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Universal Display Corporation (NASDAQ:PANL)

Q3 2011 Earnings Call

November 8, 2011 5:00 pm ET

Executives

Joe Hassett - IR

Steve Abramson - President and CEO

Sid Rosenblatt - EVP and CFO

Analysts

John Bright - Avondale Partners

Darice Liu - Brigantine Advisors

Hendi Susanto - Gabelli & Company

Jim Ricchiuti - Needham & Company

Jed Dorsheimer - Canaccord

Srini Sundararajan - Oppenheimer

Andrew Abrams - Avian Securities

Jagadish Iyer - Piper Jaffray

Operator

Good day and welcome to the Universal Display Corporation third quarter 2011 earnings call. At this time, I would 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, November 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 everyone listening on today's call and webcast. It's been an extremely productive, exciting and fruitful three months, so let's get right into it.

For the third quarter we reported positive net income of $6 million and earnings of $0.12 per diluted share. Earnings were driven by record quarterly revenues of $21.8 million. Our results this quarter clearly validate our business model of licensing our intellectual property and selling our proprietary materials with substantial margins that yield attractive returns for shareholders. Sid will go through all of our financials in more detail shortly.

This quarter's results and the steady stream of exciting OLED display and lighting market developments, we've recently witnessed a strong signal that we may have reached the dawning of the OLED era. Frankly, I couldn't put it any better than Chimei Innolux, one of our partners, which announcing their new AMOLED, true OLED, higher mobile device display technology.

The popularity of smart mobile devices had changed the way consumers communicate and interact. In response to greater demand for better user interfaces as image quality, CMI has endeavored to develop high-end mobile device display technology that will satisfy consumer's requirements. Of course, nowhere are consumer requirements more evident than at Samsung. Which recently announced it sold over 30 million OLED equipped Galaxy S and S II smartphones.

In fact, for the third quarter, Samsung surpassed Apple's smartphone sales for the first time ever. Samsung SMD currently represents the largest individual market with OLED technology and material with more OLED power devices in commercial circulation than any other company. Consequently, it's easy to understand why we are so pleased with our new Samsung OLED patent license and supplemental OLED material purchase agreement.

These agreements provide us with both a stable base of recurring and increasing licensing revenue as well as the additional opportunity to participate in the growth of the OLED market through material sale. And while these agreements currently cover a red and green material, they can be expanded to include blue, once it is developed and commercially qualified.

The value of our new agreement with Samsung transcends simple financial benefits. With Samsung signing these agreements, our OLED technologies and materials have been validated by the industry leader. This is a powerful message and we believe its strongly resonated throughout the OLED market.

On a strategic level, it's at the new foundation from which Universal Display can move forward and commence the next phase of our growth. Samsung is the OLED display industry leader and increasing number of both established and new participants are now focusing intently on the rapidly expanding OLED market.

Lately, it seems that there are announcements about new OLED development on almost daily basis. Let me highlight you some of the more recent announcements that we think best demonstrate the current status and longer-term potential of the OLED market. And as far for a market, it has been reported that smartphone vendors and the regional display manufacturers are evaluating samples of AUO's integrated touch AMOLED displays.

Their expectation is that they will ramp the volume OLED display production in 2012. AUO has already launched a 4.3-inch AMOLED. In addition, a 6-inch transparent AMOLED display has achieved the transparency rate of more than 35% and is ideal for cellphone and vehicle dashboard use.

At FPD International 2011, Chimei Innolux showcased their new AMOLED true OLED high-end mobile device display technology. The 3.5-inch and 3.0-inch high-resolution AMOLED true OLED display technology utilized a white OLED design with color focus.

In the third quarter conference call, Samsung said, they are hoping to launch mobile phones with flexible OLED displays next year. And the flexible OLED tablets and other portable devices will follow. Nokia had demonstrated similar device at their Nokia World, with a device being described as a "Nokia Kinetic Device" with a flexible OLED display.

On the new product front with Samsung Galaxy Nexus with its 4.65-inch high-definition super AMOLED display and the Motorola Droid Razr featuring a 4.3-inch qHD super AMOLED display are expected to be released this month. It's also been reported that LG Display is providing AMOLED displays to Nokia and start producing AMOLED in a Gen 4.5 plan.

There's been similarly significant progress in the development of the OLED TV market. For instance, AUO unveiled a 32-inch 3-millimeter wide full-HD AMOLED TV with metal oxide backplane at FPD International 2011. But only a prototype that shows OLED televisions are progressing towards commercialization.

