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Executives

Joe Hassett - IR

Steve Abramson - President and CEO

Sid Rosenblatt - EVP and CFO

Analysts

Darice Liu - Brigantine Advisors

Min Park - Goldman Sachs

Jed Dorsheimer - Canaccord

John Bright - Avondale Partners

Hendi Susanto - Gabelli & Company

Jim Ricchiuti - Needham & Company

Andy Abrams - Avian Securities

Universal Display Corporation (PANL) Q2 2011 Earnings Call August 8, 2011 5:00 PM ET

Operator

Good day and welcome to the Universal Display Corporation second quarter 2011 earnings call. At this time, I'd like to turn the conference over to Joe Hassett.

Joe Hassett

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

Let me begin today by reminding you that this call is a 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 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, 2011.

All statements in this conference 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.

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

Steve Abramson

Thank you, Joe, and welcome to everyone listening on today's call and webcast. It's good to be able to talk about the growing business in this current economic environment.

This afternoon, I will start with a quick overview of our second quarter financial results, discuss highlights from the quarter and update everyone of our plans to expand usage of our proprietary OLED technologies and materials in both the display and lighting markets. Sid will then follow with more detail on our financials before we open the call to questions.

Second quarter revenues were an all-time record, $11.3 million, up 33% for the second quarter a year ago. The increase was driven by both expanded commercial and strong developmental sales. In addition, we reduced the operating loss and were operating cash flow positive for the quarter. Our balance sheet remains solid.

We also reported a significant improvement in net income and earnings per share, primarily attributable to the accounting treatment of a stock warrant liability. So as we discounted the stock warrant liability which inflated the loss, it's only fair to do the same when it swings in the other direction. So we continue to focus on our operating income. Steve will go through the details shortly.

Nevertheless, after the influence of the stock warrant liability, these results clearly illustrate that we achieved strong year-over-year revenue growth, a further progress to our operating profitability and sustained momentum throughout our business. Our results are the product of our strong technology portfolio and proprietary materials and a vibrant, fast-growing margin.

Leading consumer electronics and lighting manufacturers such as Samsung and LG in Korea, AUO in Taiwan and Konica Minolta in Japan are spearheading the evolution in the display and lighting markets. Universal Display is helping these and many other companies create a whole new generation of exciting product opportunities.

Our commercial revenues were up 170% over the same quarter of the prior year, reflecting increased demand for our materials and higher license revenues associated with sales growth for a wide variety of small form factor display devices, particularly smartphones. These devices are finally making their way into the market, which to this point has been limited by industry capacity.

On past conference calls, we've noted the wider appeal of OLED and the various market sizes and growth rates cited by industry analysts such as iSuppli Display Research and others. If anything, we'd say their expectations for the industry continued to grow. Display research projects AMOLED revenues to exceed $4 billion this year, up from $1.2 billion in 2010. And they recently increased their AMOLED market forecast for future years yet again with the market now expected to exceed $15 billion in 2014.

Let me mention just a few industry highlights to put some color around current industry conditions. It was reported by at least one analyst at Samsung on their quarterly earnings call last night, emphasizing that the OLED market remains a key area of focus and they'll continue to ramp investment in this segment. Samsung also recently announced that the GALAXY S II smartphone with its high-resolution super-AMOLED display panel sold 5 million units in just 85 days, making it the fastest-selling phone in the company's history.

It was also reported that Samsung opened its Gen 5.5 AMOLED line in industry first, two months ahead of schedule. AU Optronics had originally planned to start mass production on a new Gen 3.5 AMOLED line in the second quarter of 2011, but it's been reported that there are some delays, which will likely move the opening to the third or fourth quarter of this year.

According to report from inews24, LG Display will start to provide AMOLED displays to Nokia and has started producing AMOLEDs in a Gen 4.5 plan. The report says that at present, LG Display is only supplying sample quantities and overall production is expected to ramp up in the coming months.

As we know the question will come up, let me say now that we are not announcing a new long-term agreement with Samsung today. We are making progress with the negotiations and we continue to work with them under three months extension of our current agreement as we have for the past 14 months.

Developmental revenues after excluding payments received from a customer several years ago that were recognized during the second quarter of last year were also up for the quarter. These revenues are a direct function of the growing interest in our materials and technology for product applications throughout the display and lighting markets.

