Universal Display Management Presents At Goldman Sachs 2014 Technology And Internet Conference (Transcript)

Feb.14.14 | About: Universal Display (OLED)

Universal Display Corporation (NASDAQ:OLED)

Goldman Sachs 2014 Technology and Internet Conference Call

February 12, 2014 1:20 PM ET

Executives

Sidney Rosenblatt – EVP and CFO

Analysts

Brian Lee – Goldman Sachs

Brian Lee – Goldman Sachs

Hey, everyone. Thanks for joining us. My Name is Brian Lee and I head the clean tech research efforts here at Goldman Sachs. Next up we have with us, Universal Display or OLED, as most of you probably know it by. Universal Display is a leader in NextGen OLED technology. We are joined by CFO, Sid Rosenblatt who I have had pleasure of hosting at this conference for the past several years now.

So let me start up by saying thanks, Sid for joining us as usual.

Sidney Rosenblatt

Thank you for inviting me. It's always a pleasure.

Brian Lee – Goldman Sachs

So I thought we'd just start-off with some business trend questions. I know you guys haven't reported earnings fourth quarter yet. So we'll keep it qualitative clearly. But the outlook for 2014, obviously without qualifying, what should we be expecting in terms of guidance metrics that you will be providing on the call here in the next couple of weeks.

Sidney Rosenblatt

Our call on the 27th, we will give revenue guidance for the full year of 2014, as we have in the past given full year guidance. It is still somewhat difficult for us to predict quarter-by-quarter, but we are comfortable. We will be comfortable with the number that we give for the full year. It will be probably be a range and we have been narrowing that range overtime. So hopefully we will be able to give a range that is -- everybody things is a reasonable number.

Brian Lee – Goldman Sachs

And in terms of the revenue outlook, will we get some of the granular metrics, on Samsung licensing payment, any kind of segment-by-segment granularity as well?

Sidney Rosenblatt

We should have some. We will give the Samsung license amount and predicting between host and emitters may be a little more difficult but clearly once we give the Samsung license fee, it will give you an indication what the material sales will be.

Brian Lee – Goldman Sachs

One of the reasons I asked is if you look, the fourth quarter should be the third straight quarter you put up positive EPS. 2013 should be the third straight year you had positive EPS on an annual basis. So the model of market it seemed to be maturing. So do you have any updated thoughts around providing whether it's an EPS outlook or any kind of earnings related metrics on a go forward basis?

Sidney Rosenblatt

I don't think this year we are comfortable giving EPS guidance. We will give some guidance on where we think our expenses will go, in terms of R&D and G&A and then with the revenue guidance we also have talked about what our margins are on license fee, which is 97.5%, 3% goes to the universities. Our margins for emitters is between 70% and 80% and our margins for host material is between 40% and 50%. So the blended margin is probably between 60% and 70%.

So with all of those metrics you should be able to come up with estimates of what EPS will be, but like I said, we are not comfortable at this point, at some point we will be.

Brian Lee – Goldman Sachs

Okay. Fair enough. Looking at kind of what been announced thus far from some of the major display players, Samsung and LG in terms of OLED CapEx announcements for 2014, they see mostly flat year-on-year. What's kind of the real cost directly for you guys as you kind of look at that?

Sidney Rosenblatt

Well, we see particularly from LG, LG has announced that they are going to start production of their OLED TVs in the second half of this year of the Gen 8 facility which has 28,000 substrate starts per months. So I don't know whether it starts, when they say second half, whether we are talking about August or September or October, I mean that's really out of our hand, but we do expect growth from LG as a customer for this year. On the mobile side, we also expect to see growth from Samsung in display as they either add whatever, it is Galaxy 5 and move forward and then convert we think some of the older lines which are still making Galaxy 3s, where they would convert that to the back line that actually uses our green emitter and green host materials. So we do expect to see growth from Samsung also. I don't think it's going to be flat.

Brian Lee – Goldman Sachs

Sure. So it's kind of a good segue into my next question. If you look back at 2013, green was clearly a big driver of incremental growth. There has been investor concerns that may be green upside there isn't just anymore because Samsung has completely converted over all of its OLED line-up to the green recipe that you guys provide them. First off, is that true in your view and if not then where really are the upside opportunities and if there is any kind of quantification around the percentage of the OLED mix for them that you think is using green versus not using green.

