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Universal Display Corporation (NASDAQ:OLED)

UBS Global Technology Conference (Transcript)

November 14, 2013 12:00 PM ET

Executives

Sidney Rosenblatt - Chief Financial Officer

Analysts

Brian Lee - Goldman Sachs

No presentation session for this event.

Question-and-Answer Session

Brian Lee - Goldman Sachs

Hi everyone thanks for joining us. My name is Brian Lee, I’m the Senior Clear Energy Analyst, here at Goldman Sachs. Next up we have with us Universal Display, a leader in the OLED display and lighting markets and represented by CFO, Sidney Rosenblatt. For those of you familiar with the story, know he has been with the company since its inceptions about 20 years ago.

Sid thanks for joining us.

Sidney Rosenblatt

Thank you.

Brian Lee - Goldman Sachs

So I thought maybe we should kick it off with just an overview of the current business trends and state of the OLED markets, about this time last year you were, things weren’t looking that great, you were cutting guidance and then you fast forward a year it’s flipped, you are now raising your numbers. Can you give us a sense of what’s change in a year and whether your visibilities improving as the market matures or any other drivers you could talk to here?

Sidney Rosenblatt

Sure. Last year when we reduce guidance, we've had expected in the middle of last year for Samsung to adopt our green emissive material and we have been working with Samsung at that time for about 12 months going to the process of getting or green and our host materials adopted by them.

And we expected it in the second half of last year and then clearly in the third quarter it didn’t occur, so we reduced our guidance at that time. And we weren’t exactly sure when it was going to be adopted. We knew that it was designed into their new back plains which they are using for their S4 and for their Note 3 and the question was when are they going to start manufacturing it. And it ended up that we started selling our green emissive material in March of this year and our host materials. So with regard to the second quarter and third quarter of this year we saw a significant increase in our volume of materials which you can see from our results on the material side and when we looked at it we felt that initially our guidance was 1.10 to 1.25 we got it to the high end of that and then in our call we got it now to 1.42 to 1.44. We believe that we needed a couple of quarters just to really understand what the steady rate for our green and green host material was going to be.

And we’re still obviously there is -- and we’re not certain exactly what that steady rate will be, some of it has to do with how much adoption within Samsung SAFE this N4 design is. We know everything they still make S3s, they still use the old back plains, question is how quickly will all of it get converted over and then the next piece of it will be when does Samsung add capacity in this facility.

So based upon Q2, Q3 we guided to 1.42, 1.44 it is down a little bit on material sales for Q3, but historically we’ve seen Q4 be lower in a lot of industries. You see capacity going down for November and December, they build up a lot of inventory for holiday seasons and we always have seen a slowdown. So we are pretty comfortable obviously and we narrow the range probably to the narrowest point we’ve ever had at this point.

Brian Lee - Goldman Sachs

So clearly they are buying a lot more green materials than you expected them to coming into the year when you gave the original guidance. Is that a function of you kind of being conservative because you didn’t know the timing and the volume or there is really something structurally different that you’ve learned about the need for green materials that as we had to ramp up the volume commitment there?

Sidney Rosenblatt

Some extend it’s a little bit of both. I mean when they adopted it, clearly would have an impact, because they didn’t adopt it until -- instead of March, they did in June, that would be a big difference. So really that’s what we have to, to a wide range of 110 to 125 is that really factored into when green and green host.

The second piece is the recipe. We had an idea of what our recipe is. And from the architecture an OLED display the concentration of red that you put into your pixel of the emitter versus the host is the lowest of all of them, red is a very efficient material. So it isn’t a lot of red in displays, it is not a very friendly color to your eyes.

Green when you [dope] the green massive material in your host, we know from our work that is always a multiple of red whether its 2x or 3x you always put more green than you do red in. And you can see that probably dollars in the last quarter or I think the green material was almost $13 million versus probably about 3 or 3.5 of red in dollar value.