According to at least one analyst, Samsung's talent for OLED tablets was more favorable on their quarterly conference call last month. While they are not ready to make a product announcement at this time, it appears they are proactively looking at OLED displays for tablets.

As I mentioned, LG has begun to produce mobile OLED products. And public reports have indicated that while they are not going to be investing more in OLEDs for mobile applications, they are going to concentrate on OLED TVs.

Our customers see the value of OLED TVs. To support this effort, our team has developed a highly-efficient four sub-pixel architecture that splits the blue pixel into separate light blue and dark blue pixels. This approach takes advantage of the successes we've had over the past year in increasing light blue lifetime and also recognizes that deep blue is used infrequently in a four-color display.

In addition, another possible avenue for large screen TVs is printing either by solution-based methods to more traditional approach or by dry printing methods. We have been pursuing both approaches at UDC. Our solution process technology, which we call P2OLED, has advanced considerably over the past couple of years. Efficiency has doubled over the last two three years and lifetime is approximately 125,000 hours for red, 175,000 hours for green and 8,000 hours for light blue of the 50% of the initial luminance of 1,000 nits.

We are also making excellent progress with a dry printing technology that we embedded, which we call Organic Vapor Jet Printing or OVJP. If successful, this technology would enable OLEDs to be printed using our current high-performance vacuum evaporation materials.

Also within our developmental efforts, we continue to advance our flexible display technology. We previously reported on our work with LG Display and L-3 under Department of Defense funded program to develop a flexible display on a metal foil, prototypes of which were delivered in a wrist-mounted communications device designed for our soldiers in the field.

In addition, we have recently demonstrated a four-color flexible AMOLED display prototype on plastic with our partners at the Flexible Display Center at Arizona State University.

We also developed and successfully demonstrated a novel single-layer encapsulation technology for plastic substrate systems and thin-film devices, including both flexible and rigid OLEDs. This approach is an elegant solution to improve the manufacturability and performance of OLEDs and a range of other thin-film devices. It offers a unique growth path in markets that are strategically adjacent to our core display and lightening targets.

There have been equally exciting advances in our OLED lighting technology. As you may have heard in our annual meeting, we donated some of our proprietary materials to Toshiba for the use in portable OLED lights that were used by refugees from the terrible earthquake and Tsunami in Japan. We have also licensed our lighting technology to Konica Minolta, which is currently having its products manufactured by Philips using our proprietary materials.

We continue to improve the efficiency duration and luminance of our OLED lighting technology materials as we believe that this is an area that offers a tremendous market opportunity. We're working with more than 10 potential lightening manufacturers at this time.

Recently, we also announced a one-way all phosphorescent OLED lighting panel with a power efficacy of 58 lumens per watt and a record breaking 30,000 hours of operating lifetime to 70% of initial luminance, based in part on our new light blue Universal PHOLED material system, which represents a three times improvement in operating lifetime over results presented last year.

As we also mentioned, our expanded presence in Asia where we've established engineering support offices in Korea and Japan and R&D facility in Hong-Kong, we believe a more visible presence and closer proximity to Asia will strengthen the relationships, improve efficiencies and accelerate the pace of business growth.

Industry still faces some challenges such as reducing manufacturing cost and increasing materials' lifetime. To address these challenges, we continue to invest heavily in research and development. We are constantly looking to add new patents to our portfolio and to improve and expand our innovative technologies. We're making progress across a broad array of challenges that we think are key to accelerating worldwide adoption of OLEDs in the future.

For example, we're making great progress with our phosphorus and green materials where we're aggressively pushing forward with our efforts to commercialization in the near term. Our sales of green-emitter and host materials have increased significantly amounting to approximately half our development revenues for the second quarter.

Let me talk a little about the oppositions and invalidation proceedings against our issued patents in certain jurisdictions. The first opposition was initiated a few years ago in Europe against our broad basic flexible OLED patent. This is a fundamental patent for an OLED or a non-glass substrate. We won that opposition and the other side appeal.

Recently an invalidation proceeding was filed in Korea against one of issued patents relating our OVJP technology. There are other oppositions, invalidation proceeding and patent interference actions we're involved in relating to our phosphorescence patents. They've been filed mainly by competitors of ours who have realized that the strength of our patent portfolio creates significant barriers to entry and reduces their revenue potential.

Our team was the first to invent, develop and commercialize phosphorescent technology. Our patent portfolio is strong and we will do everything within our power to save our intellectual property. We are aggressively defending our patents in these proceedings, as shown by the more than doubling of our patent-related expenses over the last six months to almost $2 million last quarter.

