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Executives

Joe Hassett - Investor Relations

Steve Abramson - President and Chief Executive Officer

Sid Rosenblatt - Executive Vice President and Chief Financial Officer

Analysts

Brian Lee - Goldman Sachs

Jim Ricchiuti - Needham & Company

Vishal Shah - Deutsche Bank

John Bright - Avondale Partners

Craig Erwin - Wedbush Securities

Rob Stone - Cowen and Company

Hendi Susanto - Gabelli & Company

Alex Gauna - JMP Securities

Jed Dorsheimer – Canaccord

Jagadish Iyer - Piper Jaffray

Andrew Abrams - SCR LLC

Jim Ricchiuti - Needham & Company

Brian Lee - Goldman Sachs

Universal Display Corporation (PANL) Q4 2012 Earnings Conference Call February 27, 2013 5:00 PM ET

Operator

Good day, and welcome to the Universal Display Corporation Fourth Quarter 2012 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joe Hassett. Please go ahead sir.

Joe Hassett - Investor Relations

Thank you, Jessica, and good afternoon, everyone. With us today are Steve Abramson, President and Chief Executive Officer; and Sid Rosenblatt, Executive Vice President and Chief Financial Officer of Universal Display Corporation.

Let me begin today by reminding you that this 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, February 27, 2013.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 securities. Universal Display disclaims any obligation to update any of these statements.

Now, I’d like to turn the call over to Steve Abramson, President and CEO of Universal Display. Steve?

Steve Abramson - President and Chief Executive Officer

Thank you, Joe and welcome to everyone listening today. Fourth quarter was a strong finish to another record year for Universal Display Corporation. For the fourth quarter, we reported revenues of $28.1 million and net income of $5.4 million or $0.12 per diluted share. As a result, we had our best year in the company’s history with revenue of $83.2 million, up 36% from last year, operating income of $13.7 million, up 141%, and net income of $9.7 million, up 206%.

Net income per share increased to $0.21 from $0.07 per share last year. These results show strong growth. And we are still in the early innings of the adoption of a revolutionary technology. The numerous industry developments, trends, and statistics being widely reported by a variety of sources continue to pay an increasingly rosy picture of the OLED industry and its growth potential. For one, analysts continue to project strong OLED display market growth. AMOLED has seen enormous growth through Samsung’s Galaxy line of smartphones and Notes. We are all anxiously awaiting details about the new Galaxy 4S scheduled to be introduced next month.

It has been widely reported that new AMOLED fabs are planned or being built, including Samsung Display Corporation’s Gen 5.5 and Gen-8. It was recently reported that Samsung has announced a plan to invest heavily in OLED technology. 5.6 trillion won or 73% of their 2013 CapEx budget, that’s a little over $5 billion. AUO was also reportedly gearing up for AMOLEDs cell phone panel mass production in the first half of this year.

TV represented next great OLED frontier. We have all read about Samsung and LG’s OLED television plans. Both companies planned product introductions in the first half of this year, although it is not clear how quickly they will ramp production. For our various business planning purposes, we are assuming production will initially be modest with volume production more likely ramping in 2014. LG Display recently announced that it will invest the equivalent of $655 million to build the Gen-8 OLED TV production line with a monthly design capacity of 156,000 55-inch OLED TV screens.

LG said it expects the plants to start mass producing panels in the first half of 2014. It was also recently reported that LG Display plans to invest KRW2.2 trillion or 54% of their 2013 CapEx budget into OLED, that’s a little over $2 billion dollars. Sony and Panasonic have also entered the race with recent demonstrations of their OLED television technology at CES. And both Samsung and LG are enthusiastically talking about flexible OLEDs with their lighter weight, conformability and unbreakability, flexible OLEDs could be a game changer.

Even Microsoft had gotten into the game showing a prototype Windows Phone featuring Samsung’s flexible Youm display at CES this January according to a report in the January 9, 2013 edition of appleinsider.com. Considering these many opportunities unfolding before us, you can understand why we believe we have only scratched the surface of the market’s potential. There is a little question that the OLED market will be considerably larger as the technology becomes more widely adopted through for example OLED TVs and flexible OLED products. And while the industry may still be in it’s infancy selling smartphones, notes and other portable electronic products, we are already experiencing phenomenal growth. We are expanding our patent portfolio, expanding the number of products, expanding our employee headcount, expanding our customer base, expanding our commercial research partnerships and expanding geographically.