It is also been reported that Samsung and LG Display are each gearing up to unveil 55-inch OLED televisions at CES 2012 in Las Vegas. LG is reportedly focusing their OLED effort on large screen sizes for TV. As reported in Nikkei Business Daily, LG plans to invest $2.8 billion to a 8.5-Gen OLED TV mass production facility. They are scheduled to come online in second half of 2014. According to this report, LG Display had planned to stop pilot production of 55-inch OLED TV panels and the second half of 2012 is still on track and LG expect to sell around 30,000 OLED TVs a month.

We've also seen some encouraging news coming out in the light OLED lighting area. This quarter we announced exciting new agreements with Pioneer Corporation and Panasonic Idemitsu OLED Lighting Company, both of which are developing OLED lighting products using our high-efficient, high-performance UniversalPHOLED technology materials.

We will receive running royalties on the sale of product sold under our license agreements with these companies. We also have separately agreed to sell our proprietary OLED materials to these companies for use and manufacturing license products. In addition, we extended our OLED material supply and service agreement with PPG. Under our new agreement with PPG, they will remain the exclusive manufacturer of our proprietary phosphorescent OLED materials. This assures us of a ready supply of high-quality materials to support our future growth.

There are indications at commercial developments in the lighting and the OLED lighting market maybe accelerating. Royal Philips Electronics has just announced plans to make OLED a mainstream lighting technology by the end of 2012. They plan to do it by producing thinner panels and driving pricing significantly lower.

Philips' latest OLED Lighting panel Lumiblade Plus is a fully phosphorescent panel that was developed by Konica Minolta, a Universal Display licensee. Meanwhile, Konica Minolta has announced that it has commercialized OLED lighting panels with the world's highest level luminance efficacy using all phosphorescent emitters. They're selling sample kits of what they are calling the Symfos light.

All these announcements point to an OLED market that is quickly growing. We continue to invest across a broader front of technologies that we will believe will both sustain our leadership position and encourage further market development. For large-format applications, we are improving the efficiency of our P2OLED solution base and dry printing technologies. These include organic vapor jet printing or OVJP, which is a pretty massive that uses their high-performance vacuum evaporation material. We continue to invest in flexible OLED technology development. And we are making progress of a single-layer encapsulation technology, which has application to flexible OLEDs and other organic electronic products.

We were recently awarded an SBIR contract by the Department of Energy, to demonstrate further gains in the performance of large area phosphorescent organic light emitting device lighting panels through enhanced thermal management techniques. Under the program, we will be use our energy efficient UniversalPHOLED technology materials to design and build large area white OLED lighting panels that generate far less heat than traditional OLEDs.

There have also been some developments and some legal proceedings relating to our patents. Regarding our U.S. patent interference with Fujifilm, we acquired Fujifilm's patent application involved in the interference. We then requested the adverse judgment to be entered against their application effectively entering, ending the interference. We think this is an appropriate business arrangement to end the interference proceeding.

Also late last week an old hearing was held before the European Patent Office on an opposition against one of our fundamental phosphorescent OLED patents. The opposition was joined by a number of European companies. The European Patent Office announced this decision at the hearing to maintain our patent with fundamental claims directed to OLEDs comprising phosphorescent organometallic iridium content. We expect that the official niche from the old hearing will be published in the near future and a written decision will follow up. We are extremely pleased with this result.

As you can see, we have had a number of positive events this last conference call, including favorable outcomes on the patent front, a long-term agreement with Samsung and a strong third quarter.

With that, I'll turn the call over to Sid, who will take you through 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 third quarter as well as sharing some insights from the quarter. After that we will open the call to take your questions.

Revenues for the third quarter totaled $21.8 million, a 208% increase over revenues of $7.1 million for the third quarter of 2010. This is by far the best quarterly revenue numbers in the company's history. Commercial revenue was $9.9 million for the quarter, an increase of 248% over the commercial revenues of $2.8 million for the third quarter of 2010.

Developmental revenue was $11.9 million for the quarter, a 182% increase over developmental revenue of $4.2 million for the third quarter of 2010. The growth in both commercial and developmental revenue for the quarter was driven primarily by higher chemical revenue, which accounted for $3.5 million and $7.5 million of the increases respectively.

Commercial revenue for the third quarter also benefited from a $3.6 million increase in royalty and license revenue, primarily from Samsung Mobile Display. Within commercial and developmental chemical revenues for the quarter are $2.9 million and $4.9 million respectively of revenue from host material sales. We believe that host material sales can enhance our phosphorescent emitter material sales business.