As we have said, challenges to our intellectual property will be part of our business as the industry grows, and we are prepared to meet those challenges. Let me briefly close with an update on our strategy and potential uses of the proceeds from our recent public offering.

When looking to the future of OLED, we're only thinking of ways to accelerate and secure growth of the industry and our company. We continue to look at IP covering the technology and materials in an OLED stack to add to an already strong portfolio. We're also looking at areas where we may be able to acquire IP covering OLED lighting or flexible OLED technologies with an attractive adjacent areas that will be complementary to and synergistic with our existing portfolio.

On behalf of all of us at Universal Display, I would like to thank our supporters for the dedication to the company over the past 15 years. We believe that the events of this past quarter have demonstrated the value of that commitment and shown the incredible potential of OLED. We look forward to our future growth prospects and to sharing that growth with you as it materializes.

With that, I'll turn the call over to Sid who will take you through the financial results in more detail.

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 second quarter as well as sharing some insights from the quarter, after which we will open the call up to take your questions.

Revenues for the second quarter totaled $11.3 million, a 33% increase compared to revenues of $8.4 million for the second quarter of 2010. Revenues for this past quarter are the best quarterly revenues in the company's history. And following the expected effects of seasonality on first quarter revenues, we also resumed our sequential revenue growth.

Keep in mind that in comparing revenues year-over-year, from an accounting perspective, we've recognized $2.1 million in non-refundable payments as revenue in the second quarter of last year.

Commercial revenue was $5.3 million for the second quarter, an increase of 170% compared to the commercial revenues of $ 2 million for the second quarter of 2010. The increase is primarily due to increased commercial chemical and royalty revenues mainly based on chemicals shipped and royalties received under patent licensing for Samsung SMD.

As we have noted in the past, chemical revenues are recognized when our materials are purchased by OLED manufacturers who tend to buy in anticipation of the current or near-term production requirements. On the other hand, royalty revenue is recognized as products using our materials and technologies are sold by manufacturers. We received royalty reports a certain period for certain period after the quarter-end. Therefore, royalty revenue lags material purchases by approximately one quarter.

Developmental revenue was $5.9 million for the second quarter, a 9% decrease compared to development revenue of $6.5 million for the second quarter of 2010. The decrease was primarily due to $2.1 million in non-refundable payments included in revenue for the second quarter of 2010. The whole amount of chemical revenue was up $1.3 million for the quarter and up by $3 million for the six months ended June 30 compared to the same period last year.

As we've said in the past, we cannot accurately predict the timing of development chemical purchases due to the early stage of the OLED product research and development. But as Steve has pointed out earlier, more companies are approaching us, taking access to our materials and license rights compared to this time a year ago.

Total operating expenses for the second quarter were $12.3 million, up 19% from $10.4 million for the second quarter of 2010. Sequentially, operating expenses were essentially in line with expenses for the first quarter. Outside of patent and legal expense, we would not expect operating expenses to vary significantly from these figures over the balance of the year.

Research and development expenses for the first quarter were $5.6 million, up marginally compared to $5.5 million for the same period of 2010. Patent costs rose $1.9 million for the quarter compared to $843,000 for the same quarter in 2010, reflecting our aggressive descent of certain ongoing and new patent challenges as well as the timing (technical difficulty) maintenance cost associated with a number of issued patents and patent applications.

Patent costs were $1.6 million for the first quarter, and it is likely that patent costs will be sustained or increased from current quarterly levels on a going forward basis.

Selling, general and administrative expenses for the quarter were $4.5 million, up from $3.6 million for the same quarter in 2010. The increase was mainly due to increased Board of Directors stock compensation employee costs, primarily executive stock compensation, and costs associated with the startup of certain new appointed subsidiaries.

For the quarter, we reported an operating loss of $1.1 million, down from $1.9 million for the same quarter of 2010. The current quarter illustrates the leverage in our model as incremental revenues yield very attractive margins and contributed to improved operating results. I would also note that our loss improved by nearly $1.7 million from the first quarter of this year.

In contrast to the stock warrant liability charges we have absorbed over the past quarters, the change in fair value of these warrants during the second quarter resulted in a $4.5 million non-cash gain. This compares to the $2.6 million loss that we recorded for the stock warrant liability in the second quarter of last year. The remaining warrants will expire in two weeks unless they are exercised by then.