Sidney Rosenblatt

I don’t have specifics in terms of how many new lines or how much they are going to convert over. I still believe that they are some lines that are not using our green emissive material. So I do see some offside. I also see them running at a, I believe the fourth quarter the capacity was not at full capacity and I think the first quarter was not a full capacity. But once you get beyond that I believe that they are going to do that.

Samsung Electronics in their corporate presentation talked about moving from just high-end smartphones to medium-end smartphones and that market is larger than the high end smartphone market. So I do believe that if that is the case then you can see increased capacity coming out of Samsung Display for Samsung Electronices.

Brian Lee – Goldman Sachs

Maybe a couple of follow--ups on that, is it your understanding or do you have any insight into that shift from high-end to medium or lower-end, it seems like the press says it's primarily attributed to becoming more LCD/LED capacity as opposed to being driven by OLED.

Sidney Rosenblatt

All I can add to that is -- this is from Samsung Electronics corporate presentation, at their Investor Day that they had about a month ago or a couple of months ago. And that talked about moving into that. They also talked about their display capacity, their CapEx for displays going from 60% to 70% OLED. So I do believe that they are committed to OLEDs and are moving with OLEDs say. There is so many different reports it's really difficult to figure what's true what’s not true, to be honest.

Brian Lee – Goldman Sachs

And then on the comment about 4Q utilization not being 100% at Samsung, is that direct feedback that you got from them, was it a demand issue or are they doing something with some of the lines that ultimately led to them not being fully utilized on the OLED side?

Sidney Rosenblatt

No, I think historically Q4 there's obviously to get a push to get stuff out for holidays and seems like December is always lower than the other month. So I just think historically we've seen Q4 be lower than Q3 and based upon the estimates that we had from our customer at that time it seemed to be lower when we gave, when we increased our guidance we did talk about Q4 being lower.

Brian Lee – Goldman Sachs

On the topic if you look more holistically on smart phones in the market, Samsung's has been under pressure, the entire smartphone group to be honest, how does that impact your outlook as you kind of look over the next 12 months?

Sidney Rosenblatt

There is always pressure, I mean clearly the smartphone market there's pressure in it. Our customer as you are aware is Samsung Display. And Samsung Display is also a merchant and historically when there's been some weak demand from Samsung Electronics, Samsung Display is still running at pretty much full capacity because they have other customers, whether it is Motorola or Nokia or others, I don’t have insight into who their other customers are but we do know that they try to keep their factory running as full as possible.

Brian Lee – Goldman Sachs

Maybe switching gears a little bit to other products I wanted to walk through a couple of other applications that you might have a view on here for the next year or so. Are you starting with TVs disappointed by the slope of the ramp relative to your original expectation? I know pricing's been coming down. Last week we saw Amazon cut their price point to $6,500 which is close to half of what the original pricing points were when the TVs were released. When does the adoption curve really start to change and inflect higher for the TV market in your view and if you can talk around specific price point, that would be helpful as well.

Sidney Rosenblatt

To be honest it's difficult for me to talk price points because we don't set the price. So it comes from LG or Samsung, there has been reductions. We always thought that 2014-2015 was a time frame for TVs. LG has talked about the second half of the year. That facility is 20,000 substrate starts per month, if you fixed up for 55 inch TVs, that comes out to about 125,000 TVs a month with full capacity which is about 1.5 million a year. It's really the first high volume TV production that anybody has put in place.

Samsung probably a year-ago talked about TV production starting in the same frame. I don’t think they have announced anything specifically at this time, there are talks about TVs, their A3 facility is the one that we have read that, that facility once it comes up and running would be probably half for mobile and half for TVs, but there is no specific dates when that will occur, that I am seeing.

Brian Lee – Goldman Sachs

Staying on the product topic for a moment, what's your view on tablets, watches maybe all things flexible as you look out over the next 12 months in terms of potential new growth opportunities? Are those things you are looking at fairly optimistically in the near term, are those more medium to longer term?