However, the host business is significantly more competitive than the phosphorescent emitter material sales business. Consequently, there is correspondingly more uncertainty regarding the long-term prospects for our host material business.

As you know, one of our more significant events during was our entry into a new OLED patent license and supplemental material purchase agreement with Samsung. These agreements run through 2017 and replace our 2005 agreement with Samsung in their entirely. Under the new license agreement Samsung is paying a fixed license fee, payable installments that increase each year of the agreement.

The installment amount were determined through negotiation based on a number of factors, including estimates of Samsung's OLED business growth as a percentage of published OLED market forecast, the use of red and green phosphorescent materials in Samsung products and appropriate royalty rates relating to Samsung's factors under the licensed patents. For the quarter we received $3.2 million in license fees from Samsung under the new license agreement.

Under the new supplemental agreement, Samsung agreed to purchase a minimum dollar amount of phosphorescent materials for use and manufacture of licensed products, subject to our ability to supply sufficient materials to meet their requirement. The minimum purchase amount were determined through negotiations based on a number of factors including, estimates of Samsung's OLED business growth as a percentage of published OLED market forecast and Samsung projected minimum usage of red and green phosphorescent emitter materials over the term of the agreement.

As a result of our new arrangement with Samsung, we are expectation phosphorescent emitter materials sales to roughly scale with the growth of Samsung's OLED business. This should enable us to participate directly in OLED market growth over the next several years.

Turning back to the numbers, total operating expenses for the quarter were $15.8 million, up 45% from operating expense of $10.9 million for the third quarter of 2010. About $2.4 million or roughly half of the total increase is in the cost of material. This reflects in increase in the quantity of materials that we produced and shipped during the quarter.

Research and development expenses for the third quarter were $6.1 million, up marginally compared to R&D expenses of $5.8 million for the same period of 2010. R&D employee cost increased by $600,000 compared to the same quarter of last year, due mainly to the hiring of the new employees, increased salaries and stock compensation for certain executives officers. This increased result set by a $521,000 decrease in development cost under our PPG agreement. And a $370,000 decreases in amortization, as some acquired technology has been fully amortized.

Patent cost rose to $1.9 million for the quarter compared to patent cost of $1.2 million for the same quarter in 2010. This reflects our defense of certain ongoing and new patent challenges as well as the timing of maintenance cost associated with a number of issued patents and patent applications. Patent cost for the quarter were consistence with our earlier comment that patent cost will likely be sustained or increased from historical quarterly levels, due to the ongoing defense of our intellectual property.

Selling, general and administrative expenses for the quarter were $5 million, up from SG&A expenses of $3.5 million for the same quarter of 2010. The increase in these costs primarily reflects our increased commercial activities, including investments to expand our presence in Southeast Asia, personnel cost increased by roughly $320,000 mainly due to increased salaries and stock compensation for certain executive offices as well as roughly a $140,000 that we spent to support the growth of our Southeast Asian offices.

In addition, we incurred approximately $310,000 in non-patent legal fees due to enlarge part to our license negotiations and approximately $270,000 in increased international consulting fees. Besides from the cost of materials, which will naturally vary with a quantity of material flow, the potential increased patent and legal expenses, we do not expect that we will need to significantly increase operating expenses to support the growth over the next year.

For the quarter we reported operating income of $5.9 million, a significant change from the $3.9 million operating loss for the same quarter in 2010, that's an almost $10 million improvement over the past 12 months. The change in fair value of our outstanding stock purchase warrants resulted in a $240,000 non-cash gain for the quarter compared to a $3.4 million non-cash loss for the nine-month period. In August 2011, all $214,000 remaining stock warrants were exercised. We won't be seeing any further accounting for these warrants in our financial statement.

In 2011 and 2010, the resulting tax rate for royalties and licensee fees paid by Samsung was 16.5%. For the quarter, foreign incomes taxes were $566,000 that were withheld in connection with these payments. We anticipate the amount of withholding taxes to increase as license fees received from Samsung increase in the future.

For the quarter, we've reported net income of $6 million or $0.12 per diluted share compared to a net loss of $7.2 million or $0.19 per diluted share for the same quarter of 2010. The loss in the third of 2010 included a previously mentioned $3.4 million non-cash charge associated with the stock warrant liability.

For the quarter, cash provided by operating activities was approximately $6 million compared to cash used in operating activities of over $2 million for the same period in 2010. The year-over-year change was primarily attributable to a substantial improvement in our net loss excluding non-cash items.