For the quarter, we had income tax expense of $289,000, reflecting the May 2010 expiration of our five-year exemption from Korean withholding tax on royalty payments received from Samsung SMD under our patent license agreement. Since May 2010, Samsung SMD has been withholding 16.5% in taxes from our royalty payments under our agreement.

After taking the stock warrant liability expense into account, we reported a net income of $3.2 million for the second quarter or $0.07 per basic share compared to a net loss of $4.4 million or $0.12 per basic and diluted share for the same quarter of 2010.

In earnings per share calculation for the second quarter of 2011, diluted EPS does not include the stock warrant liability gain in the numerator as it assumes the warrants were exercised at the beginning of the period. In contrast, there were no similar assumptions in the basic EPS calculation.

Reducing GAAP net income by $4.4 million, stock warranty liability gains would produce roughly a $1.2 million loss for the quarter, which equates to $0.03 per diluted share.

For the quarter, cash provided by operating activities was $223,000 compared to cash used of $2.3 million for the same period in 2010. This is the third consecutive quarter in which we generated positive cash from operating activities. The increase this quarter was mainly due to an improvement in the net loss excluding non-cash items of approximately $2.4 million on a year-over-year basis.

As Steve briefly mentioned, our financial position is currently the best in the company's history. Our balance sheet remains strong with cash, cash equivalents and short-term investments of approximately $326 million as of June 30, much of which represents the net proceeds of $250 million from our equity offering earlier this year.

With that, I'd like the operator to compile the Q&A list, and Steven and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Darice Liu from Brigantine Advisors.

Darice Liu - Brigantine Advisors

My first question deals with your green. Can you provide an update on the status of your green color? Is it in commercial production yet?

Steve Abramson

Not yet. No company has yet announced that they're using green in a commercial product, although about half of our development revenues this quarter were from the sales of green-emitter and host.

Darice Liu - Brigantine Advisors

If I could deconstruct your answer for one minute, no one has announced it, but half of your developmental revenues is actually from the green emitter? So even if someone hasn't announced and because you're still in negotiations with your top customers, any use of green, will that remain within the developmental line?

Steve Abramson

I think you're probably reading too much into it. We would not be the ones to announce it in a product. That will be the customer.

Darice Liu - Brigantine Advisors

Can you talk about how many customers are still evaluating your green color?

Steve Abramson

Certainly more than 10.

Darice Liu - Brigantine Advisors

Do you have any timeline in terms of when we'll see some commercial product with green?

Steve Abramson

No, we really have to wait and see how the customers release products.

Darice Liu - Brigantine Advisors

Most of these evaluations at the last inning, are we still in early innings of some of these potential customers?

Steve Abramson

They're all over the ballpark.

Darice Liu - Brigantine Advisors

Moving along, in terms of your revenues, I was wondering if the mechanics of your royalty payment would change if the materials they use of yours are only going to be used for the backlighting display. The reason why I asked this is about an hour or so ago, Nikkei reported LG Display will be investing about JPY220 billion or US$2.83 billion for an 8.5-G OLED sub. And from what I've heard, the initial OLED TVs will be more white OLED on LCD.

Steve Abramson

Well, I would say first of all that what you heard on the Nikkei is certainly good news for the OLED industry. But we really couldn't speak to what any specific company will be doing.

Darice Liu - Brigantine Advisors

Well, I guess just in general?

Steve Abramson

We negotiate with each individual company, trying to get an appropriate value for the use of our technology.

Darice Liu - Brigantine Advisors

So it doesn't really matter what the end product is or where exactly your materials are placed in?

Steve Abramson

Well, all of those things are things that we would take into account when we discuss the relationships with the customers.

Darice Liu - Brigantine Advisors

Can you provide an update on what your game plan is for your encapsulation technology? Have you decided what you're going to do with that? Are you going to outsource that? And if so, have your selected an equipment OEM?

Steve Abramson

We're actually currently evaluating various options. So we don't have a game plan we can present yet. We're very excited about that technology, because it addresses a significant market need for glass-based OLEDs and multiple OLEDs as well as a number of other thin-film devices.

Darice Liu - Brigantine Advisors

Do you foresee your product actually being in the market in the next six to nine months? Or are we looking further out?

Steve Abramson

Probably not.

Operator

And our next question is from Min Park with Goldman Sachs.