We are engaged in a number of activities that we believe illustrate our industry leadership and growth potential. Material sales represent our most immediate growth opportunity. So, it’s only natural that this part of our business receives the most attention. Today a majority of our material revenue has been derived from red emitters. But we have gone through quite a bit of evaluation of our green materials over the past few years. For instance we are selling a green emissive layer comprised of a finely tuned emitter and host combination. Green phosphorescence provides the added power efficiency manufacturers need. We have received very positive feedback from our customers and have high expectations for our green emitter and host material. As the year progresses we will have the better handle on the rate at which green should be adopted. Of course a primary focus of our R&D team is to continue to push the envelope of PHOLED emissive layer material systems to improve the efficiency, lifetime and color of our red, green, yellow and blue phosphorescence material.

Our acquisition of the FujiFilm IP portfolio is beginning to fulfill the promise we saw when we purchased it. This created some exciting opportunities in our design and development of new OLED materials as well as strengthening our device licensing business. Independent of PHOLED materials there are other markets that represent additional growth opportunities.

Encapsulation technology for one is a separate market where we have strong competitive technology. As we previously discussed encapsulation technology is the key to workable, flexible displays. Encapsulation is a similarly critical success factor in the lighting industry, where we are already selling a full phosphorescent material system for warm white light. Currently we are discussing potential commercialization roadmaps with a number of partners and are in the process of developing our encapsulation technology business model.

Lighting is another separate OLED opportunity. We are working with just about all the major lighting manufacturers with the stake in the OLED game. It’s been recently reported that by OLED-Info that one of our partners LG Cam has announced they will be launching 80 lumens per watt OLED lighting panel this summer as well as well plastic OLED light panel. They are also discussing the timing of the new Gen-5 lighting (pad) which reportedly can reduce production cost by about 95%. Each of these growth markets is supported by our strong patent portfolio where we are actively expanding, extending our position as the leading OLED patent licensor. Over the past year we significantly enhanced the value of our intellectual property through the FujiFilm patent portfolio acquisition and the successful defense of challenges in Asia and Europe. This has served to more firmly establish the importance and strength of core IP as critical to the emerging OLED market.

The key to the success of our strategy is to make sure we invest in our technology by attracting the best and the brightest the industry has to offer. And our headquarters in Ewing, New Jersey we are expanding our facilities to accommodate the talented new scientists, engineers and associates who have been joining Universal Display. We are also expanding our organization around the world. In Korea we have partnered with Duksan to initially provide a finishing step in the phosphorus and greenhouse manufacturing process. This expands our OLED manufacturing infrastructure in Korea and brings us closer to our customer base improving our ability to support their current and future needs. While the OLED industry has achieved a level of maturity with several products in commercial production, it continues grow at a high rate and is expected to continue to do so for the next several years. For example, DisplaySearch projects the industry will grow 60% this year to $10.9 billion. It is very rare to find in the industry with this degree of proven technology that is expanding at such a rapid rate of growth.

As the OLED industry evolved so does our company, we are transitioning from a New Jersey company that does business foreign markets with international company that’s headquartered in Ewing, New Jersey USA. We appreciate your long-term support of our company and we believe the growth has only just begun.

With that, I will turn the call over to Sid.

Sid Rosenblatt - Executive Vice President and Chief Financial Officer

Thank you, Steve, and again thank you everyone for joining our call today. Let me review our results for the fourth quarter in more detail before looking more broadly at our results for 2012 and our 2013 guidance. Revenues for the fourth quarter of 2012 were $28.1 million, up 51% compared to the fourth quarter of 2011 revenues of $18.7 million. The major driver of the year-over-year increase in fourth quarter 2012 revenues was the $10 million increase in the royalty and license fees compared to the fourth quarter of 2011. In the fourth quarter of 2012, emitter revenue was $9.7 million compared to $9.4 million in the same quarter a year ago. On a sequential basis, emitter materials increased from $9 million from the third quarter of this year.

Total operating expenses for the quarter were $19.8 million, up 31% from a year ago. The increase was primarily due to a $3.6 million increase in patent cost and amortization of acquired technology as a result of our Fujifilm patent portfolio acquisition and a $2 million increase in research and development expenses primarily reflecting increased funding of sponsored research and development contract as we continued to invest in future.