Quickly looking at our nine months results. For the first three quarters of the year revenues were $42.6 million compared to revenues of $19.7 million for the same period in 2010. Commercial revenue for the first nine months of 2011 was $19.9 million compared to $6.6 million for the same period in 2010. Developmental revenue for the first nine months was $22.7 million compared to $13.1 million for the same period in 2010.

Operating income for the first three quarters was $2.1 million compared to an operating loss of $10 million for the same period in 2010. Our net loss was $2.6 million or $0.06 per diluted share for the first nine months of 2011 compared to a net loss of $14.6 million or $0.39 per diluted share for the same period in 2010. Results for the first nine months of this year and last year included $4.2 million and $5.2 million respectively of non-cash losses on stock warrant liability.

Our balance sheet remained strong with cash, cash equivalents and short-term investments of approximately $338 million as of September 30. Much of this represents the proceeds from our $250 million equity offering earlier this year. In addition, with the cash we are now generating from operations, as Steve mentioned, we are in the best financial position of the company's history.

Industry growth and now that our new arrangement with Samsung is in place, we have a little more visibility until our potential future financial performance. I don't want to overstate this, as the OLED industry is still at a stage, where many variables can have a material effect on the growth of the industry and in our future financial performance.

With that very important qualification and in an effort to increase our transparency, we are going to begin providing limited financial guidance. We think that revenues for the fourth quarter of 2011 will be below revenues for the third quarter due to seasonal factors. We see revenues for the full year of 2011 to be in the range of $58 million to $62 million. With the caveats I previously mentioned, we also see our revenue range for 2012 to be between $90 million and $110 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Bright with Avondale Partners.

John Bright - Avondale Partners

Quite a bit of a debate going on, on the patent topic, particularly in Europe at least most recently. Can you talk to us about anything that took place in that old hearing that you know about that would give people doubt? There was some discussion around the iridium term. Maybe my question would be, are there any existing competitive phosphorescent in OLED products that do not use iridium? Why don't you start with that?

Steve Abramson

The answer to that question, iridium is the only phosphorescent material that's been commercialized, as of now. I mean we as well as other people work on non-iridium materials, but none of them have reached commercial stage. I'll add a little bit more color to that. What happened in the European patent decision was that we decided to cancel the claims relating to osmium, because they have a pending continuation application. So we are just going to include them in that. They are very broader claims relating to iridium organometallic.

John Bright - Avondale Partners

The second question that I have is going to be around guidance for calendar '12. $92 million, a $110 million, any characterization that you would give us on what the makeup of that guidance might look like or that revenue might look like?

Sid Rosenblatt

It's difficult to really break it down piece by piece. As we have said, this is the first time we're doing it. We do have some knowledge of what we are going to receive in payments from Samsung, but none of those terms have been disclosed. And we are looking at the year and we think that these numbers are reasonable numbers for next year.

As we move through the next few quarters and we are able to have more comfort in exactly what it is and the components are, we maybe able to give you a little more color. But we think that this is really as far as we can go at this time.

John Bright - Avondale Partners

And one clarification, that doesn't include any new contracts that might be signed, is that correct?

Steve Abramson

That is based upon what we think 2012 will look like.

Operator

We'll take our next question from Darice Liu with Brigantine Advisors.

Darice Liu - Brigantine Advisors

Just a follow-up on the prior question. Since the Samsung agreement is a license agreement versus royalty, how should we model the revenues? Will it be recognized on a quarterly basis with the volumes, or are we just talking about one (inaudible)?

Sid Rosenblatt

Can you just speak a little louder?

Darice Liu - Brigantine Advisors

I wanted a follow-up on the prior question regarding the Samsung revenues. The agreement that you signed is a license agreement versus a royalty agreement? So I was just wondering how we should model the revenues. Will it be recognized on a quarterly basis in line with the volumes or are we talking about lump sums on certain Qs?

Sid Rosenblatt

We the agreement has a annual fixed payment of which we get paid twice a year. And at this time, it will be whatever that payment is for the year and since we have payments in the third quarter and the fourth quarter, it is what we received in the third quarter and the fourth quarter of this year. For next year, it maybe a little lumpy, because we will account for it when we receive the payments, which are in second quarter and fourth quarter, unless it changes. But it will be straight-lined for the amount received in any given year.

Darice Liu - Brigantine Advisors

And just a side question. Have you received any other attractive revenues?

