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Universal Display Corporation (NASDAQ:OLED)

Q2 2013 Earnings Conference Call

August 08, 2013 05:00 p.m. ET

Executives

Steven V. Abramson – President & CEO

Sidney D. Rosenblatt – EVP & CFO

Darice Liu – Director IR

Analysts

Brian Lee – Goldman Sachs

Alex Gauna – JMP Securities

Jim Ricchiuti –Needham & Company

Austin Bernardis – Cross Research

Hendi Susanto - Gabelli & Company

James Meredith – Cowen & Company

John Bright – Avondale Partners

Craig Erwin – Wedbush Securities

Jed Dorsheimer – Canaccord Genuity

Andrew Abrams – JG Capital

Jagadish Iyer - Piper Jaffray

Operator

Good day, and welcome to the Universal Display Corporation Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Darice Liu, Director of Investor Relations. Please go ahead.

Darice Liu

Thank you, Josephine and good afternoon everyone. Welcome to Universal Display’s second quarter earnings conference call. Joining me on the hall 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 the 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, August 8, 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.

Steven V. Abramson

Thanks Darice and good afternoon to everyone on the call today. In our second quarter of 2013, Universal Display delivered a tremendous quarter with record revenues of $49.4 million, record operating margin of 44% and record earnings of $0.33 per share. We believe this was a pivotal quarter for us. This quarter provided an excellent preview of the company’s growth potential.

It’s a saying time for OLED market. We are encouraged by the growing customer discussions and pipeline activity we are seeing in the display of OLED markets. We continue to work with top display manufacturers who have been out over the best of plan to scale our production as well as develop new products. With the introduction of the first commercial mobile product utilizing both our red and green materials in the second quarter of 2013, we have seen our green emitter sale almost triple quarter-over-quarter and our green host sales more than double quarter-over-quarter, both contributing significantly to earnings.

I would like to take a moment to thank our employees for all of their hard work. Across the company, we are building momentum for continued profitable growth. Over the past few years we have made great strides in improving our materials and technology. We now have both red and green emitters as well as green host in commercial volume production. Looking forward, we are working to expand Universal Display’s growth profile.

We are mining our core phosphorescent and Fujifilm’s owed intellectual property for next generation materials and technology which will support our customer’s product roadmap including flexible displays, TVs and lighting.

Augmenting our expanding materials portfolio, we are also pursuing new avenues of growth through projects such as single layer barrier and capsulation and Organic Vapor Jet Printing. Encapsulation OVJP, a long-term project, we are still in the early stages of development but look quite promising.

In summary, we believe we are building a business that can sustain attractive growth rates over the long term consisting of new materials and technology, new customer agreement and new commercial OLED products, all of which we believe will contribute to our growth in the coming years.

Now for the review of second quarter operations, I’ll turn the call over to Sid.

Sidney D. Rosenblatt

Thank you, Steve. And again, thank you everyone for joining our call today. Let me review our results for the second quarter in more detail before commenting on our 2013 guidance.

Universal Display had an outstanding second quarter achieving record revenues, operating margins, operating cash flow and earnings. Revenues for the second quarter of 2013 were $49.4 million, compared to second quarter of 2012’s revenues of $30 million. Two major factors driving our revenue growth were royalty and license fees, and material sales, roughly a 45-55 swift.

Our second quarter 2013 royalty and license fees were $21.2 million. $20 million stem from license agreement, which is up from the second quarter of 2012 by annual license payment of $15 million. Our total material sales were $27.1 million in second quarter of which developmental was $1.4 million and commercial was $25.7 million. Breakdown of commercial material sales like color, for the second quarter of 2013, the prior quarter and comparable year ago quarter, are green emitter sales were $13.1 million in the second quarter, up 186% sequentially from the first quarter’s $4.6 million, and up Year-over-Year from 2012’s $1.5 million.

Green host sales were $9 million in the second quarter, up 192% sequentially from the first quarter’s $3.1 million and up year-over-year from 2012’s $1.4 million. The substantial rise in green emitters and hosts has attributed to the first mark on utilizing both our red and green material ramping volume production.