For the fourth quarter, we reported net income of $5.4 million or $0.12 per share. Net income this quarter is net of $3.2 million in taxes mainly reflecting the 16.5% withholding taxes due on South Korean license revenues. Our model has significant operating leverage with a 51% increase in revenues driving a 135% increase in operating income to $8.4 million or 30% of revenues.

Our balance sheet remains strong with cash, cash equivalents and short-term investments of approximately $244 million as of December 31, 2012. The decrease in cash over the past 12 months was mainly due to the $109 million used this year to purchase Fujifilm’s worldwide patent portfolio of more than 1200 OLED patents and patent applications. For fiscal 2012, cash provided by operating activities was from approximately $17.8 million. As of December 31st, 2012, inventory was $11 million consisting largely of finished goods with a small quantity of raw material and up about $7 million over the past 12 months.

As we have stated on other calls, we considered the buildup of inventory an excellent investment of our cash because it improves our ability to quickly fill customer orders and significantly lands our customer goodwill. During the fourth quarter, we used $5.2 million of our $50 million authorization to repurchase roughly 206,000 shares. We will continue to utilize our share repurchase authorization strategically. Given our long-term focus and the early stage of the industry, we believe our performance can best be evaluated on an annual perspective.

Consequently, let me highlight our results for the year. Revenues of $83.2 million were up 36% over fiscal 2011 with commercial material gross margins of approximately 85%. Material revenues were up 19% primarily a function of strong growth in the first half of the year followed by flattish material sales over the second half of the year. Material revenues increased to $44.5 million in 2012 compared to $37.4 million in 2011. Emitter revenue was $38 million in 2012 compared to $26 million in 2011. Host material revenue was $6 million in 2012 compared to $11.3 million in 2011. As previously mentioned, we have the largest host material revenue quarter in the company’s history $7.7 million in the third quarter of 2011, a one-time event that significantly increased our 2011 host revenues. Samsung met their minimum material purchase requirements for 2012.

Research and development expenses increased to $30 million in 2012 from $24.1 million in 2011. The increase was mainly due to increased research costs incurred at PPG Industries’ outsourced research and development and increasing sponsored research contracts. Patent cost and amortization of acquired technology increased to $13.4 million in 2012 compared to $7.4 million in 2011. The increase was mainly due to increased amortization cost associated with the Fujifilm IP acquisition in July of 2012. Additionally, we had increased cost associated with the defense of certain ongoing and new challenges of our issued patents as well as the timing of prosecution and maintenance costs with our patents and patent applications. The combination of attractive gross margin and significant operating leverage generated 141% increase in operating income.

With fiscal 2012 as the baseline, outside normal considerations as disclosed in our various public filings, we expect our fiscal 2012/13 results to be primarily affected by the following factors. The rate of OLED market growth, the rate at which Samsung adds capacity and introduces new OLED products, the rate at which those products adopt our green technology, the speed of OLED television growth, and the speed of which additional companies enter the market for portable displays and lighting.

Looking at current operating levels as well as these major variables, our expectation is for full year 2013 revenue to be between $110 million and $125 million. This includes a Samsung license fee for 2013 of $40 million. Based on the trends in the adoption of the OLED technology and handheld devices and the research efforts underway on larger format displays, we believe there is a good reason to continue to expect significant market growth over the next few years.

With that, Steve and I would now be happy to take your questions. Operator, could you please provide instructions for the question-and-answer portion of our call?

Question-and-Answer Session

Operator

Absolutely, thank you. (Operator Instructions) And we’ll go to Brian Lee with Goldman Sachs.

Brian Lee - Goldman Sachs

Hey, guys. Thanks for taking the question. Maybe on the guidance first, I am just having some trouble with how you get to the low end of your guidance at $110 million, that’s what your high end was for last year, and you thought that number was doable even late into the year. So, in 2013, your low end implies no growth over red from last year, no growth in licensing from Samsung, and then just the green that you had been thinking you were going to be able to do in the back half of last year. So, can you help reconcile how that’s feasible that low end?

Steve Abramson

Well, as you know, we have reduced the guidance when we realized that green was not going to be adopted in 2012. And the green host was not going to be adopted and capacity that we anticipated in the beginning of the year did not come on board during the year. And when we went through our normal process for developing what we think the guidance should be we went customer by customer and we use our best estimates and we then come up with a range. And so the 110 guidance number for last year was one at the beginning of the year we felt was achievable, but there were lot of things that have occurred that still are questionable when they will occur, which is how we get to the low end of the guidance.