Sid Rosenblatt

What we did is we signed a license agreement that goes from beginning of 2011 through 2012. And through the negotiations process we determined what the total amount would be, which would include everything that we believe we would have been owned from the past. And we were actually paid some royalties in the first part of the year based up on the old agreement. So when we signed the fixed payment amount, we took everything into consideration.

Darice Liu - Brigantine Advisors

In the past, you talked about increasing your market organically and non-organically, such as maybe extending into other layers in the OLED stack such as the HIL or the ETL. Can you provide an update on that?

Steve Abramson

Well as you saw from this quarter, we start to work on for example, host materials. So that's the first step in looking outside the emitter space.

Darice Liu - Brigantine Advisors

And the composition in the host material, it's very similar to the ETL and the HIL though, correct?

Steve Abramson

We wouldn't disclose that. I mean, no. That'd be confidential.

Darice Liu - Brigantine Advisors

But you are looking into expanding outside?

Steve Abramson

We are looking to expand our research and development and material business outside of emitters and to other aspects of the stack.

Operator

Our next questions come from Hendi Susanto with Gabelli & Company.

Hendi Susanto - Gabelli & Company

My first question is, do you have green emitter materials in your commercial material sales in Q3? And could you also indicate whether gross margin of the green emitter material are similar to the red ones?

Sid Rosenblatt

We do have green emitter materials in our commercial revenues for the quarter. We don't specifically break this down. Our emitter material margins are pretty much in line with each other.

Hendi Susanto - Gabelli & Company

And then the new Sony PlayStation Vita is using AMOLED display. Would you be able to tell whether that display is based on phosphorescence AMOLED display technology similar to Samsung's?

Steve Abramson

We don't know yet. Has that thing released?

Sid Rosenblatt

Hendi, has that product been released?

Hendi Susanto - Gabelli & Company

I don't think so. But I'm not 100% sure.

Steve Abramson

After it's release, we would like to be able to talk about it.

Hendi Susanto - Gabelli & Company

I think based on my calculations, it seems that the increase in chemical revenue in development is like way higher than the commercial one. Could you give some color on that?

Sid Rosenblatt

Well, as we said in there, there is about $4.9 million in host in developmental revenue. So the big increase is on the host side.

Hendi Susanto - Gabelli & Company

It is my simple understanding of the latest update on your European hearing. So the Court is requiring you to remove any reference to other phosphorescent materials and then retain the iridium reference. And my understanding is the only material is osmium. And I just want to verify whether besides osmium there are other materials?

Steve Abramson

Hendi, there are other materials. There is platinum, for example, osmium, iridium. And we have various patents in the U.S. and around the world directed to those materials as well. What happened in the European Patent Office was we removed the osmium claims and we're going to re-file them in a pending application. We also have our first phosphorescent patent, but it was not the subject of any of these proceedings. So our basic phosphorescent patent which will cover, however you get phosphorescence, but not subject to this European proceeding.

Operator

Our next question comes from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti - Needham & Company

I was hoping to maybe get my arms around the revenue stream from Samsung in the quarter a little better. Samsung was approximately $9 million of revenues. Is that correct?

Sid Rosenblatt

I don't think we disclose customer A, B and C. I don't think we specifically state that.

Jim Ricchiuti - Needham & Company

In terms of the license and royalty revenues that you received, Sid, from Samsung in the quarter, approximately $3.2 million of license fees came under the agreement that began at the end of August. Is that correct?

Sid Rosenblatt

That's correct.

Jim Ricchiuti - Needham & Company

And then it was another portion of that that earlier in the quarter reflected the previous agreement?

Sid Rosenblatt

In the prior quarter.

Jim Ricchiuti - Needham & Company

And is there also a development chemical component in there as well from Samsung?

Sid Rosenblatt

We do so, Samsung developmental chemical, that's correct.

Jim Ricchiuti - Needham & Company

Just switching gears for a second, you guys generated an operating margin of, I guess, around 27% in the quarter. How should we think about the operating leverage going forward with the revenue range that you provided? It doesn't sound like you're assuming much of the increase in operating expenses. But maybe there are some line items within operating expense that we need to be mindful of.

Sid Rosenblatt

Well, as we said, we do have patent cost. We'll follow whatever it is we need to stand to ensure that our patents are protected. From the expense side, we don't see a lot of change in how we need to run our business from here. We will hire a few people. We're increasing our presence in Asia.

But as I said, I don't see the expense side having to go up significantly. Obviously as our materials business grows, we will obviously have more costs associated with them. But the margins on the material we think will still be very significant as they have been in the past.