Will we see that proportion stay the same, we think it will stay close to the same. Will there be some differences, there may be. And that is really something we need probably three or four quarters to know exactly what that is going to be. And then when you get the blue actually, you dope blue even more than you would green, just because of, just the architecture of how OLEDs work.

Brian Lee - Goldman Sachs

You mentioned specifically the Galaxy S4 and the Note 3 which your understanding is the N4 recipe was green as it’s being used in. Is there any reason in your view that going forward, every Samsung device phone ultimately use recipe that has a green phosphorescent emitter from you?

Sidney Rosenblatt

I can't speak for Samsung, but I would suspect that once, what they have said with the S4 is that they gives them a 25% power savings by using our green phosphorescent emitter. At SID, the President of Samsung said they expect all phosphorescent devices in 2017. So, I see no reason why they would go backwards. It would be hard to say our next model or the S5 or whatever it is, is now going to use 25% more power than the last version. It's not going to happen. So, can I speak to them, no. Do I think it will be and everything going forward, I would think so.

Brian Lee - Goldman Sachs

Okay, fair enough. And then as you look ahead in 2014, what should be the drivers we are monitoring for continued growth when you think about capacity, new customers, new applications and maybe any other you want to mention. And then I guess how would you rank each of those in terms of the potential impact for future growth?

Sidney Rosenblatt

Well, Samsung is obviously the leader. Samsung talked about their CapEx going forward next year, more than half of it is related to OLEDs. And then within three years it's almost 80% related to OLEDs. I expect to see some increased capacity on the mobile side at Samsung, they're introducing a curved or they call flexible screen. So those lines will be up and running.

So I do see some increase, specifically they haven’t announced any specific capacity increases, but I would expect to see some. The other area that we will see for next year is LG, LG is now talked about introducing a curved mobile device, they don’t have a lot of capacity for mobile devices but they do have some. And on August 1st they had a ceremony announcing that they’re converting one of their Gen-8 sized lines in their passive LCD fab to OLED manufacturing for TVs and will be making TVs in the second half of 2014.

And that line if you calculate how many 100% yields that could make, almost 2 million TVs annually. So that, there is a lot of glass to be covered I don’t know whether be, I doubt if the up and running at full speed next year. The other area you’ve got AUO who has a small mobile line, you’ve got probably Japan Display, they've talked about putting in OLED capacity next year. So that’s really what I see over the next 12 months in terms of increases in capacity.

Brian Lee - Goldman Sachs

Do you think the increased capacity at Samsung if you had to look at the new customer capacity you’ve versus just some organic growth at Samsung, what do you think will weigh heavier on your future growth potential at least in the near-term?

Sidney Rosenblatt

It’s hard for me to talk about customers. Samsung is our customer and they sell to Sony for their mobile devices, they sell to Motorola, they sell Nokia, they sell the BlackBerry. So there are a number of, they’re a merchant, their largest customers from Samsung display is Samsung Electronics. But to be perfectly honest we're a material supplier to the factory.

Brian Lee - Goldman Sachs

Sure. Maybe staying on the customer topic for a moment, you’ve talked about LG Display, it feels like for over a year in terms of potentially being the next long term customer. Can you give us an update on where that current process stands and if there are any other customers that seem to be accelerating, whether AUO or you mentioned Japan Display and I think there has been increasing chatter around the potential OLED activity in China as well.

Sidney Rosenblatt

Well, LG, we work with them. I fully expect LG’s material to be in -- our materials to be in LG TVs. We have worked with them on the mobile side, expect our materials to be in their mobile devices. In terms of where we are in licensing, we’re negotiating with them.

I know I have said that for a long time, it took 21 months to finalize the Samsung license agreement. So these things have a life of their own. And as I have said in the past, we’re very comfortable with our relationship, we sell them materials, we work closely with them and continue to work closely with them.

With some of the others, with Japan Display or AUO, and others, we work under the same agreement. We already start out with an R&D agreement or joint development agreement, and we move to material supply, where they get a right to put the material in the device, they get a license built in and then they just pay some multiple of what they would if they signed a license. And we've had a number of those relationship and are very happy with them.