Brian Lee - Goldman Sachs

Okay, that’s helpful. I guess one more thing on the guidance, there is uncertainty around a few of the moving pieces, but is green adoption one of those moving pieces just green adoption in a commercial product for your largest customer?

Steve Abramson

It is part of it. It is the speed of which is adopted. We expect to sell green material and green host this year, but it is how quickly it is adopted in and how quickly it grows.

Brian Lee - Goldman Sachs

Okay. So, green in 2013, you would anticipate not only a shift, but it is designed into a commercial volume product?

Steve Abramson

Correct.

Brian Lee - Goldman Sachs

Okay. And last one if I could squeeze in, you said in prior calls and I think it’s in your K that you collaborate with Nippon Steel for green host materials. Are there any changes to that relationship anticipated in 2013 as green materials get adopted? Thank you.

Steve Abramson

No, there is no change in what we do. We work with them. We actually mix our host with their host and that mixed host is then sold to customer in Korea. So, they are not a competitors of ours, they are somebody that we actually work with, and we report our sales when they buy it from us. So, next question please?

Brian Lee - Goldman Sachs

Okay, thanks. Thanks guys.

Steve Abramson

Thank you.

Operator

Our next question comes from Jim Ricchiuti from Needham & Company.

Jim Ricchiuti - Needham & Company

Good. I think I heard you say that Samsung met its minimum requirements for the year?

Steve Abramson

That is correct.

Jim Ricchiuti - Needham & Company

And does that minimum change each year, so does that presumably we have had increases in 2013?

Steve Abramson

That is correct also.

Jim Ricchiuti - Needham & Company

Okay. And then looking at your OpEx, Steve, you alluded to a lot of expansion plans. How should we think about your OpEx and this year R&D and any major changes there and just in general SG&A to the extent you can comment about that? Thanks.

Steve Abramson

I don’t, takeaway amortization, because that clearly will grow, because the amortization of Fujifilms will be almost $11 million on an annual basis. I expect my R&D and G&A combined to not to go up somewhere in the 10% to 15% range. Right now, it’s budgeted into lower end of that.

Jim Ricchiuti - Needham & Company

Okay.

Steve Abramson

And will be – with our customers in Asia, but we are not going to double our number of people, I mean, the expansion is adding people in Asia.

Jim Ricchiuti - Needham & Company

Got it. Do you see any Fuji revenue related revenue net this year or is that more next year?

Steve Abramson

Yeah. Right now, we are still working with the IP and it will get into our revenue stream exactly when I can’t say, I can’t say specifically in my 2013 guidance, I have revenue that is allocated as Fuji revenue.

Jim Ricchiuti - Needham & Company

Okay, thank you.

Steve Abramson

Thank you.

Operator

We’ll now go to Vishal Shah from Deutsche Bank.

Vishal Shah - Deutsche Bank

Yeah, hi, thanks for taking my question. Steve, I just wanted to get your thoughts on what you think about the OLED TV adoption and assumptions in your guidance for the year, and also how should we think about some other customers and license revenues, any major contracts that you guys are working on for this year and what it takes for them to sign any of those contracts? Thank you.

Steve Abramson

Sure. It looks like OLEDs – as we see OLED TVs probably must start slowly in 2013, but LG and Samsung have talked about initial product introductions first half of this year. We will expect the volume production to be in 2014. Other people such as Sony and Panasonic demonstrated TVs at CES, but they have not yet announced commercialization plans. And we are working with all of the major players in the industry either our long-term contracts or a series of shorter term contracts. And as things evolved, some of those may change from shorter term contracts to longer term contracts.

Operator

We’ll now go to John Bright from Avondale Partners.

John Bright - Avondale Partners

Thank you. Good afternoon. First question is on the quarter, Steve and Sid, on the patent cost, can you walk through again what were the reasons for the increase in the patent cost and where the normalized aspect of that is and then also on the quarter talked about the inventory ramp that we seem to continue to see we would think that maybe that would come down?

Steve Abramson

Well, the patent cost include the amortization of the Fuji patent. So, that is $11 million divided, it’s almost a $1 million a month. So, the second half of the year, it would have had the increase from Fuji. The other parts of its there are more patents. We acquired the Fuji patent, the basic prosecution cost of getting patents and the annuities on patents will grow number of patients are grow. With the biggest increase in that is the fact that is now patent expense which includes the amortization of Fuji. So, that’s really were you see that increase there.

