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Executives

Steve Abramson - President & Chief Executive Officer

Sid Rosenblatt - Chief Financial Officer

Paul Johnson - Investor Relations, Gregory FCA Communications

Analysts

Jim Ricchiuti - Needham & Company

Jed Dorsheimer - Canaccord

Mike Sutton - Oppenheimer & Co.

Jonathan Skeels - Davenport

Universal Display Corp. (PANL) Q1 2010 Earnings Call May 10, 2010 5:00 PM ET

Operator

Good day, and welcome to the Universal Display Corporation, first quarter 2010 financial results conference call. As a reminder today’s call is being recorded.

At this time I’d like to turn the conference over to Mr. Paul Johnson, on behalf of Universal Display Corporation. Please go ahead, sir.

Paul Johnson

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

Let me begin today by reminding you that this call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of this call in any form, without the expressed written consent of Universal Display is strictly prohibited.

Further, as this call is being webcast live and will be made available for a period of time on the 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, May 10, 2010.

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. Universal Display disclaims any obligation to update any of these statements.

With that out of the way, I'd like to turn the call over to Steve Abramson, President and CEO of Universal Display. Please go ahead, Steve.

Steve Abramson

Thank you Paul, and welcome to everyone listening on today’s call and webcast. I’ll give you some shot insights into our first quarter financial results, ahead of Sid’s more detailed review. Then I will discuss some highlights from the first three months of 2010, as well as some exciting prototypes and design concepts of OLED lighting being exhibited by some of our partners that use our Universal PHOLED technology. As always we’ll be happy to take you questions following Sid’s remarks.

First, our revenues for the first quarter of 2010 rose to $4.2 million compared to $2.8 million for the same quarter of 2009, the previous increase overall and that both commercial revenue and developmental revenue were higher. The first quarter of 2010 saw a continuation of the trends in OLED display and lighting that emerged in 2009.

On the display side, manufactures like LG Display and Samsung SMD have continued to bolster AMOLED display production, and commit additional capital to OLED manufacturing growth. This exemplifies a recent news from LG Display, that the company committed $226 million more towards its OLED production capacity. According to LG Display’s Chief Executive Officer, Kwon Young-soo, this could essentially triple their production of AMOLED displays from 4000 subsidiaries per months to 12,000 by the end of 2011.

Samsung SMD also appears to be adding production capacity for OLED Display. Since last month, they announced a commitment to the investment needed for a new Gen 5.5 AMOLED plan. Makers of cell phones, smartphones and other personal electronic devices, continue to utilize attractive displays as a focal point. For power conception thinness and visual quality of this AMOLED screen, they sense a natural choice for these highly visual products.

Samsung SMD has highlighted it’s super AMOLED displays as it’s next innovation in AMOLED’s. The Super AMOLED is active-matrix OLED display with an integrated touch function. This is the case of the manufacturer having innovations to OLED technology, utilizing its energy efficiency and visual quality, along with innovations like a touch sensor, 1000 of the millimeter thick over the display.

According to Samsung SMD, this thinness allows the AMOLED screen to provide better images and great visibility even in direct sunlight. Production of the first Super AMOLED displays was to have begun in March.

While innovation and growth drives the OLED display industry, we’re seeing the same kind of movement on the OLED lighting front. Although OLED lighting is currently behind OLED display on the commercialization timeline, the work with Universal Display is doing through our own internal R&D, and our contracts with the DOE, it’s helping to shorten that timeline.

Today we launched a new portion of our corporate website under the OLED marketplace section of www.universaldisplay.com, to showcase some of the company’s prototypes and relationships with OLED white lighting developing, the universal solar technology and material. We thought it would be interesting to issue the work being done to commercialize OLED lighting today, and make it a mainstream product tomorrow.

For example, LG Chem of Korea has announced its plan to commercial white OLED’s for lighting application. In October 2009, they exhibited a variety of white OLED product concepts, at FTD Green Devices in Yokohama, Japan, using our Universal PHOLED technology and materials. Our website shows a set of white OLED prototypes LG Chem developed, that illustrated a beautiful bright and uniform light emission from an OLED.

Another company creating innovation with our uniform Universal PHOLED materials and technology is NEC Lighting of Japan. It developed a variety of beautiful lighting concepts based on white OLEDs, recently showed at ENEX 2010 in Tokyo, Japan. This prototype illustrates how the variously informed factor of white OLEDs, created a variety of new lighting design opportunities.