Red emitter sales were $3.6 million in the second quarter, up 25% sequentially from the first quarter $2.8 million but down year-over-year from 2012’s $5.1 million. As we noted during last quarter’s earnings conference call, our red emitter sales have been impacted by material efficiency as well as volume price break. We believe we are near the tail end of these pricing breaks.

Material costs in the second quarter were $8.3 million, sequentially up from the first quarter’s $3.1 million. Most of this increase is related to more than 110% increase in volumes. The remainder is related to gross margins. This translates into second quarter material gross margins of approximately 7%, down sequentially from the first quarter’s approximately 76%. This decline is attributable to product mix and price reduction.

Our royalty and license fees gross margins remain at a robust 97%. This brings our total gross margin for the second quarter and the first half of 2013 to approximately 80%. It has only been three-and-a-half month since the first commercial Smartphone utilizing our red and green materials was launched into the worldwide consumer market. All we have seen is surge in green emitter and host shipments due to the short timeframe since the new material recipe was adopted, our data and predictive ability on the run rate and product mix, major factors in the material costs is rather limited.

Operating expenses excluding costs of material sold for the quarter were $19.3 million, essentially flat from last quarter’s $19 million but up year-over-year from 2012’s $15.5 million. The increase is mainly attributable to an increase in patent and amortization of acquired technology expenses, primarily due to higher amortization associated with the Fuji Corporation OLED patent portfolio acquired during the third quarter of 2012.

Regarding the year’s full OpEx, we still believe 2013’s operating expenses excluding material costs will increase approximately 15% year-over-year. Our operating margins remain robust and increased 100 basis points year-over-year. Second quarter of 2013 operating margins were 44%, up from the comparable year ago quarter which was 43%. Taxes were $6.5 million in the second quarter inline with our effective tax rate of approximately 30% per year.

We would suggest that the street uses quarterly tax rate for the second half of 2013. For the second quarter of 2013 we earned a record $0.33 per share in net income, compared to second quarter 2012’s $0.23, with each of our revenue streams contributing to our healthy profit.

Moving to the balance sheet, we ended the second quarter with $245 million in cash and short-term investments, up from March’s quarter up to $120 million. Operating cash flow for the quarter was a positive $26.4 million, the best we’ve ever had. Regarding our patent acquisitions, there have been no material or significant new challenges or decisions since our last quarter’s conference call. In the second half of this year, we are expecting a decision on one pattern hearing and a couple of oral hearings are scheduled. More details can be found in our 10-Q.

Now towards 2013 Guidance. Based on customer discussions, current operating level, product mix as well as other major variables we now expect our 2013 revenues to reach the high end of our $110 million to $125 million guidance range for revenue which includes Samsung's license fee of $40 million. Looking at the quarter, we are proud of our results not only that we achieved record revenues operating margins, earning, operating cash flow, but we continue to demonstrate the Universal Display's growth opportunities are just beginning.

Let me turn the call back to Steve for some closing remarks.

Steven V. Abramson

Thanks Sid. As you can see we are well positioned in this growing market to increase revenues and earnings year-over-year for the foreseeable future. Based on a growing customer list and expanding product portfolio new materials and technology and a ramp of new OLED products in the commercial markets, including TVs, touchable displays and lighting. We believe that all these factors will drive the company's trajectory top line and bottom to be exceptionally positive over the long term.

On that note, Jessica we will start the Q&A.

Question-and-Answer Session

Operator

Thank you, Mr. Abramson. (Operator Instructions) Our first question will come from Brian Lee from Goldman Sachs.

Brian Lee – Goldman Sachs

Hey guys! Thanks for taking the questions. First I guess on your comments on 2013 guidance, I am just trying to couch how you are viewing the high end of guidance there is still five months left in the year, you sound confident in doing the high end. So, is the right midpoint now something like $120 million and then just on that point, how much wiggle room is there around that on either side given we have got two more quarters to go?