Sidney Rosenblatt

We are very optimistic about flexibles, I mean the curved phone that LG has and the one that Samsung has, and the watch and you have heard a lot of rumors about different uses of watches, watch displays, OLED watch displays. LG, I think is really the one that's in the forefront. LG has had a flexible display program for a number of years. LG has made the back planes for all the flexible displays that we've delivered over the past three years to the Department of Defense under our government programs.

So I do think that LG is focusing on flexibles and is focusing on TVs. I think Samsung is also doing the same thing. I believe LG is probably the one that will -- LG's -- the Galaxy Gear Watch, things like that, I think there will be, so we're that we think is a very important area for growth. Once flexibles start to take off, unbreakable flexibles I think, they pretty much will be unstoppable because once you get a lightweight unbreakable device, I think that really is, OLED are the only ones that could do that. You see LCDs that little curves and things like that but you can’t make them on plastic.

Brian Lee – Goldman Sachs

Any reason that tablets aren’t sort of going to follow a similar trajectory as smartphones if you think about the major OEM and tablets who would do OLED out of the gate, it would do with Samsung and I think there has been some recent speculation that they would introduce a couple of models at more attractive price points this year, but any particular insight into specifically the tablet market?

Sidney Rosenblatt

I have read the same things you have, they have talked about the 10 inch tablet for -- with OLED device. To be perfectly honest the product side of it is something that we have very little insight into.

Brian Lee – Goldman Sachs

On flexible the technical issues seem to be, whatever is limiting the timing on that product application today? Where, based on the feedback you get from customers, Samsung and LG where are they on that front now and based also I guess on indication of capacity ramping, any comments you can provide there?

Sidney Rosenblatt

The issue has always been encapsulation technology for flexibles. The technology that is being used today works for lower volume production. I think for high volume production they do need to work on next generation encapsulation technologies. One of the areas, one of our long term focuses is on the flexible technology that we have which is a single layer barrier technology. And so we’re working to get that as part of our long term plan which is also one area which is organic, paper jet printing.

We have a number of long term projects that we are working on, to some extent flexibles don’t matter, doesn’t matter to us whether it is on glass or plastic because it’s the same material, it is the same content for us it just increases the market.

Brian Lee – Goldman Sachs

And you think some of the early technical issues, that recent low volume levels have been ironed out where these products will see start to see some volume here in 2014?

Sidney Rosenblatt

As far as we know I believe that there is a lot of them that have been worked out. I do think that there’s always challenges with it but I do think you will see more volume of flexibles. LG, I think will focus on flexibles and focus on TVs, and I believe that Samsung in its HP facility will focus on TVs, mobile devices and flexibles also.

Brian Lee – Goldman Sachs

Okay, wanted to talk new customers from a moment, we walked through some of the products and applications that might be growth drivers here in the near to medium term but if you look at 2013 you guys grew revenue about 70% year-on-year it was mostly off of Samsung growth. Street has you modeled to grow another close to 40% year-on-year here for 2014. How important is growth at, not just new applications but new customers, whether it be LG or players in Japan and/or China to kind of achieve pretty heavy growth rate run rate that people seem to just keep expecting?

Sidney Rosenblatt

And I think from the Japanese customers, most of those customers are on lighting. We’ve got six different lighting license agreements that we have signed and we just announced the relationship with Phillips. I still think that is going to be a very small part of our growth. The material side of the lighting business is probably 5% of our total material sales. LG, by -- that facility if you look at the square meters of glass that the Gen8 size facility can produce it almost is in square meters of glass almost 50% of the square meters of what Samsung's capacity is today.

By having much larger substrates we coat the entire substrates. I mean that is a significant jump up in the material uses that we will have for this year.

Brian Lee – Goldman Sachs

And you care about nameplate quite not just solely yield?

Sidney Rosenblatt

That’s correct. We only care about substrate starts, because we coat the entire piece of glass whether it yields or whether it does not yield. So we’ll see and that’s -- the question is going to be when does that come on, as I said earlier whether that starts in -- they say second half of the year, that could be July, that could be December. So we look at that, we also see some other customers, you've got Samsung, I think there may be some other customers I don’t really see anybody else having significant capacity in 2014, besides those two.