For Panasonic Electric Works of Japan, we have been providing red and green phosphorescent OLED technology materials for the NEDO government program in Japan. PEW was a strong leader in OLED lighting innovations, and through their efforts and others, white OLED had the opportunity to play an important role in a global green lighting solution.

As we have previously announced, we have executed license agreements with Konica Minolta and Showa Denko, for Universal PHOLED technology for white lighting application. Demand for energy efficient technology is increasing. Our Universal PHOLED technology and materials, by offering a significant improvement in the now energy used to power an OLED devise, holds promise for new and better lighting solutions.

The energy efficiency of our technology and materials, together with how they are being utilized, developed and deployed by our licensees and partners, in innovative displays and lighting prototypes, led us to be added to the NASDAQ clean edge, clean energy index during the first quarter of this year; the early months of 2010 that provide some cautious economic optimism.

We continue to see growth in the AMOLEDs display production by our partners, increase the sooner adoption of AMOLED products, and innovation and advancement that further entrench us on the display side, and create new markets on the lighting side.

As we approach this years SID conference at the end of the month in Seattle, Washington, we look forward to sharing some new advances and insights into our technology development efforts. If you plan to attend the conference, please visit us at our booth number 1213 on the show floor.

With that I’ll turn the call over to Sid.

Sid Rosenblatt

Thank you Steve and again, thank you everyone for joining us on the call today. I’ll be reviewing the financial results for the first quarter of 2010, and I will also share some insights from the quarter. We will be happy to take your questions following my formal comments.

Revenues for the first quarter totaled approximately $4.2 million, compared to $2.8 million for the first quarter of 2009. Total commercial revenue for the first quarter was approximately $1.8 million, compared to $ 1.4 million for the quarter of 2009. The improvement in commercial revenue year-over-year was partly due to an increase of $288,000 in royalty revenue, which mainly represents royalties received under patent license agreement with Samsung SMD.

Also during the quarter there was an increase of $107,000 in license revenue, based on the license agreement we entered into with Showa Denko in December of 2009. An increase of $42,000 in commercial chemical revenue had an additional positive impact on commercial revenue during the quarter.

Developmental revenue totaled approximately $2.4 million for this first quarter, compared to $1.5 million for the same quarter of 2009, the increase in development revenue was attributable to in large part, to an increase of $746,000 in development chemical revenue, based mainly on increased purchase of development chemicals by a customer.

In addition, there was an increase of $2,36000 in contract research revenue, principally due to the timing of work performed, and cost encouraging connection with the existing government contracts, as well as an overall increase in the value of our government contracts.

Total operating expenses for the first quarter decreased to approximately $8.5 million, compared to $8.8 million for the same quarter of 2009. Once again, R&D comprised the largest portion of our expenses at approximately $4.5 million for the quarter, compared to $5.2 million for the same quarter of 2009.

The decrease in R&D expenses was mainly due to a decrease of $942,000 and cost incurred under our agreement with PPG Industries. We are pleased with the overall reduction, but we expect operating cost to remain in the $9 million range on a quarterly basis for the next several quarters.

Operating loss for the quarter totaled $4.2 million versus an operating loss of nearly $6 million for the first quarter of 2009. The decrease in our operating loss for the quarter was mainly due to an increase in revenue of $1.4 million, and a decrease in operating expenses of $356,000. We are pleased with the improvement in the operating loss as we continue to see growth in revenue, and to manage our cost on a quarter-to-quarter basis.

Our next loss for the first quarter totaled approximately $3 million or $0.08 per diluted share, compared to a net loss of approximately $5.6 million or $0.15 per diluted share for the same quarter of 2009. The improvement in our net loss was primarily attributable to a gain on stock liability of $540,000, and an increase in an income tax benefit of $454,000 comported to the same quarter of the prior year.

Cash used in operating activates totaled approximately $443,000 for the first quarter compared to approximately $4.5 million for the same period of 2009. The primary reason for this decreased use of cash, was a decrease in a net loose of $2.64 million which includes the impact of non-cash items, a $925,000 increase in cash payments for license rights granted and advance payments received under a government contract, and the timing of payments of accounts payable at accrued expenses.