Steven V. Abramson

Well there – what you said is the high end, I mean, there is a number of major factors that affect our guidance which includes green emitters, and green hosts and we have been in commercial production for only about six months. So it really is still difficult for us to give you a really narrow range – I mean it's been good as anything to be honest.

Brian Lee – Goldman Sachs

Okay. Fair enough. Well, maybe on that point, it does sound like visibility has improved. You mentioned specifically the first sound use both red and green has been the driver of growth of this quarter and it's been out for three-and-half months, can you provide any color on the second half? How many other devices you might be expecting to use both red and green?

Steven V. Abramson

Well it's difficult for us to talk for our customer. We believe that Samsung Display Corporation our customer will continue to buy these materials or the devices. We don't really have visibility into what the end product is that Samsung Electronics puts them in. but we right now, based upon, as I said, discussions with our customers, we are comfortable at the top end.

Brian Lee – Goldman Sachs

Okay. Thanks guys.

Operator

Our next question comes from Vishal Shah from Deutsche Bank.

Unidentified Analyst

Hi, this is (inaudible) for Vishal Shah, thanks for taking my questions. Congrats on a great quarter. I wanted to understand a little bit more about what you’re seeing in terms of utilization and I guess wheels on the red and how we should be thinking about the mix between red and green going forward just given utilization yield is improving for some of your customer, how is that going to make impact the way we should think about the mix of your materials?

Steven V. Abramson

Well it's still very early stage and for red, for green for commercial production our product mix is shifting. We continue to change this as we add new materials and it's even though we have seen, they have been using red for about four years, we pretty much are seeing the efficiency in red. They are at the early – they are at the beginning of the ramp in terms of efficiency, for green. We really don't know as we said, it's only been a few months that we have been selling it. We probably will have a better feel for what the efficiency ramp is over the next two quarters whether they continue, whether the efficiency ramp is deep enough, we really don't know.

There are different materials, they are deposited at different ways, they have different results. So I don't think you can from one and translate it directly to the other.

Unidentified Analyst

Okay, okay. How should you think about margins going forward all those materials have lower margins relative to the emitter, but what sort of leverage can you pull to maybe offset some of that pressure maybe the mix between the emitters and the host changing you get little bit more host sales, thank you?

Steven V. Abramson

Well, it is really difficult for us to project as long as both of them continue to grow if host materials proportionally grow faster than emitter then there may be some pressure on our margin and regarding that if that’s the case if it’s moves that way we can see margins at the few percentage points for quarter in the second half of the year, but really depends upon the products mix and pricing.

Unidentified Analyst

Okay, that’s fair enough. Thank you.

Steven V. Abramson

Thank you Susie.

Operator

(Operator Instructions) We will now move to Alex Gauna from JMP Securities.

Alex Gauna – JMP Securities

Thanks for taking my question, nice quarter. I was wondering you mentioned on getting towards the end of your price breaks on volume shipment of the red can you just touch the little bit on efficiency with the red and we squeezed out most of the efficiency gains touched it red should attract more in device function and can you may be give us a ballpark on with that end type of consumption rate growth rate looks like to you right now?

Sidney D. Rosenblatt

We think we’ve seen a lot of the efficiency gains we can predict exactly what our end customer is going to do in terms of their manufacturing systems, but we also believe that were knew the end of the volume pricing rates as well.

Alex Gauna – JMP Securities

And any comment in terms of what kind of growth rate you see in terms of consumption or is that too much into the crystal ball

Sidney D. Rosenblatt

It’s probably too much in the crystal ball, it’s going to grow commensurate with the volume growth exactly what’s the two slopes are going to like is really a little bit too much on crystal ball.

Alex Gauna – JMP Securities

And then in terms of green should we in terms of setting our expectations from number that there are going to be those efficiency gain headwinds and can you remind me green is not involved in your current license thing is that correct that something that could also factor in going forward?

Sidney D. Rosenblatt

Green is included in the current license agreement with Samsung, blue is not included with our current license agreement with Samsung. In terms of green we are seen robust volume shipment which will likely need to some volume pricing breaks in the current quarter, but we’re just the beginning, we just thought about three and a half – four months of green materials and just beginning to introduce them in to their products, so we really do need a couple of quarters to be able to do some trend analysis.

