Sid Rosenblatt – Executive Vice President and CFO
Mahavir Sanghvi – UBS
Universal Display Corp. (PANL) UBS Global Technology & Services Conference Call November 16, 2011 2:00 PM ET
Hello, everyone. Thanks for joining us this afternoon. My name is Mahavir Sanghvi. I’m an alternative energy analyst here with Steven Chin at UBS. This afternoon we have the pleasure of hosting Universal Display. So the CFO, Sid Rosenblatt, he is going to speak for about 25 minutes and talk about Universal Display. And then, we’ll have a breakout session in one level below in the Julliard room.
So, with that, floor is open.
Thank you very much and thank you for joining us today. As said, I’m Sid Rosenblatt, CFO, Executive Vice President been with the company since we started it. We are an organic light emitting diode technology development company. We actually manufacture materials and license our technology. I would appreciate it if you would all read our 10-Qs and our 10-Ks. We pay our lawyers a lot of money to write this and somebody should read it.
So, as I said, we are the intellectual property holder in what are called phosphorescent OLED technology, organic light emitting diode technology or thin film materials that when you put them on a display, light up and give you the full color display that you will see, it is in number of, it’s all of the Samsung Galaxy 1 and 2 products, it’s in a number of other products and there have been demonstrations of TV applications and you’ll probably see more and more.
The actual layer that lights up, that emits the light in the device is one, one the thickness of the hair so if you look at the picture on the right that is an actual picture of the 15-inch OLED TV that was made by LG Display and the TV itself is a quarter of an inch thick.
We have two parts of our business. We have basic patents in phosphorus and OLED technology. In addition to that, we make the phosphorescent emitters that go into the device and I’ll show a schematic of what an OLED is. But we have two main parts of our business, which is we have basic patents in the architecture and then we have patents on the specific materials that go into devices. And you will hear more and more about technology over the next few years and if you’ve followed us you’ve heard us for a number of years.
It has taken longer to mature than I think any of us thought but it has applications in multiple different high growth markets which include displays, tablets, TVs and then for general illumination, and we have our patents issued worldwide and for some of you who know us I’ll actually talk about some of the patent issues that have come up recently, and I’ll talk about our long-term road map where we think this technology will go.
The key to our technology is what we call phosphorescent emitters and essentially the way that an OLED screen works is there are no light bulbs, is very different than the liquid crystal display. If you look at your LCD or your laptop that you guys have in front of you, it has a backlight, it has a bright white light and then the light from your bright white light then shines through the transistors, reflects off the layers of liquid crystal and then you see all the colors of the rainbow.
An OLED is very different, an OLED is layers of film and then you put red, green and blue dots, red, green and blue materials, and those materials themselves light up and then the way that they light up is you essentially put current into the molecule, the molecule goes into an excited state, it creates energy and relaxes that energy that it creates comes out in the form of heat or light.
The conventional OLED technology that’s been out there from Kodak Corporation for a number of years, 25% of the energy is converted into usable light, 75% is wasted as heat from the physics of the molecule. What our scientists were able to do is figure out a process that we call phosphorescence, which takes that other 75% and converts it into usable light. We therefore get what’s called 100% internal quantum efficiency or in English, we use 75% less power to get the same amount of light out of the molecule.
So when you compare us to a basic fluorescent OLED, we have a 4:1 power advantage. But LCD technology, LED back with LCD technology has gotten much more power efficient. But we still just by using our phosphorescent emitters using one of our colors, just using the red color which was all that was in products for a while, we have a 15% power advantage.
When you move to having green it will go to 30% and when you use all phosphorescent materials, we believe that you’ll get at least a 50% power advantage over conventional LCD technology which for portable devices is very important since we all complain about the battery on our handheld devices dying. This gives you an extended battery life because 80% to 90% of your power of your handheld device is used to drive your display and as you’re using your display more and more your batteries are dying faster.