John Bright - Avondale Partners

Got it. And on the inventory?

Steve Abramson

Inventory, we’re continuing to build inventory. We expect – obviously we expect material sales to grow in 2013 and we believe that investing in our inventory is the best possible use of our cash at this time. We wanted ensure that our customers get the product within really short period of time. We ship essentially materials the next day and we are obviously we want to make sure that we are – we have inventory on hand that things do accelerate and things go faster than our anticipated growth, that we have material here to meet the demand. We never want to be in the situation where customer request material and we don’t have.

John Bright - Avondale Partners

And is it safe that we assume that the majority – material is green related material number one and number two. Do you have any better sense today of whether that might be use when you get three months ago. When there might be use any three months ago?

Steve Abramson

But as we said we’ve increase our inventory green and green host which is probably the majority of the increase and anticipation of green be adopted in second quarter or third quarter last year. So, we have continue to do that, we as we said in our guidance we expect revenues to grow and we expect green and green to host to be into commercial product this year.

Operator

And we’ll now go to Craig Erwin from Wedbush Securities.

Craig Erwin - Wedbush Securities

Thank you. Good evening gentlemen. Thank you for taking my question. So that dovetails into something I wanted to ask about, obviously it sounds like your confidence level now on green adoption is even materially higher than where you were last year at the same time, but there has been some back and forth in the press on the commitment of Samsung to adopt phosphorescent green in the S4 product. Can you comment on whether or not any individual product could have any significant impact on the potential cut-in rate for the phosphorescent green and whether or not you believe that that's important for you, and I don’t know if you might be able to comment whether or not you think that that press assertion has any accuracy?

Steve Abramson

There has been number of report haven’t seen that their not adapting there has been number of reports -- I have read that talk about the S4 power consumption and the assumption reduction in power consumption in the S4, which then relates saying their using green phosphorescent for having not seen anything that there is not say that. For haven’t seen the real up and back. We believe that green will get adopted and just depends how quickly the ramp of green is how quickly. Our successful the products are lot of those things out of our hand. We are not the once that make the end product.

Craig Erwin - Wedbush Securities

Excellent. When we do a little bit of math with some of the numbers in your K, it looks like your Korean customers outside of Samsung had a pretty nice uptick in demand in the quarter, looks like they might be at the highest level now in a couple of years. Can you comment as far as to whether or not you are seeing other customers outside of Samsung pick up fairly significantly? And what you think about the potential for the trajectory there? I know you are being conservative on OLED TVs, but would you see the most recent order trends as far as being sustainable over the next couple of quarters?

Steve Abramson

Obviously, the other customer the other big guy in Korea and that is still lumpy there. The fact that they have picked up is fact that they are working on OLED TVs and we see lumpiness in the way they order because they’re not in a production will get. Do we believe that this trend will continue that we believe that they will get into the market as they’ve said they committed CapEx and they are committed to OLED TVs that we do see that other customer in Korea growing in 2013.

Craig Erwin – Wedbush Securities

Excellent. And then last question if I may its kind of an open ended question. But there is a lot of enthusiasm out there for technologies and the general illumination or sort of white lighting market. Can you update us on the breadth of customers that you’re doing business with are there been any material changes among your customers are there any specific milestones or industry developments that you find exciting for this market?

Sid Rosenblatt

Well, we have a number of signed royalty bearing license agreements with lighting customers and we’re working with the number of other. The exciting thing that Steven mentioned in his script is that LG Chem is talking about committing to build a gen five size facility for OLED lighting which is - what the industry needs it need somebody to build a high volume capacity facility to get the costs down so that you can start seeing OLED light sources in the marketplace. Essentially Samsung did it with displays a number of years ago and there were in the forefront and are the leaders today if you need someone in the lighting industry to do the same thing and if the reports are true we are very excited about LG Chem moving into OLED lighting.

Operator

We’ll now move to Rob Stone with Cowen and Company.

Rob Stone - Cowen and Company

Hi guys.

Steve Abramson

Hi Rob.

Rob Stone - Cowen and Company

I think was there anything episodic in your patent related G&A costs in the fourth quarter in terms of thinking about the run rate being just the steady trajectory up or some modulation up and down?