Min Park - Goldman Sachs

First, just going back to the color green, just wondering if you could tell us what would trigger your recognition of commercial green chemical sales. Is it predicated on a public announcement by an OEM or is your awareness that is going into commercial product enough for you to recognize the commercial sale?

Steve Abramson

The customer will notify us in their purchase order, because they have the requirement in the contract to notify us whether it's going to commercial products or whether it's still developmental. So when we get a notification from the customer, that order is in a commercial product, which then will be covered by our license agreement. If we're talking about Samsung, we would then categorizes characterize it as commercial chemicals.

Min Park - Goldman Sachs

Is there any chance that some of the developmental chemicals that you recognize this quarter would be used for commercial products in the future quarters? Or would they just tell you, we're actually going to use this for commercial products and not for test lines?

Steve Abramson

The second quarter would all be developmental. It literally occurs when they place the purchase order. That will determine when and what category it goes in.

Min Park - Goldman Sachs

And then just given what appears to be a little bit more high (nutrimentous) for a large-screen OLED, could you just talk about how we should think about materials pricing and your recognition of revenue as you start putting materials into larger form factor displays?

Steve Abramson

Our material pricing is based upon volume of grams of material or kilograms of material that you purchase. It does not have to do with the size of the product that it's going into. But we do structure our material sales with breakpoints based upon larger volumes of material purchases.

Min Park - Goldman Sachs

Could you just help us understand why R&D was down so much down quarter-over-quarter and if this is the new normal level we should be look at going forward?

Steve Abramson

There is a few things that impacted. I think this level plus a little bit is what we should look at going forward.

Operator

Our next question comes from Jed Dorsheimer with Canaccord.

Jed Dorsheimer - Canaccord

Nice boost in the commercial royalties and chemicals. Why though in terms of the mechanics did deferred revenue come down a little bit?

Sid Rosenblatt

Deferred revenue is a number of different pieces. Some of it is customers where we have done some work that they get credit if and when they sign a license agreement. So it stays in there. Some of the deferred revenue is technology development contracts that we have with some customers that we do the work over a period of time and we just amortize that as we do the work.

So it's fairly stable at this point. We had a number of customers that we've done some work for. And then whey enter a license agreement, they will get credit for some of these payments. So at that time, it would be amortized.

Jed Dorsheimer - Canaccord

And then maybe just, Steve or Sid, at a higher level, clearly LG's decision to move to TVs is a nice boon for the OLED industry in general and certainly you guys. But in the near term here, I think a lot of people were looking at LG coming in as sort of these potential second sources in the mobile market to maybe draw some of the larger handset and tablet type players in the marketplace.

So right now, Samsung has been operating at 100% capacity. They've added a significant amount of capacity here in terms of the first phase of the 5.5. Does it concern you at all that or do you think that it pushes things out in terms of their ramp of the OLED market? You don't have the potential for the Apple's or some of the other guys that need and require second sources to come into the marketplace until we start to see TVs?

Steve Abramson

I think there may be some other people that might step up to the plate to provide additional mobile opportunities, because there are other people in Taiwan, for example, that are looking at that space.

I think the LG's concentration on TVs is a real positive for the OLED industry. And my recollection of the announcement was they weren't going to make any further investments in mobile space, because they were going to concentrate on TVs.

I think overall we'd like to see more investment by everybody quicker.

Jed Dorsheimer - Canaccord

As you look at from a milestone perspective, should we be focused on sort of AUO and Chi Mei in terms of providing those second-source opportunities? I know you don't want to talk on specific customers. But in general, are those the Taiwanese players that we should be looking at?

Steve Abramson

Those are the Taiwanese players that we're working with in the market. I can't speak to their specific product plans. But those are the Taiwanese players in the market.

Operator

And we'll take our next question from John Bright with Avondale Partners.

John Bright - Avondale Partners

I'm going to go back to the green question. I think in either in a response to a question or in your prepared remarks, you talked about half the development revenue being associated with the green. Has there been any relationship in the past between revenues in the development segment moving into commercial and the timeframe between them that might applicable to green?

Sid Rosenblatt

We always talk about developmental revenues being first phase, before you move into commercial production. And we've talked about LG in the past that it's moving into commercial. Timeframe, though, is very difficult for us to calculate. We have said for the past year that we have a number of customers evaluating green material and it really depends upon their production schedule.