The static of an OLED technology are the same whether it’s a fluorescent or a phosphorescent. It gives you a very thin form factor. As I said, the layer film that lights up is one, one thousand the thickness of a hair.
These molecules actually emit light in all directions. So when they’re excited they emit light in 360 degrees, so when you turn an OLED screen off-axis, if you look at it from the side or if you have or from the bottoms up or from the top down you still can see the entire screen. There is no distortion at all when you turn it side-to-side or up and down.
Because these are self-emissive materials you have a true black background, so you get a million one contrast ratio. So the colors actually look like they’re jumping off the screen. And they inherently switch on and off three times faster than video rates, so you don’t have to do all the tricks that you had to do and the cost associated with LCDs in order to make them have full motion video without seeing hosting as you still see with probably lower end LCD technology.
So when you compare it, when you get to apples-to-apples in terms of capacity, OLED should cost about 20% less to manufacture than a comparable LCD. Since there is no backlight, there is no color filters, there is no liquid crystals and the reduced cost in the IC drivers because it’s less complicated circuitry.
Today as I said, it is in a number of devices, it’s in a number of the Samsung ones, it’s been in Sony products and LG products. This year, I’m sorry in 2012, we expected to see in some of the tablets and there has been announcements by LG and others to say that by the end of 2012 they will start limited production of TV applications.
And then as you move further down the, in time as the technology gets to be more robust and cost starts to drive it and we start driving cost down particularly in the manufacturing side, you can then start moving into lighting applications and OLEDs can do things that other display technologies cannot in terms of flexible displays, unbreakable displays, confirmable displays, transparent displays and I’ll talk a lot about each of them.
These are just a number of the products. Samsung in 2011 announced $5 billion of CapEx. I’ve read recently that they expect to spend an additional $5 to $7 billion in 2012 on CapEx and that they stated that they’re going to cut your LCD CapEx and continue to invest in OLED technology and we’re reading the same about LG Chem and AU Optronics in addition to some others.
This is display searches market forecast in the second quarter. As you can see the market really does grow in 2011 from 2010 and then it continue through 2014, ‘15. Once you get out past these three years, display search literally just takes a 15% increase. For 2011, ‘12 and ‘13 it’s based upon known capacity that’s going into the ground.
I can tell you that I’ve used display searches chart the same chart for over the last five years and this chart has looked the same for the last five years the only thing that’s different is the years have slipped. This is the first time in this quarter that when display search in Q1, Q2 and now the Q3 numbers that are pulling the numbers in versus pushing them out. So the market is here and the market is actually growing faster than they’ve estimated to be during this year.
This is actually a simple diagram of what an OLED is, it’s essentially a piece of glass or plastic or metal foil, you put seven to nine layers of film, each layer of film is about 300 to 400 angstroms thick and essentially it is, as I said, one, one thousand the thickness of a hair, you put current in the transistors and it lights up. It’s a very simple elegant device.
And the key that our materials business and our IP is the fact that we are driving power down and for mobile devices, I can’t emphasize enough how all of us and how all the manufacturers are trying to drive the battery life, make it longer by driving the power utilization down.
This is maybe difficult to see, but what I like you to see and this is the lifetime of the materials every 10,000 hours is six hours a day for four years. About five or six years ago these numbers were 10,000 hours in red materials and green materials, and that was of 50% lifetime.
As you can see we’ve got almost 50,000 hours of lifetime with one of our red materials down to 95%, essentially no degradation that’s 20 years of about being able to see any distinguishment in the color being degraded over time.
These are emissive materials, it’s very similar to our old cathode Ray2 over time our old fat TV sets just weren’t quite as bright as they were. It’s not that they quit working but they didn’t look quite as good, it’s because the phosphorus which were different were tired, they go into this excited state and relax 180 times a second over time they degrade. We have materials that are in the 100s and 100s of 1000s of hours. For red and green materials we have met all the specification for all of our customers that they have given us for products.