Sid Rosenblatt

No I don’t think so. I think it was pretty much inline with what we thought.

Rob Stone - Cowen and Company

And do you have any view on the tax situation for the 2013 I think in the past you have sold some tax credit I know you have the license fees trigger taxes in Korea twice a year when the cash comes in. Any color you can provide on taxes if you might look different this year from last year?

Sid Rosenblatt

Yeah, the license fees from Korea 16.5% of license fees there is a 3% alternative minimum tax that we have to pay even though we have NOLs. The sale of our New Jersey tax credit did not occur because Governor Christie eliminated that program. So we are not able to do that so that we’ll not continue. So tax wise there is anything we can do strategically we will but that’s the picture today.

Rob Stone - Cowen and Company

Okay. And finally on technology development that was a bit more in Q4 than we were thinking in up quite of sequentially any comments there outlook for this year?

Steve Abramson

Yeah, I think the outlook for this year should be more in line with the other quarters I don’t see that as a big growth area particularly as the industry moves more towards production there is an lot that we will see in terms of customers paying us to work with them and the government programs have been going – have been decreasing over the past two years and with what we see going on in Washington today I don’t expected to really grow.

Rob Stone - Cowen and Company

So is that government or commercial mainly in the fourth quarter?

Steve Abramson

Everything in there it’s both, its government programs on commercial.

Rob Stone - Cowen and Company

Okay thank you.

Steve Abramson

Thanks.

Operator

And I’ll go to Hendi Susanto from Gabelli & Company.

Hendi Susanto - Gabelli & Company

Good evening and thanks Steve and Sid for taking my question. First with regard to OLED TV would you be able to share whether or not you expect green emitter materials to be the designed in the 55 inch OLED TV launches by Samsung and LG?

Steve Abramson

Hendi we really can’t comment on what our customers are going to design and clearly we’re trying to get many of our materials in to the TVs as we can.

Hendi Susanto - Gabelli & Company

Okay and then you also mentioned a number of growth value for 2013 I’m curious to know what your expectation about the adoption of AMOLED display in larger size tablets, are there still technical hurdles that display manufacturers are still working on?

Steve Abramson

Specifically for tablets the DisplaySearch is numbers don’t have a large amount of growth in that I mean the growth that you see based upon market projection is in mobile and in TV. So I don’t see a lot of traction in the tablet sizes I mean it’s in the note, but that’s not a large, it’s a not tablet size, I think it’s like almost six inches in diagonal.

Hendi Susanto - Gabelli & Company

So, like if I may clarify my questions, are there things that need to take place in order for AMOLED displays to be adopted and let’s say like 8 to 9 inch like tablets?

Steve Abramson

Now, I think it’s more what the manufactures where they want to put their capacity that they have, where they will get the highest return. So, I mean that’s really out of our control, that’s something that Samsung and other ones that are moving into the marketplace will have to make a decision on whether it’s AUO or even (Kemac).

Operator

And we’ll now move to Alex Gauna from JMP Securities.

Alex Gauna - JMP Securities

Thanks so much for taking my question. I was wondering if you could comment on your expectations for material growth in this coming years, is it faster or slower than the overall guidance that you have. And maybe give us a ballpark about how significant a percentage green might be in overall material expectation?

Steve Abramson

The second part I can’t really say, but if you look at the revenue growth, we projected at the low end of $110 million of which $40 million is license fee and $6 million or $7 million is technology development that brings our material revenue to $65 million to $70 million and it’s going from $45 million up to $65 million to $70 million, so that’s almost 50% growth. And at the upper end it’s all in the material side.

Alex Gauna - JMP Securities

Okay, thank you. And then with regard to the $2 billion in CapEx, you said LG has outlined if you think about only a third of being towards the TVs, is the remainder of that $2 million that remaining two-thirds, $2 billion, I’m sorry, is that targeted at lighting or can you give any color on their expectations or ability to move into the mobile display market?

Steve Abramson

We haven’t really seen the breakdown of what it is we just saw the aggregate number.

Alex Gauna - JMP Securities

One more if you could, I am wondering what you think that the industry can achieve the OLED at reasonable yields in terms of pixel density this year sort of PPI targets your customers are talking about?

Steve Abramson

Unfortunately you have to speak with our customers on those issues. The resolution issue is something the customers are focusing on particularly.