And so I don't really see a lot of areas that are going to go up. I mean the operating margin for this quarter, I haven't really looked at it that closely. But if we continue at this ramp, if we continue at this revenue rate and grow at this rate, I think you can figure out where we'll be.

Operator

Our next question comes from Jed Dorsheimer with Canaccord.

Jed Dorsheimer - Canaccord

Congratulations on the results. It's been a long time coming. It's nice to see it finally pay off here. How did you do it in the host side? I mean the host materials, are they covered under your patents? They don't seem to be. So you've actually done a great job of building that business to a greater portion than your emitters. So I am just a little confused to how that sort of came out of left field here.

Steve Abramson

Well, there are different materials and different patents on that level. And what we found was important to work on some the host materials in order to be able to fill our emitters, because you need a emitter host combination.

Jed Dorsheimer - Canaccord

So the ramp in the host materials, are those going to the same company that's taking most of the emitter materials as well?

Steve Abramson

They are going to our customer.

Jed Dorsheimer - Canaccord

Is there concentration or are some of the companies that you're working with more of a development capacity, are they trying to increase their efficiency by using some of your host materials? Or is it, as you mentioned, the combination of the built first host materials that you're seeing the benefit from?

Steve Abramson

Well, it's a little bit of both. We have those host materials out there in the market. There are other host materials that other people have as well, because it's a more competitive business. On the other, you would sell more host materials and emitter mirror materials, because you just dumped the emitters into the host.

Jed Dorsheimer - Canaccord

Do you expect it to be this level going forward in terms of the split? Do you expect the host to grow at a faster rate than the doped emitter materials?

Steve Abramson

It's really related to how fast the host business is going to grow.

Jed Dorsheimer - Canaccord

And when you've done an analysis in party your minimum material sales with your largest customer here, as you've done an analysis of the material sales or the doped materials, what percentage of the total markets do you see the host in doped emitters?

Steve Abramson

I am sorry, Jed, could you repeat that?

Jed Dorsheimer - Canaccord

So we look at the stack. We got basically seven different layers. The HTL, the ETL, the host in doped materials. I am curious as we look at that sort of revenue build for the materials market, what percentage do you see is your opportunity between the host and doped materials that you're selling?

Steve Abramson

The whole organic materials piece of an OLED display is still a small portion of the whole OLED display.

Jed Dorsheimer - Canaccord

But if we call the market, say, $300 million or $400 million, whatever the number is, $0.5 billion, do you see the host and doped materials being 50% of that market, or do you see it sort of in even breakdown between the HTL, HIL the host, the doped and the ETL?

Steve Abramson

We don't know what they are pricing on those other materials. So it's really tough to answer your question.

Jed Dorsheimer - Canaccord

In terms of the lawsuit, just don't want to beat a dead horse here, but do want a little bit of additional color looking forward to the see in the summary coming out here shortly. But it looks as if, what, 18 or 20 claims out of the 28 were fined in terms of scope focuses on the iridium. It looks like you've got a new addendum on osmium. Is there anyone else that you know of in the market that's selling either a platinum or osmium doped material? Is this time or a host material using that composition?

Steve Abramson

The host doesn't play into this, because these are really emitter materials. And nobody is selling any of those materials commercially as far as we know.

Jed Dorsheimer - Canaccord

Is there anyone selling it from a development perspective that you know of?

Steve Abramson

I couldn't speak to that. I really don't.

Jed Dorsheimer - Canaccord

We have limited detail to go off of in terms of the Samsung, what's been disclosed in-terms of the 8-K with much of it blacked out. But what it looks like, and tell me if I'm reading this wrong, that Samsung is unable to purchase materials or work with anyone that is selling materials that violates your IP.

So I guess one of my questions is if based on the refinement of scope of these claims, if somebody did have a platinum doped material or an osmium doped material, based on the structure of that agreement with your largest customer, would they be able to sell to Samsung without Samsung having to pay you a royalty or infringe on your IP?

Steve Abramson

I can't really comment on that question. What I will say is that we have broad phosphorescence patents that have been issued all over the world. This patent having in Europe was the organometallic patent and it relates directly to iridium, and we're taking the fundamental patent claims relating to iridium, we're taking the osmium piece of it and we're going to refile it as far as the continuation claim.

We have the similar organometalic patents all over the world. They cover not only iridium, but platinum and osmium as well. So we continue to have a matrix of patents covering this entire space, and we feel very good about the decision that was reached in European Patent Office.