Alex Gauna – JMP Securities

Okay. Thanks.

Operator

And we’ll now move to Jim Ricchiuti from Needham & Company.

Jim Ricchiuti –Needham & Company

Thank you. Steve I just wanted to follow up on that so it seems like you are suggesting that second half your materials revenue is based on the upper hand of your guidance could be down and it sounded to me as if green was the wild card here and yet you are suggesting I think that the green is still going to be you are anticipating very good volumes for green, so maybe you can just help me understand what some of the dynamics or in the second half in terms of the materials revenue?

Steven V. Abramson

As you know actually Jim one of the major factors is green emitters and host, but it’s only been in the commercial production for a short period of time and we need a few more months and quarters to be able to assess the types of run rate and product mix trend if any with those new materials so for the time being we prefer to stick to our current guidance range which is now to the high end and once we get more information we’ll be able to provide updates in our next earnings conference call.

Jim Ricchiuti –Needham & Company

Okay and just a follow up, (inaudible) can you talk a little bit about whether you feel you are closer to any new commercial licensees versus say a few months ago.

Sidney D. Rosenblatt

Well we are working with all the major players under various agreement for the license agreement for material supply agreements and we continue to push these negations forward and when the appropriate time comes we will evolve into a different business relationship as appropriate.

Jim Ricchiuti –Needham & Company

Okay. Thanks a lot.

Operator

Our next question comes from Austin Bernardis from Cross Research.

Austin Bernardis – Cross Research

Good afternoon, thanks for taking my question. Real quickly, just to clarify on the price breaks that you expect to see for green emitters, did you see in the current quarter or in the first quarter and in addition to that or rather tied into, is just in the initial price break for green and will it not be the same magnitude that we saw in the first quarter for the red?

Steven V. Abramson

Well, in terms of price breaks, because the volume of green is at a high level, they will probably get to price break points faster than red did. Now in terms of red, for the first quarter, compared to last year, there was a decline over the year from 2012 to 2013 in the price, but as we said, we came close to the end of the price breaks for red. Green is really at his – just a pretty much at the beginning of the volume price breaks. But again, we could see a few percentage point reductions and our margins really depending on the mix.

Austin Bernardis – Cross Research

Okay. And then, secondly, I know it still, I mean green is just in the market ramping, but how do you think about future material launches and you expect to sort of really monetize some of the IP that…?

Steven V. Abramson

For the Fuji film all the pattern portfolio, we have already integrated a number of those materials technology into our current development program. And it's been able – we have been able to really broaden the scope of our development program. In term of new materials going into the market place, that really depends on our customer, what materials they are interested in, in terms of what products they will adopt and all that is work in progress. We are working very closely with our customers as to help them develop the products and the materials that would go into those products.

Austin Bernardis – Cross Research

Thank you.

Operator

We will now move to Hendi Susanto from Gabelli & Company

Hendi Susanto - Gabelli & Company

Good morning, Steve. Thank you for taking my question and congrats on strong sales in the second quarter.

Steven V. Abramson

Thank you.

Hendi Susanto - Gabelli & Company

If I analyze commercial sales and then look at the ratio of sales between green hosts and green emitter, they are all over the place. I am wondering whether you could share some insight on those patterns for the last four quarters and I am wondering once each option green emitter and green hosts stabilize whether you have some idea on what the ratio of materials sales between emitter hosts and emitter – between the hosts materials and then the green emitter materials may look like?

Steven V. Abramson

I think your question is what’s the ratio between green and green hosts materials and it is still a little bit early for us to project in terms of what is specific ratio is, I mean you can see in terms of dollars, green emitters are higher dollars than the hosts materials and the hosts materials, as you are well aware, we do sell them to Nippon Steel Chemical who then sells it to – they actually do some – they blend it with some of their materials and they sell it to Samsung themselves.

So, the ratio has been little bit, it fluctuates and I think will probably has to have at least two more quarters of high volume manufacturing including red and green before I can really give you an answer to that question.