Brian Lee - Goldman Sachs

I know you can, I am sure you get into specifics, but when you do think about potentially structuring these longer term contracts, there has been a lot of speculation about the end date of the current Samsung deal and how it end up tells with some of your key patent explorations. Does that impact your approach to structuring future deals? And then just in general what goes into figuring out the right timeframe to get customers committed to on a long term basis?

Sidney Rosenblatt

Let me address the 2017 issue since you brought it up. We’ve had a lot of -- there is lot of talk about 2017. Our Samsung license agreement ends in 2017. I expect to sign another license agreement after that there was a date that we could only agree on the dollar amount up until that date and so we agreed to it. So talk about our IP expiring in 2017, we have four basic patent families that are early phosphorescent patent families. And though that family of patents all of which are interrelated and you would not be able to make a device of phosphorescent device without violating one of them is really that family expires at the end of 2020.

So there is one U.S. patent that expires in 2017, 2018 around the world but all of the other patents organometallic patents and L2MX patents are all things that you would need to make a phosphorescent device. Those families expire at the end of 2020. Does that impact our license? We have five lighting licenses that essentially expire when our last patent expires they have no expiration date. If I was going to negotiate today with a customer, would I pick 2017 as my optimal date, probably not. But it is what it is. That was really the economics of it had nothing to do with the IP.

Brian Lee - Goldman Sachs

I wanted to go back to new applications for a moment, you brought a big curve sway or flexible. I think like there has been obviously an increasing amount of bugs around that form factor, just today we heard news about Samsung potentially applying that to the Galaxy line sometime next year, but there has been some recent rumors of (inaudible) something on the curve format next year as well. I guess first off, are there competing solutions for OLED to do a flexible form factor when it comes to a mobile device? And then for you, how do you view the opportunity with respect to flexible and then how do you monetize it?

Sidney Rosenblatt

The only display that you can make, the only technology that you can actually make endurable, affordable or curve one is OLED technology, it’s just you can’t make LCDs bend or flex. So the fact that OLEDs are the only one, I think it’s actually obviously a very good opportunity that Samsung has shown a curve phone that sort of fits to your face, LG has done it, they are talking about watches one flexible that are curved. The opportunity for us is expanded capacity.

You literally use the same amount of material, the architecture of making something on plastic or making something curve is the same as making it on the glass substrate. So OLED is an OLED whether you put it on glass, plastic or metal foil. So the actual amount of material of light output are pretty much the same, there may be some tweaks. Where we see the fact that you can’t do this with any other technology, we believe it will just accelerate the capacity expansions.

Brian Lee - Goldman Sachs

So to you it’s the unit volume growth picture if there is a new class of mobile devices that expands the market there. But if you think about, today’s announcement was that Samsung would have a display that could maybe curve around the side of the phone. I think you have talked about in the past with your stock pickers or email indicator pop-up. But conceptually if I think about that that would also mean you get larger display surface area and so would that also mean maybe higher volume content for device opportunity as you flexible?

Sidney Rosenblatt

Yeah. The larger the display clearly the more material is going to be in it. What would be important is we coat all the pieces of glass or plastic. So what is, assuming their capacity stayed the same today and what they decided to do is not make glass for certain products then just make these flexibles, I would not see any increase in my material sales. I don't believe that would be happen, I believe in order to do it they are going to add additional capacity because you're just going to expand your market. Adding additional capacity is what would be important to us, because we will coat more square meters of glass.

Brian Lee - Goldman Sachs

Okay. And then lastly I guess on the application front, just talking about TVs for a moment. There has been a growing push for UHD I think that wasn't as much on the radar a year or two ago. So how do you see that cannibalizing the OLED opportunity? And can you talk any specific feedback you get from either Samsung or LG who made the initial push in OLED TVs?