Our balance sheet remains strong with cash, cash equivalent and short-term investments of approximately $63 million as of March 31, 2010, compared to approximately $63.9 million at the end of 2009. Our working capital at the end of March 31, 2010 was $53.5 million compared to $53.7 million at the end of 2009. We believe that this reflects our prudent use of cash during the quarter.

With that, I will now open the lines up for questions. Operator, could you please compile the list for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

A question regarding the Samsung agreement; those expire I guess sometime next month, and I’m just trying to a sense if the pace of which the negotiations are taking place, is there an urgency here or is it basically a customer, because you’ve been working with them for so long, so this will basically just run on through and forward, and your agreement is to phase out sometime this summer or can you give us some sense as to how we should think about this agreement?

Steven Abramson

Well actually Jim, as you’ve known us for a long time, we continue to work with out customers and our partners and the agreements get done as they get done. Sometimes they get done quickly, sometimes it takes sometime, but the object is to build this industry and create win-win situations with everybody.

Jim Ricchiuti - Needham & Company

And in the R&D discussion, it turns like you guys are putting a little bit more R&D for the lighting space. Can you give us any sense as to what portion or percent of your R&D is going in that area right now or is it still fairly small?

Sid Rosenblatt

It is still fairly small. We don’t specifically look at these. The government programs that we have with the DOE is where we focus a lot of our efforts and a lot work that is done on the material, the material relates not only to lighting but it also relates to displays.

But we do think that OLED lighting is probably the next area that we will start to get commercialized, and it is an area that we think is important as we have over the past few years in addition to flexible displays. So I don’t think its anything that we say is a major portion of our expenses, but it is something that gets our attention.

Jim Ricchiuti - Needham & Company

Last question and then I’ll jump back in the queue. Just looking at the 10-Q, it looks like there are couple of other items that have cropped up in the legal proceedings discussion and I’m just wondering how we should think about the possibility higher legal expanse over the next couple of quarters or is this basically are we already seeing this in your quarterly expenses.

Steven Abramson

These are oppositions that have been filed against some our patterns recently, and we’ll probably be continuing about the same level of legal expense that we have been continuing at for the next few quarters. These are things that we just get filed and they take time.

Operator

(Operator Instructions) Your next question comes from Jed Dorsheimer – Canaccord.

Jed Dorsheimer - Canaccord

The first question I have for you is, the Green, it looks as if Green is a lot more important for larger area displays, and I’m just wondering if we should look at the timing of the licensing. Green is sort of a proxy for interest on larger area OLEDs or if you would disagree with that?

Steven Abramson

Jed, I think Green is important for small area, large area OLED as well because of the power efficiency, and the power savings, and I’ve said it before, we are continuing to work with our customers to get Green into there products, but I don’t really think that it would just be a proxy for larger displays though its valuable for that, as well as small displays.

Jed Dorsheimer - Canaccord

Then I guess why hasn’t it been implemented in the small area displays at this point.

Steven Abramson

This just takes time to go though all of the introductory stuff.

Jed Dorsheimer - Canaccord

Do you think that the super OLED is the catalyst, because you are obviously using touch maybe requiring more power. So does that become a catalyst for using Green, because it seems as if for the small area it’s using Red and for essence it hits the power requirements.

Steven Abramson

The more power efficiency you could have the more products you can sell, the more products you can make. It’s really almost a trend muncher at this point. So, we are working hard to get the green into the various products of the customer.

Jed Dorsheimer - Canaccord

And then, just moving over to the lighting, the fundamental patent expires I think 2017, please correct me if I’m wrong on that, and I’m just wondering, as we look at the lighting opportunity, is there a risk if it takes longer than or I assume you’ve tied other patents to that, how should we look at the patent portfolio as it changes from sort of a fundamental material science to more application related beyond the expiration?

Sid Rosenblatt

We’ve created a matrix of patents around our key technology, particularly the phosphorescent technology. While the initial patent expires in the end of 2017 in the U.S., and the end of 2018 in a number of other countries, we have a number of other patents that are also fundamental in that area that stretch out over a number of years.

Jed Dorsheimer - Canaccord

Then last question may be, just asking for sort of your thoughts on predictions at SID. Anything new that you think will be shown there, that might be interesting or you think that the super OLED is probably going to be one of the newer highlights of the show?