Hendi Susanto - Gabelli & Company

Okay. And as a follow up, may I know whether you have any updates on the blue material development and your encapsulation technology?

Sidney D. Rosenblatt

We are continuing towards very hard on blue. We have not yet gotten to commercial lifetime level, but once we have something to announce we will certainly do that. We have a very tight focus team that's working on blue from evolutionary process of our existing materials that as well as looking at some revolutionary ways of creating blue.

The encapsulation technology as you know, is using plastic as a substance need to be encapsulated, that's because exposure to oxygen, water deteriorates materials and plastic was graded being bendable and performable is very poor. There have been few encapsulation ideas for plastic most of which center on a multiple barrier layers. We have been working on single barrier layer encapsulation. Compared to a current alternative, a single layer means less materials, less weight and less tag for manufacturing, we are still in the early stages of this long-term project, but it looks quite promising.

Hendi Susanto - Gabelli & Company

Thank you and great job on the first half of the year.

Steven V. Abramson

Thank you.

Sidney D. Rosenblatt

Thank you.

Operator

And we’ll now move to James Meredith from Cowen & Company.

James Meredith – Cowen & Company

Good evening and let me add my congratulations to all the others, great quarter and great outlook. I want to touch on the green versus red questions as well it is about $22 million of green sales and $3.5 million of red does that imply that there is seven times as much green material being delivered than the red?

Sidney D. Rosenblatt

There’s couple of things first in red we are selling just emitters, in green we are selling emitters and hosts.

James Meredith – Cowen & Company

Okay.

Steven V. Abramson

The actual green emitter sales were $13 million and the host sales were about $9 million.

James Meredith – Cowen & Company

Okay, that’s helpful. So, still about a three and a half or so to one ratio of green to red and I guess that would be because red is so far down the learning curve at the OEM.

Steven V. Abramson

That’s only one of the reasons based on the learning curve and other reason is red is certain volume price for red to green, and green is not yet hit.

James Meredith – Cowen & Company

Yeah. That I actually what I meant. Thanks. For my follow-up I’d like to just ask again about the guidance a just little number crunching and it looks as though leaving the Samsung out that the second half would have to be actually slightly below the first half to even to make a 125 million for the full year that’s highest end of the range. So I’m wondering why would be it that if Samsung, if the Galaxy S4 drove a good bit of the sales, the material sales this quarter why that would be going down in Q3 and Q4?

Sidney D. Rosenblatt

There is a number of variables in our forecast one of the major factors obviously is green emitters and hosts which have only been commercial for six months as I said we need a couple of more quarters to assess the run rate and the product mix, other major factors is introduction or ramp up our commercial expenses new OLED products such as flexible displays and TVs and these many more volume purchases, but to be honest for the time being we prefer to stick with our current guidance range that we’ve narrowed and we will update it on the next call as you are aware things just changed.

James Meredith – Cowen & Company

Thank you, appreciate it again congratulations.

Steven V. Abramson

Thank you.

Operator

Our next question comes from John Bright from Avondale Partners.

John Bright – Avondale Partners

Thanks. Guys is there a way to look at this quarter and the strong performance in the material sale similar to the third quarter of last year where it look like there were building of the inventory particularly on the green side both in emitter and host, you’re not necessarily sure about the forecast associated with the exact products primarily associated with the Smartphone is that a fair way to look at it at the moment?

Steven V. Abramson

I’m not so sure this is the exact same as Q3 2012 in that today we know that there are commercial products with red and green material on it and then there was a push to raw materials and it were in some specific products, but now e are in Galaxy S4 and the number of other products and that use red and green material. So, we are – I think it is a little bit different today than it was then.

John Bright – Avondale Partners

But the inventory in generally related _ to get more aggressively on your guidance is probably because they are picking up – they are building their inventory you don't want to get ahead of them on…?

Steven V. Abramson

It could be via materials for that pipeline too.

John Bright – Avondale Partners

My second question is related to the tail end of the pricing is relates to red, that's contract related that's why you know that's coming to the end where there is not price break beyond that, is that accurate?