Jed Dorsheimer - Canaccord

You have got a great patent portfolio. But I think it would be helpful at some point in time if you might be able to clarify just given that Samsung looks like they make up more than 90% of your sales to be able to without a doubt state that the refinement would not allow anyone to sell materials by bypassing you just given your business model. It might be helpful.

And then just as a follow-up, Sid, gross margins on the materials, it looks like as you transition from a development to sort of running those cost through the P&L about 75% or 76%, is that roughly the range on a go-forward basis that we should look at the material sales versus the much higher royalty sales with 97%?

Steve Abramson

It is because of the host businesses, the lower margin business than the emitter business.

Operator

Our next question comes from (James Mesoduf with Cowen & Company).

Unidentified Analyst

I understand third quarter was fantastic. But what is it that's now injecting seasonality into your sales team?

Sid Rosenblatt

Historically, the fourth quarter chemical sales has always a been a little lower than the prior quarters. And I think it is that the customers are buying materials as they ramp up to get product out in the holiday season. And then when it gets to the December timeframe, things sort of slow down. So historically, that's what has happened which is what we think will happen again.

Unidentified Analyst

What factors could cause you to be towards the lower and/or the higher end of your guidance for 2012?

Sid Rosenblatt

It just depends on our customers, whether they ramp up during this period and buying more materials and depending whether they continue to build product for the first quarter of next year as opposed to the seasonal piece of it. The only reason we would do that, as I said, for the past couple of years even though the quarters have been significantly lower, the commercial chemical sales have always been and developmental chemical sales in the fourth quarter has historically been lower than the prior quarters.

Unidentified Analyst

Right, but the Samsung revenue stream is known. We don't know it, but you know it, right?

Sid Rosenblatt

The Samsung license piece is known, that is correct. The material purchases are not known.

Unidentified Analyst

Is there a significant difference between the gross margins that you earned on development chemicals versus commercial chemicals?

Sid Rosenblatt

There is a different pricing structure between developmental chemicals and commercial chemicals, but we do have pretty high margins on both.

Unidentified Analyst

And the big difference is whether it's of the host or an emitter, right?

Sid Rosenblatt

There is. The margin on the host materials and the margin on the emitter business are different. Host materials are much more competitive and it's a much more higher volume business.

Unidentified Analyst

What is the status of the contract with AUO?

Sid Rosenblatt

With AUO, we have an agreement that we have renewed for six months at the end of June through December 31. And we are talking to all of our customers now.

Operator

Our next question comes from Srini Sundararajan with Oppenheimer.

Srini Sundararajan - Oppenheimer

My first question is specifically on China. It's known that China is not the best place for enclosing patents. So as their OLED capacity ramps, how do you propose to make sure that you get your due revenues?

Sid Rosenblatt

That is a very good question and we're studying it closely. We do not have an answer yet at this time.

Srini Sundararajan - Oppenheimer

Would you, going forward in the future, like perhaps give us some indications of the area of OLED that has been deposited or used? Maybe you don't need to break it out in terms of your sales, but perhaps in terms of overall OLED area that's being outputted. Would you be able to do that?

Sid Rosenblatt

That's something that we would not really have the data on. Guys like DisplaySearch and some of the other analyst firms that follow the industry into square inches then go through product-by-product is where that information would be. We really do so materials by kilograms of our customers when they order it, and we don't have nor should we have the information of what it goes into.

Srini Sundararajan - Oppenheimer

My other question is if you look at the ramp of OLED TVs, that's going to be dependent on coming up with a cheaper process, because at present it looks like it's going to be expensive. So would that cause you any problems in your post-2012 outlook?

Steve Abramson

I'm not sure I actually agree with your hypothesis. It's really possible that the existing technologies that people are working on once they get them to high volumes could be cost effective in making OLEDs.

Srini Sundararajan - Oppenheimer

Do you use any rare earths like lanthanides in your chemicals?

Steve Abramson

No.

Srini Sundararajan - Oppenheimer

And lastly, I think you might have want to clarify that when people talk about osmium and other elements, basically these would be at the center of organometallic complexes and even those complexes are themselves patentable. So just the name osmium doesn't mean anything. If you have a patent on the particular chemical form that some of the osmium item, for example, I think that is something that you might what to clarify and let the analysts know really?

Steve Abramson

That is a good point. Thank you very much.

Operator

Our next question comes from Andrew Abrams with Avian Securities.

Andrew Abrams - Avian Securities

The host material, are we talking about customer A in that regard, or we talking about some of the other customer base that you might have?

Steve Abramson

We're selling them broadly.