So it's difficult to say how quickly things will move from one category to the other, because it really is based upon decisions of the customers.

John Bright - Avondale Partners

Is it fair to say that there is a strong leading indicator of potential commercial revenue coming from green?

Sid Rosenblatt

Yes, Absolutely.

John Bright - Avondale Partners

Next question is on the OpEx. It looks like you're expecting the patent line item to be at or above the remaining of the year. Yet, on the other items, you expect it effectively to be flat for the remainder of the year. Is that right?

Sid Rosenblatt

Yes, I think fairly flat, just may some growth, but not significant growth. I think we talked about maybe 5% growth in some of the areas in the beginning of the year. But the patent cost is the one that clearly is going to accelerate.

John Bright - Avondale Partners

Order of magnitude on what we could expect in acceleration if it's $2 million today, are we talking about doubling or are we talking about 15%? What are we talking about?

Sid Rosenblatt

Well, I hope it's not doubling.

Steve Abramson

The way a lot of these proceedings operate is there will be a big burst of energy and then you won't do anything for a while. So it really depends on the specific timing of specific proceedings. But generally, we're getting more of these administrative or patent oppositions. And so the amount of patent expenses is going to be higher. But if you look at it year-to-year, that's probably a better indicator.

John Bright - Avondale Partners

Lastly, 10% customers in the quarter?

Steve Abramson

It will be Samsung, and I think it'll be LG.

Operator

We'll next question from Hendi Susanto with Gabelli & Company.

Hendi Susanto - Gabelli & Company

You said that 50% of developmental revenues were green-emitter materials. How about the other half?

Sid Rosenblatt

There are other materials, which would be red and some other materials, light blues and blue that we sample. So it can be any other material that we sell. And we sell a lot of materials on developmental customers, red material that are not in production yet. So it's all other materials that we have.

Hendi Susanto - Gabelli & Company

Did you disclose what percentage of revenue comes from Samsung and LG Display respectively in the second quarter of 2011?

Sid Rosenblatt

I don't believe we have the specific number, but I'll check.

Hendi Susanto - Gabelli & Company

How do you see your order trends in the month of July and the first week of August?

Steve Abramson

We really don't talk about that on these calls. Since we don't really give guidance, we don't discuss the quarter. We're not really going to talk about Q2. I apologize, but that's just been our policy.

Hendi Susanto - Gabelli & Company

Do you have updates on the timing and your plan to build a secondary manufacturing facility in U.S. with PPG?

Steve Abramson

I think we talked about it in last calls with PPG that we are working with PPG to put another facility in place, and we're still working with them. I don't think we have any specific dates when that will occur. But we're making sure that as we believe the demand goes up that we can meet all the demands of our customers. So we're continuing to work very closely with them on that. But I don't have any specific date.

Operator

We'll take our next question from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti - Needham & Company

Just a follow-up on the questions on the green phosphorous material. You talked about the fact that you're working with more than 10 partners in this area. Can you give us a sense as to the development revenue concentration with two or three of these customers or is it fairly well dispersed?

Steve Abramson

It's more concentrated than that. It's more concentrated than the first.

Jim Ricchiuti - Needham & Company

Steve, I know you're not going to talk about specific customers. But just with respect to your conversations with your various partners, individual licensees, are the discussions that you're having with these parties with respect to their timetable, the capacity expansion, consistent with the published accounts? Or are these reports that we see now somewhat optimistic?

Steve Abramson

I wish I could answer that question, Jim. But I can't.

Jim Ricchiuti - Needham & Company

Switching gears for a second, is it going to have an impact on your business. Just on the development revenue side, the government-funded revenue, do you guys see any change there at all, probably not in near term, but what are you thinking along those lines?

Sid Rosenblatt

We don't see anything in the near term. We don't have a lot of visibility. I know what we have in-house for the next 12 to 18 months, and these programs that we're part of normally last that long. So it's hard for us to say we see any changes at this time.

Steve Abramson

We've not gotten any indication in any of our programs or any type of problem.

Operator

Our next question comes from Andy Abrams with Avian Securities.

Andy Abrams - Avian Securities

Inventory levels, are you still holding as much as you're going to need for the next 12 months?

Sid Rosenblatt

We keep a lot of inventory in hand, because we want to make sure that our customers know that anytime their business ramps up, we're ready to meet their needs. So we keep of plenty of emitters on hand.