Sidney D. Rosenblatt

Correct.

John Bright – Avondale Partners

Gentlemen thank you.

Steven V. Abramson

Thanks John.

Operator

Our next question comes from Craig Erwin from Wedbush Securities.

Craig Erwin – Wedbush Securities

Sorry, congratulations again on the solid quarter.

Steven V. Abramson

Thanks.

Craig Erwin – Wedbush Securities

So, one of the things you discussed previously is the potential for a new red maybe to help with pricing at your major customer can you update us on status of that product and whether or not we see similar sort of step up in price as far as what we have seen down – for red in the past?

Steven V. Abramson

We have – we are constantly working on new materials and we work with our customers side by side to meet their new specifications and work with them on a road-map and we are constantly developing new materials and we have developed some new materials that we have talked about being – the red being sampled.

The question is what is the applications for those red and that's something that we work closely with it, with the customers, with – right now the red that's in the products that they are making is really the red that we expect and continue using for the stable future in the mobile products.

Craig Erwin – Wedbush Securities

The next question I had was about the deposition rates on green. Is this something you expect to be highly variable over the course of the initial assumption attention or do you expect the green deposition rates to flatten up relatively quickly?

Sidney D. Rosenblatt

When you say deposition rates, are you talking about the manufacturing efficiency that the customers would be using?

Craig Erwin – Wedbush Securities

Exactly, yes.

Sidney D. Rosenblatt

Each molecule is different at the customer’s plant. So and that's really within the parity of the customer. One of the reasons why we do need a couple of more quarters to really understand what the run rate is going to look like?

Craig Erwin – Wedbush Securities

Understood. Thanks again for taking my questions.

Steven V. Abramson

Thank you.

Operator

And we'll now move to Jed Dorsheimer from Canaccord.

Jed Dorsheimer – Canaccord Genuity

Hi. Thanks guys and congrats in the quarter. So, just I guess two questions, first on the, sort of a look at the price break from Q4 to Q1 that occurred in the red, it was about 40% decline and I know that you had mentioned that there was also a takedown in volume, so I guess as it relates to the green, would the price break be similar in range and volumes are hit, and then is that on both green emitter and green host or would that just occur in green emitter? And then I have a separate follow up.

Steven V. Abramson

The specifics of the 40% drop, I don’t exactly know what that number is. We did see a decline in pricing. I don’t think there was any 40% decline. The decline in our pricing is based upon our contract with Samsung and that relates only through red and green emitter material.

Jed Dorsheimer – Canaccord Genuity

Got you, great. Thank you. And then, just I wanted to sort of move over most of the calls been spent on handsets, so during the quarter, LG did launch the TV, all of the upside though really was Samsung related, not LG-related, is that correct? And do you have any thoughts on the TV market?

Steven V. Abramson

On what?

Jed Dorsheimer – Canaccord Genuity

On TVs, OLED TVs.

Steven V. Abramson

Okay. Not virtually outside in this quarter was Smartphone related, that’s correct. Currently OLED TVs are manufactured in pilot, as you know. We believe this production transitions from pilot to volume production past the relative decline. But importantly, we hardly doubt that the display makers who have entered and who are planning to enter the OLED TV world, would do so without believing that they could eventually be competitive with today’s products.

Jed Dorsheimer – Canaccord Genuity

Okay, thanks guys.

Steven V. Abramson

Thanks Jed.

Sidney D. Rosenblatt

Thanks Jed.

Operator

Our next question comes from Andrew Abrams from JG Capital.

Andrew Abrams – JG Capital

Congratulations guys. One or two quick questions. How close was Samsung’s actual order rate versus your kind of rolling guidance that they give you? Have they been getting more accurate or are we in kind of outer space again because of green?

Steven V. Abramson

It’s difficult for us to answer that question, mainly because we do get estimates and sometimes they meet them and sometimes they don’t. This quarter was a very good quarter for us, whether this will continue is something we really have to see. Are they getting better than they were? Probably. Are they real, real accurate? Probably not.