Japan Displays talked about second half of this year, I don’t -- it's Gen 4.5 -- I believe that they are talking about. It would be good, all of the growth is good but I think our two largest customers will be our two largest customers.

Brian Lee – Goldman Sachs

Do you guys have insight into what the OLED technology roadmap is for Japan display? It does seems like they’ve historic -- in recent years there has been talk about a hybrid path and at some point they try to figure out which would be the road to commercialization and if there’ve been any more clarity on that?

Sidney Rosenblatt

As far as I know they look at RGB side-by-side, they look at white with color filters. I don’t think there is been any definitive answer today. I mean that historically we’ve always made RGB side-by side because they talked about a true OLED as opposed to white with color filters.

Brian Lee – Goldman Sachs

And in terms of material make up any -- that you point out?

Sidney Rosenblatt

Yeah, the TV group tried, we have a number of different materials the TV specs are different than mobile specs for color. So we have a number of different materials that we have developed for TV specific, or whether it's for mobile specific. To be honest we sell a number of different materials to the R&D groups of both companies. So I don’t think there is anything definitive that we know of that we could say.

Brian Lee – Goldman Sachs

Okay, fair enough. Two questions staying on the customer topic for a moment, on LG you throw out some of these stats that clearly the timing is uncertain but the magnitude impact clearly seems to be fairly high. Why are they not a long term customer at this point given -- we are talking mid to end of the year so there is some wiggle room between the timing whether it's a matter of six months, clearly that could out push and it becomes an out year issue. But if they do stick to the kind of this second half of the year timeline why are they not a part of the long term customer framework similar to what you have with Samsung?

Sidney Rosenblatt

Sure, the long term license negotiations, as they were with Samsung take some time. To use your terms we’ve been negotiating with them for a long time. We know to bid and ask and they know what I ask is in terms of license fees or royalties. And they also know what their material pricing will be once they sign a long term license agreements and all these agreements also include some upfront payment. So there is an economic point where it makes sense for them to sign a long term license.

Today to be perfectly honest is we are very comfortable selling them under our material supply agreement because we build a license fee into your materials. And we essentially are getting license fees or royalties on materials that are wasted. But once their volume gets to a certain point somebody there says it will be cheaper if we pay a licensee fee and we get the material at this price. And that to be honest is when this will occur.

And also when you’re negotiating, as you guys would know very well, if you go in and say I got to get this deal done, you’re the guy who has to give up the most, and we don’t need to do that. We’re very happy with the relationship the material set is set on our materials. They are buying, they are our second -- when you take NSCC out because it goes with Samsung they are the second largest customer and I expect them to be a larger customer this year.

Brian Lee – Goldman Sachs

Okay. You only have one long-term deal today with Samsung, so there is not a lot historical precedence but when you signed the deal with Samsung three year ago, the OLED market and Samsung’s penetration into it was a lot less evolved than it is today. So sitting here today whether it’s LG, or your own [ph] dependence on other customers, you talked about the bid ask as the long-term agreement, are you thinking further out in terms of locking customers in given, I think you've talked in the past 2017 was a convenient date to end the Samsung deal because that’s where you have visibility out to, has the visibility improved where you see longer term deals that what you originally signed with Samsung?

Sidney Rosenblatt

If I had a choice, if I knew historically what I know today I would have not signed a deal through 2017 with Samsung. It was a date that was not based upon anything which we hear, it’s based upon the fact that our first patent expires in 2017, therefore that's why this occurred. To be perfectly honest that was never in the mix, but unfortunately that is the result.

Am I looking longer term and further out, yes. We do not believe that we have a cliff for our patents in 2017. We have four basic families of patents are on the early architecture of patents for phosphorescence and that group is four families which is comprised of 60 patents which run through 2020. So we don’t believe that A, there is a cliff in 2017. If you want to look at it and say that basic phosphorescence coverage on early is 2020 that’s a fair statement.