Alex Gauna - JMP Securities

I guess I am wondering if you feel like it’s moving in the right direction that you are hearing positive feedback on that?

Steve Abramson

We think as AMOLED has the ability to compete with LCDs on the relevant factors.

Alex Gauna - JMP Securities

Okay, thank you very much.

Steve Abramson

Thank you.

Operator

We’ll now go to Jed Dorsheimer from Canaccord.

Jed Dorsheimer - Canaccord

Hi, thanks. Just two questions I guess first one regarding LG, that’s still a development agreement and should we look at that if you do sign is their volumes pickup when the commercialized TV, if you do sign the longer term agreement. So, we basically view that is the Samsung agreement because there is fairly different pricing schemes there.

Steve Abramson

Well, we have a short-term material supply agreement with LG. It’s not a development agreement, it is where we sell the materials and build the license fee and we are negotiating with them. We said we expect negotiation to continue what the end result will look like with we’ve said that we’re looking to get royalties, but beyond that there really isn’t much I could say about ongoing negotiations.

Jed Dorsheimer - Canaccord

Would you expect to have something signed by the end of the year? And then as my follow-up or second question I was wondering if you might be able to comment on sort of the update on your solution-processible materials just in with respect to what were shown at CES in terms of some of the TVs being printed? Thanks.

Steve Abramson

Jed, as you know we don’t predict when any specific agreements will be signed or what goes in them. So, that’s we have been fairly consistent on that.

Jed Dorsheimer - Canaccord

But I guess that would not be in your guidance then?

Steve Abramson

It’s not – we just don’t predict when we are going to sign something

Sid Rosenblatt

We’ve made some assumptions internally on – in our guidance obviously about certain things, but we can’t go through all of them.

Jed Dorsheimer – Canaccord

Okay.

Steve Abramson

Our solution processing materials from what we’ve seen in the industry are at least competitive with the results from everybody else.

Jed Dorsheimer - Canaccord

And were the materials that were shown at CES using a small molecule or I thought that they were a polymer I just want to clarify?

Steve Abramson

You have to actually ask Panasonic.

Jed Dorsheimer - Canaccord

Okay.

Steve Abramson

I don’t think they disclosed the nature of the materials.

Jed Dorsheimer - Canaccord

Thank you.

Steve Abramson

Sure. Thank you.

Operator

We will now go to Jagadish Iyer from Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Yeah, thanks for taking my question. Two questions please. First on the what is baked in terms of the green adoption, do you think that it would come to the level of red emitter, because if I strip that $65 million and try to kind of pass it out between red and green host and green emitter, how should we be thinking about it and what is kind of baked in? And then I have a follow-up please.

Steve Abramson

I mean – we don’t give all the separate components, we literally go through customer by customer and they give us what they think they are going to need, so what their needs are and forecasts and with that we then go through and do our percentages of likelihood. So, I can’t tell you what all the components of our guidance are. But clearly we got a lower end in the higher end, so things happen faster at the higher end, but the pieces that I really can’t discuss.

Jagadish Iyer - Piper Jaffray

Okay, fair enough. Second on the question on you 10-K there were two things on the patent that I would to have some clarification please. One is on the EP ‘803 patent and EP ‘898 please. Can you give us, can you elaborate what is going on that because there is something which says that the patent was held the broadest claim was upheld or you chose not to file an appeal, but can you kind of walk us through those puts and takes of those two patents please? Thank you.

Steve Abramson

I think Jagadish why don’t you call us offline and we can talk specifically about those patents. What we have disclosed in the 10-K is really the disclosure but give me a call offline and we can talk about those specific patents.

Jagadish Iyer - Piper Jaffray

Okay.

Operator

We will now go to Andrew Abrams from SCR LLC.

Andrew Abrams - SCR LLC

Hi guys I am wondering if you could kind of guide a little bit on margins as green has adopted green and green host has adopted and that goes into commercial production, would we expect to see margins decline a bit as the host material becomes a larger portion of the total mix materials?

Steve Abramson

Yes, we still are in the 60% gross margin range for host materials but in the 85 to 94 emitter but obviously as the mix as there are more host materials in it, the overall margin will come down.

Andrew Abrams - SCR LLC

And if we look at the end selling price of green host material when it’s sold to a Korean customer, what percent of that price would be yours in terms of the mix between you and NSCC?

Steve Abramson

I mean that’s we sell our materials to NSCC and they in turn resell, they do their process and mix in their host and then they sell it to the customer in Korea. I really can’t tell you what the mix is.