Andy Abrams - Avian Securities

Blue, have you gotten passed the kind of conceptual stage with customers? Are they qualifying that technology. I know it takes a slightly different setup for the customer. Is there anybody who is committed to it at this point or at least from the developmental side committed to it?

Steve Abramson

I think I would say there is lot of people that are interested in it more than anybody that's committed to it.

Andy Abrams - Avian Securities

What about other items in the stack. Are you guys actively looking to participate directly in other parts of the stack or we're working more closely with those who provide the other layers to enhance the way our emitters work.

Steve Abramson

We've been doing a lot of more work on the host side recently as well as working even more closely with some of the other materials companies both on the host and the transporter side.

We answered your question, because we think the materials business of this industry is a very important piece. And so we want to help grow it as large as we can and we want to get as much of it as we can.

Andy Abrams - Avian Securities

What's the status Moser Baer on the lighting development project?

Steve Abramson

We are continuing to work on the government contract.

Andy Abrams - Avian Securities

Have they actually produced a facility yet or are we still in the kind of developmental stage?

Steve Abramson

They have the facility up-to-date in New York and they are in the process of designing and developing the equipment and putting it together.

Andy Abrams - Avian Securities

Lastly, can you give us a little guidance on the way we should be looking at the commercial revenue breakdown between materials and royalty? Is there any way you can give us a little bit of guidance there?

Sid Rosenblatt

It's really difficult, maybe because it's difficult to predict the timing of material purchases by our customers. You can look at some of the market projections for the second quarter to look at whether it's growing or not growing in the third quarter, but it's really difficult for us to give any guidance on that level.

Andy Abrams - Avian Securities

If let's say Samsung decides to come out with a tablet in fourth quarter or first quarter of next year, the impact that you guys see would be strictly on a per square meter basis material side before we get to the royalty side? The royalty side you'd see later, but are we thinking just along those lines? Is there anyway that they could reduce the amount of material on a larger display than what they are using now?

Sid Rosenblatt

I think that they're always looking to be as efficient as possible. But in theory, you are correct. Look at the more square inches or square meters that are produced, the more material they're going to use. I don't think there is anything that says if you go from a four-inch diagonal to a 10-inch diagonal, you get x efficiency in the material, but they are constantly working on reducing their material utilization and their deposition process.

Andy Abrams - Avian Securities

And from your perspective, and this is probably looking more at LG than anybody else, doing large-size displays outside of the mask method, have you guys been working closely with anyone in a specific area for doing the deposition on a larger basis rather than masking and overlapping things like that?

Steve Abramson

We work with almost everybody in this space and try to make sure that our materials would perform to whatever manufacturing methodology there.

Andy Abrams - Avian Securities

And you see no limitation using the mask method for larger displays or at least you haven't so far?

Steve Abramson

That's always been an issue how far can you extend fine metal mask. When we first started in this industry, they said you couldn't ge the Gen 2, and now you're using a Gen 5.5 facility. So there may not be a limit of how far you can go with the mask method, but there are other methods as well that people are working on and we're working with them as well to ensure their materials and technology can fit into various manufacturing platforms.

Operator

And we have another question which comes from (inaudible) with Cowan & Company.

Unidentified Analyst

Most of my questions has already been asked and answered. Just a few housekeeping things. Could you give us a little bit more detailed breakdown within commercial and development how much were chemicals in each case?

Sid Rosenblatt

On the development side, it's all chemicals. On development revenue, while you got government contracts, which were about $1.3 million, and technology development revenue was less than $0.5 million. So that's the difference on developmental side. And on the commercial side, we really don't break it down, but you can almost back into the SMD numbers and the fact that we tell you how much factors were withholding we're tuck it away.

Unidentified Analyst

What were CapEx and depreciation in the quarter?

Sid Rosenblatt

I have to look at the cash flow statement. I don't think it was significant.

Unidentified Analyst

Within development or commercial for that matter, can you give us a sense of how much contribution lighting is making at this stage to revenue, just roughly?

Sid Rosenblatt

It is still not significant. I mean the bulk of our revenues are related to display.

Operator

And we have no further questions at this point. I'd like to turn the conference back over to Steve Abramson for any additional and closing remarks.

Steve Abramson

I would like to thank everybody for all their support. And as usual, if anybody has any questions, please call Sidney or myself. Thank you very much.

Operator

Once again, this does conclude today's conference call. We thank you all for your participation.

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