That does not mean that our licensing business goes away in 2020. We have more than 3,000 patents of which more than half of them are architecture-related, whether it’s encapsulation, whether it’s stock architecture, transparency, red-green, blue-blue there is a number of different areas that we still have and so we expect our licensing business to continue beyond 2020.

Brian Lee – Goldman Sachs

One last question on the customer front and then I’ll switch gears here. Where does China fit into all of this for you guys? Two-three years ago probably not even on the map, you go to CES in January and there is a handful of OEMs now showing up OLED TVs, handful of them also talking about wanting to be in the panel production side of things, not just buying panels from Samsung Display or LG Display and putting the parts around it and branding it. So where do you see China in their OLED technology roadmap and where do you fit in?

Sidney Rosenblatt

There is a number of companies that are serious about OLED technology in China. You’ve read about lots of them, there’s an article called recently that talks about couple of them having TV panels this year. But it specifically stated they would buy them from Korea. You've got companies like BOE and a number of others that have talked about OLEDs and are committing dollars to it. We believe that China probably is 2015 before there is any production, real production in China, it is an area that we will deal with.

They are going to be a force when they put their dollars towards it. Their infrastructure today for OLEDs really doesn’t exist but we know who the customers are there and we’re working with customers around the world.

Brian Lee – Goldman Sachs

Any reason to believe your technology wouldn’t be central to whatever roadmap emerges out of China for OLEDs and then maybe most importantly how would you ensure that you are paid appropriately if you are kind of part of the roadmap?

Sidney Rosenblatt

I don’t think anybody would make OLED Tech, an OLED Display without using phosphorus emitters, no one does it today, no one says they would do it. Your power consumption if you want to an all fluorescent device would end up being probably 50% or 60% higher than LCD technology and no one is going to put a display in a mobile device that kills a battery faster than LCD technology.

So I don't think it's a question whether or not or not anyone would use phosphorous. The other side is how you get paid? I mean China is an issue in terms of licensing technology and material. There are plenty of companies that work with Chinese manufacturers that do get paid, and some of the Chinese manufacturers pay license fees. They are multi-national companies. They understand that they are not going to be able to do business outside of China unless they do pay. So there are some safeguards and there are risks just like with anyone else.

Brian Lee – Goldman Sachs

Do you guys have any feet on the ground in China the way you have feet on the ground in Korea today?

Sidney Rosenblatt

We do. Well, our representative in Taiwan covers China. So he is there quite a bit.

Brian Lee – Goldman Sachs

Got it. What's the status of new material development? I think the last time I had you up on a stage like this, we talked a little bit NextGen red materials those are being sampled, would you expect those to actually be part of the revenue mix here in 2014 and then any comments you can provide on just where blue is and if there is any updates on that?

Sidney Rosenblatt

Number of our NextGen materials are being sampled. I would expect some of them to be in market place this year. It depends on the product, customers, what they want specifically. Update on blue is that we still have a light blue that works for lighting applications, that give you 20,000 hours of lifetime to 70% degradation, which is pretty good. That's eight years at six hours a day.

Our deep blue for displays has made progress, but until we have something that is commercially available we are not going to really talk about, increases by the hour which is difficult. We do have a specific program group that are working on blue but we also have teams that work on Red, Green host materials, other materials in the stack and all of that would give you we know that if we come up with host that we can then combine with blue if it's an efficient host it may increase the lifetime of our blue. We think the blue solution really is a system solution.

So all of our team even though they may be working in a specific area all in the back of their mind work to see what this will do with Blue technology..

Sidney Rosenblatt

Okay. Great. I think we'll see if there is any questions from the audience?

Question-and-Answer Session

Unidentified Analyst

Yes. This is Kevin. You mentioned that you have a patent for the flexible OLED, is that right and if so, are you going to license that to the product companies or can you describe what exactly that patent is and what geographies you are covered by how you see that as an opportunity going forward? Are you transitioning to more of a licensing something like Rambus I wasn't sure about that? Thanks.