Andrew Abrams – JG Capital

Got it, okay. And do you have any understanding of the actual sale through of host material from NFTC or is it basically you just see what is sold to them and you have no idea what their inventory levels are before they are sold to Samsung?

Sidney D. Rosenblatt

We have a sense of that but we don’t have specific numbers on that.

Andrew Abrams – JG Capital

Got it. Thanks, appreciate it.

Operator

Our next question comes from Jagadish Iyer from Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Yeah, thanks for taking my question. First, my question is why is red volume lower in effect to the green emitter given that red was likely in three devices versus a single device of green?

Sidney D. Rosenblatt

Red, they use red more. Jagadish, if I understand your question, they simply use red more efficiently and they have been using it for longer than they have been using green. We don’t know all of the end products that the materials go into.

Jagadish Iyer - Piper Jaffray

Okay. Then how do you characterize the red volumes versus green volumes for the second half of 2013 versus the first half? Thank you.

Steven V. Abramson

We’re really not making any predictions. We have given guidance on the top revenue line. Do we think it will be in proportion? I think that it should be fairly close. I mean they clearly are using more green than they are red in the devices.

Jagadish Iyer - Piper Jaffray

Thank you.

Steven V. Abramson

Thank you.

Operator

And we’ll now take a follow up question from Hendi Susanto from Gabelli & Company.

Hendi Susanto - Gabelli & Company

Okay, thank you once again. Sid, I normally think you would talk about PPG building and new secondary facility, how do you plan to use the light for secondary facility and how much capacity it will have relative to your current capacity?

Sidney D. Rosenblatt

I don’t have the specific numbers but of the capacity, but basically we are going to be using it because our production volumes are expanding and we needed that second facility. So we are going to be using that for additional red and green materials at this point in time.

Hendi Susanto - Gabelli & Company

Thank you.

Steven V. Abramson

Thank you, Hendi.

Operator

And we’ll now take a follow up question from James Meredith from Cowen & Company.

James Meredith – Cowen & Company

Hi! Thanks for taking the follow up. Just the quick one on the R&D spending which appears like it's chipped down a little bit from the first quarter and I am just wondering if that's what's behind that down tick and whether that's sustainable, sort of number.

Sidney D. Rosenblatt

There are a number of things in R&D number that includes that are somewhat fluctuating. Just to give an idea, sponsored research with our partners their certain quarters and times where they do more work and others depending on the load. And so from our standpoint, our basic number usually see is fairly steady but some of the other ones that get built on R&D number can fluctuate at times.

Steven V. Abramson

And we are continuing to grow our R&D team. So those numbers, they fluctuate quarter to quarter overall we are continuing to grow…

Sidney D. Rosenblatt

We are adding to the UGC team here but like I said, there are a number of variables that go into R&D.

James Meredith – Cowen & Company

Are you able to say with those sort of the UDC is that would not be fluctuating?

Sidney D. Rosenblatt

No, we will probably give you the color maybe later on. I don't have the specifics right in front of me right now.

James Meredith – Cowen & Company

Okay then just in general should we think of this as a lower than average number?

Sidney D. Rosenblatt

No, I think what we did, we expect the numbers for the year to be year-over-year up about 15% in OpEx and because of fluctuate a little bit, whether SG&A or R&D, they all do fluctuate a little bit.

James Meredith – Cowen & Company

Great, thanks again.

Sidney D. Rosenblatt

And there is a number of non-cash items in there that somewhat fluctuates too.

James Meredith – Cowen & Company

Okay. Thanks.

Steven V. Abramson

Thank you.

Operator

(Operator Instructions) And we will take a follow up question from Andrew Abrams from JG Capital.

Andrew Abrams – JG Capital

Hi, just a quick one. Was there any yellow or blue sales in the quarter or these numbers that are appreciable?

Steven V. Abramson

There were some but they were very small and we didn't really discuss on because they were so small compared to the others.

Andrew Abrams – JG Capital

Got it, okay. Thank you.

Steven V. Abramson

Thanks Andy.

Operator

And there are no further questions. That does conclude our presentation for today. Thank you for your participation and have a wonderful day.

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