Sidney Rosenblatt

Well, Ultra or 4K TVs, OLED can make 4K you can make the 4K OLED. The Sony TV that was demonstrated at CES was a 4K 55 inch OLED TV. So it really is resolution, it has to do with your shadow [mass]. There is nothing that they are not mutually exclusive 4K versus OLED. So you can make a 4K OLED. So the benefit of OLED which is a very thin form factor and a very high contrast ratio, a million to one or two million to one, only will enhance the 4K experience. So I don't believe they are mutually exclusive.

Brian Lee - Goldman Sachs

Okay. Maybe switching gears a bit on the material side, you started off the conversation talking about how green has been a big growth driver and the main reason you raise the guidance for the year. Red has clearly been a big more challenged if you look at some of the growth trends there. Is there anything that can reverse the sort of stagnating growth trend in red? I guess the reason I ask is you mentioned the next-gen red, would that mean higher ASPs or potentially higher volume content any kind of color you can provide there?

Sidney Rosenblatt

Well, on our red emissive material today, it has been in Samsung’s products for a number of years. There has been number of efficiencies in terms of the equipment that have occurred over the past few years which has done that. We actually in this quarter sold more red material, the per kilograms of material in Q3 over Q2, red was up. We also said that we reached our lowest price point in our cumulative volume breaks for red.

So if you see increased capacity or increased or switches to more M4 design, you will see some growth in red. Red is the smallest doping concentration of any of them. So it is never going to be at the same level, but it’s never going to be on a par with green.

If we introduce a new red whether it is for a different application, we then would go back to the original pricing and then go through the same volume declines that we have. So our contract with Samsung is for red and green and is for specific materials. So if we have a new material that they adopt then they go through the same progression of pricing and the pricing is built into the contract.

Brian Lee - Goldman Sachs

So you step function up and then you gradually come down to the same level that you've gotten to today?

Sidney Rosenblatt

That’s correct.

Brian Lee - Goldman Sachs

Okay. And what is the status of the next-gen red, is it in qualifications and can you talk about that?

Sidney Rosenblatt

See it is something that was specifically, we actually make a number of different materials, our customers come to us and say, we want a different CIE coordinate, we wanted to be so many [condos] per amp, we wanted to do this, we wanted, depending on what color they are looking for, we design number of them. This one was designed for a specific application, whether it gets adopted or not. They’ve been buying quantities of it, we scale that up. If it does get adopted that will be fine and may end up being in one product versus the existing red in another product, that's really up to them. We are working on next generation green materials.

I mean we’re always looking for higher performance materials, we intend to be the OLED material developer. And we intend to cut, just to give you a simple example to sort of go back to the lifetime. The green material that we are selling today is a specifically patented material and that patent is through 2029. So we intend to be a leader in OLED material development across the board.

Brian Lee - Goldman Sachs

Okay. That's good segue into I guess a topic that everyone cares about for you guys on IP and patents, a lot of focus right now on the November 21 or 22 [oral] hearing in Europe. Can you remind us what's being challenged, what the status of that case has been to-date and then to the extent that you can talk to your base case for what you think the outcome could be?

Sidney Rosenblatt

That is EPO238 and it is a patent that there was a prior hearing where the organometallic part was upheld and the osmium part in the hearing we've said, we will take out and that will be part of another divisional patent that have. The parties who brought the opposition up, challenged the opinion. And the appeal is on the 21st and 22nd. As we have always said, we expect the outcome to be positive. And simply also have said though that the outcome of anyone patent decision in any single jurisdiction is not going to affect our ability to license and not affect our existing agreements. We’ve got 3,000 patents issued in pending worldwide. We’re talking about one patent in Europe that has a number of patents that are above it and a number of other patents you would not be able to make a phosphorescent device just by this patent being completely invalidated because there is a number of other patents and you have to make and sell it in Europe. So, and within our Samsung contract whether patents get invalidated or opposed or challenged does not affect our Samsung agreement. And I know there has been a lot of chatter out there that says Samsung is not going to pay them and just hidden Samsung agreement. If you actually go to the SEC website of the redacted version which has pricing and things like that, you go to Section 4.2 of that and if you read it, it says this agreement is not invalidated for any reason including losing of patents or oppositions or challenges.