Sidney Rosenblatt

It is hard for me to understand all of that, but I think you are asking about just our flexible patent or all of patents. Flexible patent -- when you get a portfolio license, you get a flexible, flexible patent is that actually was challenged in Europe and we won that challenge, that patent was upheld in Europe. That patent is part of our Samsung. Samsung has a portfolio license so it has right to make flexible displays using our flexible patent, which is a patent making OLEDs on plastic. That patent has been issued around the world. We have not licensed that patent separately. It is part of our licensing program. So we have not specifically licensed that patent to any individual company.

Unidentified Analyst

Are there other companies that are covered as well or just Samsung specifically?

Sidney Rosenblatt

Right now LG is the only other one that's working on flexible technology and as I said we have a short-term license agreement with LG and so they have rights to make whatever devices we know it's going into. That will be part of our portfolio, that when we sign a long-term license agreement with LG we will then include that patent in that portfolio.

Unidentified Analyst

Thank you.

Brian Lee – Goldman Sachs

Any other questions?

Unidentified Analyst

Hi maybe what’s your strategy in terms of partnerships, may be especially on the side of manufacturing of your materials as you kind of develop other parts to dispatch?

Brian Lee – Goldman Sachs

I am sorry, what are your partnerships on the manufacturing side as you look at..?

Unidentified Analyst

Or how do you kind of look at that as you expand?

Sidney Rosenblatt

Well we work with the number of chemical companies that make materials that go into stack. So we have a number of relationships with LG Chem, with Idemitsu Kosan with a number of other companies we’ve talked about historically. And so from the material side we work with them so that their materials whether it's a transport or an injection layer or hose material that works very well with our emissive materials.

On partnerships we’ve licensed what we call organic wafer phase deposition to Aixtron SE Corporation in 2013. That's the only manufacturing equipment manufacturing partnership that we have we’ve made a couple of small investments in some small companies Flextronics and Plasma SI. Plasma SI is an equipment company so work on encapsulation technology.

But we don’t have specific partnerships with equipment companies. We have with PBG industries who make our materials. PBG industries is our exclusive suppliers of our materials to us.

Brian Lee – Goldman Sachs

Any other questions from the audience. Not than I've got time for two more and just staying on the topic, just on the manufacturing and partnership side of things, to may be wrap up with. First on the Duksan relationship for greenhouse materials in Korea last time I think you had mentioned they are not quite qualified yet, any updates to that and expectations around timing?

Sidney Rosenblatt

Yeah that’s moving forward they are making larger and larger batches. So I expect that they would be doing the transistors from our host materials this year.

Brian Lee – Goldman Sachs

This year, first half second half?

Sidney Rosenblatt

Probably the first half.

Brian Lee – Goldman Sachs

First half, okay. And you mentioned PPG being the source supplier for a solar manufacturing partner for the emitter materials. At the end of last year they upped their capacity on behalf of you guys. Any details you can share in terms of the scope or timings of that particular pack expansion?

Sidney Rosenblatt

Yeah, the Barberton facility that we had a ribbon cutting ceremony at about a month ago or a little bit more, it actually will start producing I believe in a next month or so materials for us. So it is ready to go to make sure that we meet our needs for this year and beyond that and it has additional capacities it's a new facility -- it's an existing facility that has plenty of room for expansion.

Brian Lee – Goldman Sachs

How often are you having discussions with PPG, is it on kind of rolling quarterly basis or when..?

Sidney Rosenblatt

Every day, our people literally talk to PPG every day. It's a very close relationship. We ship materials literally out of our facility every single day. So the materials comes from PPG, we are constantly updating our forecast we are constantly updating when we will get things to make sure that we never have a supply issue. So it is really a daily conversation.

Brian Lee – Goldman Sachs

And just going back to the new material topic for a moment. On the Fuji Film patents that you acquired a long back, any thoughts around moving some of that into commercialization stage?

Sidney Rosenblatt

Actually some of the new materials that we are developing are based upon Fuji patents.

Brian Lee – Goldman Sachs

And you would expect some of those actually start to flow through into P&L in 2014?

Sidney Rosenblatt

Yes.

Brian Lee – Goldman Sachs

I think we’ve got a minute left so unless there is any questions from the audience, we do have a break out in the California room, so more time to ask questions.

Sidney Rosenblatt

Thank you.

Brian Lee – Goldman Sachs

Thanks, Sid.

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