Sid Rosenblatt

You know what, I’m as excited as you are to get to the show and see what people have.

Operator

(Operator Instruction) Your next question comes from Yair Reiner – Oppenheimer.

Mike Sutton – Oppenheimer & Co.

This is actually Mike Sothern for Yair. I was wondering if -- I guess the first housekeeping question, was there 191,000 of commercialization assessment in the quarter?

Sid Rosenblatt

Commercialization efficiencies?

Mike Sutton – Oppenheimer & Co.

Yes.

Sid Rosenblatt

Probably, let me see. Technology development revenue and commercialization efficiency, that is correct.

Mike Sutton – Oppenheimer & Co.

Okay. You have any sense of -- I remember you thought it might end before the end of the quarter but it’s still going on; any sense of how long you think that might to going for?

Sid Rosenblatt

We are hoping that it gets extended. We are working with the customers to try to extend it, so we are hoping that will continue through the year.

Mike Sutton – Oppenheimer & Co.

Is that on a quarter-to-quarter basis right now?

Sid Rosenblatt

No it is not, but we are working there with the customers to extend it and we don’t really have a time frame at this time.

Mike Sutton – Oppenheimer & Co.

Okay. In regards to LNG displays ramp up, so do you have any sense of their yield and whether material efficiency as compared to Samsung?

Sid Rosenblatt

Its very early. They are working through a lot of the start-up issues, and at this point they are working on start-up issues, they are trying to optimize what they are doing, so I don’t think you’ll know any yield or anything like that for at least a number of quarters that they are producing.

They are trying I believe to start out very, very efficiently, and they have been working on OLED for quite sometime, but until they really start to turn out the displays and they get a feel for what their yields are going to be, they will announce it, we probably wouldn’t announce in anyway, but it is early in the ramp up phase, so we haven’t heard anything and you would have seen it in the press.

Mike Sutton – Oppenheimer & Co.

Right. In regards to the Samsung’s Gen 5.5, I mean do you think we could see some tenants or larger screens coming on that or is it still really like difficult?

Sid Rosenblatt

Gen 5.5 can make obviously much larger screens, and it really depends on what their plans. We’ve read some of the public documents that we have read also, but you can’t see larger screens out of that. I mean that’s a pretty large subsidiary.

Mike Sutton – Oppenheimer & Co.

Right of course, and it is my last question. One of your customers clearly contribute a significant part of your revenue, do you have the number or percentage of your revenue they contribute in this quarter?

Sid Rosenblatt

One customer?

Mike Sutton – Oppenheimer & Co.

Yes.

Sid Rosenblatt

Are you talking about the developmental customer?

Mike Sutton – Oppenheimer & Co.

No just a percent of it.

Sid Rosenblatt

Okay. I mean Samsung is our largest customer, and we don’t break out specifically what their percentage is, but they are a significant piece, but with developmental chemicals worth $2.4 million, that’s not Samsung, there maybe a little bit in there. So your commercial revenue of $1.8, that really would be a lot of Samsung.

Operator

Your next question comes from Jonathan Skeels - Davenport.

Jonathan Skeels – Davenport

Hi guys. Have the phone manufacturers been hoping for green material to be incorporated into the Samsung manufacturing process at some point soon. Have you heard about demand may be from their side in this?

Sid Rosenblatt

I think you have to talk to them, but as any handset manufacturer who wants to put more and more functions on their devices, they are going to one reduce the power for that there. They can continue to add functionality and charge more money. So I am pretty sure that they are getting pressure from the handset guys.

Jonathan Skeels – Davenport

I mean, I guess would it be safe to assume that maybe the incremental cost associated with green, and the fact that you have the upcoming license renegotiation with Samsung may be a reason why we just haven’t seen that adopted yet?

Sid Rosenblatt

Your assumption is as good as any of our assumptions. I can’t comment.

Operator

And that will conclude our question-and-answer session. I’d now like to turn the call back over to management for any additional or closing remarks.

Sid Rosenblatt

We like to thank you all very much for participating on the call, and hopefully we will see a number of you at the SID conference, and if not, as you are well aware, you are welcome to contact us at anytime. So thank you and good night. Thank you very much.

Operator

And that does conclude today’s call. We appreciate everyone’s participation.

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