Andrew Abrams - SCR LLC

Okay and lastly would you expect any of the longer term contracts that you sign over the next year or two to be non-unit based or would expect them all to be unit based contracts or at least have some component of unit-based contract?

Steve Abramson

Well, we would like them all to have some component obviously of unit based or royalty based upon the ASP of the module. I mean that is our goal to do that.

Andrew Abrams - SCR LLC

Got it, okay. Thanks very much.

Steve Abramson

Thank you.

Operator

And we will now go to Jim Ricchiuti from Needham & Company.

Jim Ricchiuti - Needham & Company

Just with respect to the guidance on the material side, you cited several number of variables in terms of the OLED market growth Samsung capacity green adoption, what are biggest if you were to look at those four or five items, what are the big items in terms of the range of estimates that you are giving for materials?

Steve Abramson

I mean to be honest there is a number of them clearly capacity increases in capacity will increase our volumes, adoption of green and how fast it gets adopted and in how many different lines or products it gets adopted is a very important factor.

Jim Ricchiuti - Needham & Company

Yeah, I guess what I am getting to is if I look at what happened last year where you started out the year in terms of your guidance and then the reset that we saw at the Q3, I mean, I think it’s fair to say that a big component that was green adoption. And so I’m just wondering is that a still the big factor in the range of that you’ve given from materials?

Steve Abramson

That was a big component, but capacity was another component because the capacity during the year ended up fairly flat for the second half of the year in a couple of the lines that which we thought at the beginning of the year were going to be glass based were designated as flexible lines, which never really came online. So, overall capacity is important. Obviously, green and green host materials is adoption and the rate of adoption and when it’s adopted is probably clearly a bigger part of it.

Jim Ricchiuti - Needham & Company

Okay, thank you.

Operator

We’ll now go to Brian Lee from Goldman Sachs.

Brian Lee - Goldman Sachs

Hey guys, just two quick follow-ups. First on the inventory, should we be modeling that to be up in Q1 as well?

Steve Abramson

I really can’t talk about Q1, we will continue to build inventory based upon estimates from customers that we need whether or not it will be up is something that I really can’t say.

Brian Lee - Goldman Sachs

Okay. And then thinking about the guidance one more time in terms of linearity, is it fair to assume you will be shipping green in the first half of this year or are you assuming all second half green revenue in that guidance range?

Steve Abramson

We hope it’s sooner than later, I mean to be honest I mean we expect it to be sooner.

Operator

And our final question comes from Hendi Susanto from Gabelli & Company.

Hendi Susanto - Gabelli & Company

Hi, Steve, one follow-up question, may I know what the red emitter material sales in Q4?

Steve Abramson

I’m sorry, repeat it.

Hendi Susanto - Gabelli & Company

What is the red emitter material sales in Q4?

Steve Abramson

Red emitter material sales…

Hendi Susanto - Gabelli & Company

Red and green if possible.

Steve Abramson

Red emitter sales were almost $7 million and green emitter sales were about $2.3 million.

Hendi Susanto – Gabelli & Company

Okay, thank you.

Operator

And our final question will come from Alex Gauna from JMP Securities.

Alex Gauna – JMP Securities

Yeah, I was just curious if you could some color in terms of what kind of lead times your customers are typically giving you right now. Is it a four-week or an eight-week or what kind of range are we looking at?

Steve Abramson

We give multiple forecasts and we go one-month, two-month, three-month, six-month, so we try to get as much information as possible, so that we can plan your inventory. So, we do get multiple ones delta that they always change. I mean, they are still in early stage, so it is the industry is early the production ramp things change quickly.

Alex Gauna – JMP Securities

Okay.

Steve Abramson

So, what we do get, we do get quite a bit of information as much as we can.

Alex Gauna – JMP Securities

I’m somewhat curious with that answer, the much information as you can. You said earlier that you are anxiously awaiting the Galaxy S4. Do you feel like you know what the composition is and can’t say or do you feel like your customers are going to keep you somewhat guessing as well?

Steve Abramson

I’m not so sure I could even answer that question.

Alex Gauna – JMP Securities

Alright, fair enough, I got it, right.

Steve Abramson

Good question, it was a good question. Thank you all.

Operator

And that is all the time we have for today. Thank you all for joining and have a pleasant day.

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