So it’s not going to impact our Samsung agreement. And if somehow the outcome is negative to us, there are still some channels to appeal it. And we will continue to do that.

Brian Lee - Goldman Sachs

Okay. And outside of Europe, are there other patent challenges that we should be monitoring with specific dates….

Sidney Rosenblatt

We’ve had won that decision in Japan where we at a lower level in the Japanese patent office we lost, we appealed it, they said that they were mandated back to here, they said that the prior art that they used was inappropriate, so they told them to go back and reexamine the patent based upon their instructions which we believe we will then win.

There are a few other ones next year, they are constantly going to be either in Japan or Europe, there is [SEL] in Japan who challenged a number of them and in Europe you got the same group which is OSRAM, Philips, BSF, Merck, Sumitomo. OSRAM and Philips want to make OLED lighting, BSF and Merck want to be into the materials business and it’s challenging in Europe and [EPL] was fairly inexpensive and easy to do. The patents are valid during this entire process and they are licensable during this entire process.

Brian Lee - Goldman Sachs

Staying on that beat for a minute that’s not so much on the challenge side, but the opportunity side, you had the Fuji Film patents in-house for several quarters now. Is there any better visibility on what you might see some initial commercialization from that patent portfolio and kind of what timing you might expect?

Sidney Rosenblatt

Yeah. We are going through some of the new materials that we are developing are based upon the IP that we have. So we are starting to see some work and there clearly is, we talked about there are some IP in there in the blue emissive field which is another area that we are working on and that we are making progress. So we are starting to see benefit of having that IP portfolio. Can I specifically point to one patent and say it’s going to give me X dollars, no.

Brian Lee - Goldman Sachs

Is it too aggressive to assume that in calendar year 2014 something that’s being derived or collaborated off of the Fuji Film portfolio would result in something that might be….?

Sidney Rosenblatt

See some of our new materials that we're working on, the higher performance materials has a basis in the Fuji IP.

Brian Lee - Goldman Sachs

Okay, fair enough. I'm going to stop here for a moment. We'll open it up to the audience if there are any questions, otherwise I will keep going.

Sidney Rosenblatt

You really must board them.

Brian Lee - Goldman Sachs

I have asked all the questions. I guess on the materials front again, I think you mentioned on this last call that the [Dotcom] relationship is still in a qualification process. What I guess is that still the current status and what really needs to happen, is it a timing issue or are there some technical quality issues that they just haven’t been able to overcome?

Sidney Rosenblatt

They are going to do a final synthesis step in our host materials. Our host materials are made for a PPG. We then sell them to Nippon Steel Chemical Company who then blends them with some of their other materials and sells them to Samsung. We've been looking to have some local content. We thought that one of the steps would be having them do one of the final synthesis steps. And we are continuing to qualify it. It has to go through not only our qualifications, but our customers’ qualification. So it needs to go through NSCC, taking the materials, making sure that when they actually blend it with theirs, they get the same result. And that the customer gets the same result. So these things just take a long time. I mean, to be honest, Samsung was testing our green and this is material and host for at least 18 months.

Brian Lee - Goldman Sachs

Does it negatively impact you at all if for some reason [Dotcom] is never able to get fully qualified and you just keep the current status quo? How you manufacture and synthesize?

Sidney Rosenblatt

It doesn't impact us in terms of price or quality. Having local content in Korea is something that our customer would like and we try to accommodate our customer by doing that. But in terms of the end product, there will be no difference.

Brian Lee - Goldman Sachs

Going back to applications for a moment, I know we touched upon flexible, we touched upon TVs. One application I think that a lot of people gloss over because Apple is such a dominant market share players in tablets, but we have seen some tablet market share diversification over the past year. So what do you guys see as the tablet opportunity as you start to see some of the smartphones getting in 5.5 and 6-inch screens which are not that far off from the low-end of the tablet market?

