin.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Brian for closing comments.

Thank you all for your time today. We appreciate your interest and support.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.