Sid Rosenblatt

Yes, we're selling it to a number of different companies.

Andrew Abrams - Avian Securities

And the breakdown of 2012, I am thrilled that you're giving it to us and I am going to press you further. Can you give us an idea of commercial and developmental? Can you kind of lead us in that kind of split?

Sid Rosenblatt

As I said, we've looked at our internal projections for the year and we're comfortable with the range. The one thing over the years that we have learned is what we think falls in one category falls into different category. I think over time, if we can, we will give you more information, but I can't give you anymore than I've said at this time.

Andrew Abrams - Avian Securities

And lastly on the green material, you said that it's now in the commercial numbers. If it's still a major percentage of the developmental numbers or have that changed?

Sid Rosenblatt

It is still in developmental numbers. It's a big piece of developmental chemical number was the host material. Of the reminder we talk about being $4.9 million out of the $10 million, the reminder is red and green materials.

Andrew Abrams - Avian Securities

Concerning the green material, maybe you could just talk a little bit about your A customer. Are they now using that material on a commercial basis or are they still in evaluation?

Sid Rosenblatt

If it's in the commercial category, it means it's going into a product.

Operator

Our last question comes from Jagadish Iyer with Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Are they any other technologies that you think are very compelling to deposit OLED films other than evaporation please? Recently DuPont and the backdrop of it announced the thin film deposition technology. So I just would like to find out given that your relationship with DuPont, are you going to be benefited in the event that that technology comes to fruition?

Steve Abramson

Well, to answer you first question, backing deposition is the way our OLEDs are made today. Our people have been working on inkjet printing or other types of solution processing technologies of which DuPont has one, and we are working on our material set to ensure that if any of those manufacturing technologies are successful, our materials will apply to them.

A third manufacturing technology that we have been working on is still in the development stage. It's something called organic vapor jet printing, which is a printing technology without a solvent, basically using a carrier gas.

DuPont has a license agreement from us to actually manufacture inkjet printing displays. We know that they have been working on a manufacturing technology. We don't know anything more than what was issued in the press release. But if that technology successful as expected, our materials will apply to it.

Jagadish Iyer - Piper Jaffray

And the second question I have a follow-up is on the blue material. I know it's a little bit far out, but how should we think about your introduction of blue material? Is that a 2012 event? Would it be impacting your revenues in '012, or is it probably an '013 event at this time?

Steve Abramson

We're still working on the development for deep blue for displays. Now we're selling light blue for lighting now. We are selling a phosphorescence just on which would be red, green and light blue to create a warm white. Before displays and deep blue, we really can't predict when that will come. The development will be completed and it will be ready to go commercial.

Operator

We'll take our next question from Darice Liu with Brigantine Advisors.

Darice Liu - Brigantine Advisors

I just had a follow-up question regarding the materials, actually this solution processible material. Are you guys making any progress with that, or is there any development agreements using those materials yet?

Steve Abramson

Well, we are making progress with it, and we are working with a number of customers on it.

Darice Liu - Brigantine Advisors

Is there any timeline to when that will be commercialized?

Steve Abramson

I don't think so, because it's not just our materials, but it also relates to the manufacturing equipment as well. So there are a number of moving parts in terms of when and whether that technology will ever be commercial.

Darice Liu - Brigantine Advisors

Are you working with the display guys, relating guys and their manufacturing guys?

Steve Abramson

We work with a number of people in the industry.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Excluding (technical difficulty) your emitter sales didn't grow much last quarter and you expect chemicals sales to drop this quarter. At the same time, Samsung has been ramping new fab substantially in second half this year. Any reason why your emitter business doesn't grow proportionally?

Sid Rosenblatt

Our emitter business for the quarter has grown. And Samsung, when they purchased our emitter, they are being much more efficient in their manufacturing process. We understand that and we have said that as they scale up and put new equipment in, it is much more efficient. But our emitter business has grown.

Operator

Our next question comes from Srini Sundararajan with Oppenheimer.

Srini Sundararajan - Oppenheimer

Sorry, this is not a question, just a request that from the next conference call, if you could limit the analyst to one question and one follow-up, then probably it might go a lot smoother without anybody particularly dominating it, just a request.

Joe Hassett

We appreciate that. And we did ask them to do. But we will make sure that we follow that as we do it next time. We appreciate that.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back over to Mr. Abramson for any additional or closing remarks.

Steve Abramson

We'd like to thank everybody for their support and have good evening. Thank you very much.

Operator

That concludes today's conference. Thank you for your participation.

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