Sidney Rosenblatt

I have to answer this from a personal standpoint because I can’t speak for either Samsung or Samsung Electronics in terms of what their product roadmaps are going to be. I’d say our OLED technologies in the Samsung 7.7 inch tablet. I think the tablet market personally is going to the 6-inch note, I think stuff that [average is going to work] into one device. Right now we don’t have a laptop or phone, a tablet and I do see that the one thing that this is the Galaxy Note, it is a little bit bigger, we can actually really use this almost as a real tablet. It’s much larger, you can see it. One thing that I've seen that nowadays flexible is they have one that flips over, I don’t k now if it’s quite the size, but then you then open it up and you now have almost a pretty much a real size tablet.

So you have a flexible display, where it’s flexible in the middle, but the rest of it is not flexible. So it’s not as complicated as making something that has truly bendable and flexible and you won’t be able to bend it all the way back because of the way it would be designed. So you then can move into having something twice the size, so you can literally have a phone and a tablet, and not really need all these devices which I’m sure as a consumer electronics selling you may not want, you like selling them all, but I do think that's probably where this is going.

Brian Lee - Goldman Sachs

Okay. And is your understanding that given the larger screen size of the tablets versus mainstream 4.5-inch smartphone OLED displays, I guess they are bigger now, but are those being fabricated on the existing base of fab that 4.5 and 5.5G or do you need to get into the 8G larger panel sizes to start really fabricating the tablets?

Sidney Rosenblatt

No, I have 5.5G can make up to a 32-inch display. And Samsung was talking about actually building a Gen-6 size facility of which half of it actually be for TVs and half for mobile or tablet, so it really depends how you cut it.

Brian Lee - Goldman Sachs

And we've had a time for one or two more questions. So I’ll give the audience one more chance if not I can. We have a question here.

Unidentified Analyst

(Inaudible).

Sidney Rosenblatt

From our end it’s really, we've -- our materials work in TVs, have lifetime in the TV specs. Like anything else it’s capacity. Plasma TVs were $15,000 when they started. There is really no OLED TV capacity. They need to work on getting their yields up and the only way you could do that is by making more of them. LG has converted the Gen-8 size line, they believe that they can get the yields up. I believe that they -- I don’t believe that they think they can keep selling these for $9,000 a piece and have it a real product. So it’s just like anything else, the more you make the cheaper they get.

Brian Lee - Goldman Sachs

Any other questions from the audience? If not, maybe one last one for me, just sit on the cash a lot of cash sitting there on the balance sheet, what are your thoughts and priorities when it comes to capital allocation?

Sidney Rosenblatt

Right now we are going to, if there is any opportunities that come up we want to make sure that we are flexible enough to do something. The [4G] portfolio is something that we had our eye on. We will stay within what we know which is the OLED fields and the OLED IP field. So if there is something that comes up, we would use it. We don’t pretend to start buying up manufacturing display capacity or anything like that. Our cash is there. We bought some stock back over the years. And I think if we continue, if our cash continues to grow we’ll have to make some decisions on how we handle it in terms of returning to shareholders or things like that. But right now we wonder if something does come up and there has been a few opportunities that we’ve passed on that there have been companies sold and we just didn’t feel that we got -- we would get value if we participate in it.

Brian Lee - Goldman Sachs

You said stay within what you know, would that just mean materials or could you see yourself in different parts of the OLED value chain, whether it’d be equipment because you have IP around the manufacturing process technique or something like that?

Sidney Rosenblatt

I don’t think if we went into the equipment side, we would do it by ourselves. I mean, we clearly don’t have the expertise in that area. We’re working on encapsulation technology and that is a piece of equipment. So if there are some opportunities, it is something that we think we can get value where we participated in, but I don’t -- we will not become an equipment manufacturer.

Brian Lee - Goldman Sachs

Okay, I think we are right on-time. So we wrap it up here. Thank you.

Sidney Rosenblatt

Thank you.

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