And we do work with a number of other companies. We were initially formed by funding research at Princeton University and our founder, Sherwin Seligsohn and he also founded a public company called IDCC, which is a technology licensing company in the cellular space, read about work that was being done at Princeton in 1994. We formed the company and funded the research at Princeton. We continued to fund research at Princeton at Michigan at USC and the all of the intellectual properties developed at Princeton and USC in the OLED field, we get exclusive rights to the IP.
In addition, we work with a number of universities around the world in Japan and Korea, in Taiwan because in those areas we do fund the research and we get the IP, but more importantly the professors in Asia know have their pulse on the business and we are able to get very good information from the professors that we work with in these different countries. As opposed to here where professors -- our professor they’d like to start companies and make money, but they really are not, they really don’t have the ear of the business leaders as they do in Asia.
And we work with a number of other material companies, if you see SFC and Idemitsu Kosan, LG they actually make some of the other materials in the stack. So as I said, there is about seven to nine layers depending on your architecture they make it and they have some of the companies that make some of the materials and we actually work with them to make our phosphorescent emitters even more robust.
On the intellectual property side, we’ve got 642 patents issued worldwide and another 600 and some that are pending. In Japan we’ve got 35 issued patents. In Europe we’ve got 33 issued patents. There have been a number of patent rulings in the past year that have come up and if you look at any intellectual property licensing company whether its from Qualcomm, from IDCC or Rambus or any of those there are always issues in terms of people challenging your patents because to be honest it’s cheaper to spend some money on some lawyers to try to challenge them and see if you can then knock the patents out versus paying license fee.
And we believe that our patents are very strong. We recently had a decision in Europe that upheld our organometallic which is the same patent that we have issued around the world. There’s been a lot of talk about the fact that we lost some of our claims in that to be perfectly ours from our standpoint. The claims that we lost were claims that were outside the OLED world and this is the same basic phosphorous and patent has been issued in Korea and the U.S.
And let me say that in the U.S. where the bulk of our patents are issued and pending, we have no oppositions and no claims against any of our U.S. patents. And probably have a longer conversation about patents in the breakout session or the one-on-ones, but I’d be happy to go through as much as I can at that time.
We do work on other technologies. It’s not just phosphorescence. We have basic patents in flexible displays on plastic, on some encapsulation technology and encapsulation technology is very important for a number of reasons.
One, right now OLEDs have two pieces of glass, the top and bottom piece of glass. If you can eliminate one of the pieces of glass, you can eliminate costs by putting a single layer or multiple layer encapsulation over it and when you get to a flexible or bendable or unbreakable display you want to eliminate glass completely, the encapsulation technology becomes key because oxygen and moisture close OLEDs to degree. So you need barriers and encapsulation that keep oxygen and moisture out. So, these are some of the very key areas that we have been function -- working on and have got very good results in addition to transporters and other materials that are in the stack.
We’ve got a signed commercial license agreement with Samsung we announced it in August a seven year agreement with Samsung that has license fee that they pay us in increasing amounts through 2017. In addition, they’ve agreed to buy our red and green phosphorescent emitters and they have minimum material commitments to us through 2017, all of which increase each year as the market grows these were negotiated between the parties and in addition to that Samsung has agreed not to try to invalidate our patents.
So, we’re when we looked at the total package, we were very happy with this result. We’ve got agreements in place that are short-term agreements and we’re negotiating long-term agreements with LG with AUO, with Chem all of them we believe will be in the market place over the next 12 months.
We’ve signed licensed agreements recently on the lighting side with Showa Denko, Konica, Minolta, Panasonic Idemitsu OLED Lighting Company and we’re working with NEC Lighting. So, there is actually been a lot of activity on the lighting side, which is in its earlier stage and I think it is a number of years before you will really see any meaningful product coming out on the lighting side but you will see on the display side.
Just to give a quick look at the lighting business, its projected to be $5 or $6 billion over starting in next year whether or not these projections are either too aggressive or too -- not aggressive enough, I think it will probably take to next 12 to 18 months to 24 months before any of us realize what these are, I don’t know whether this is one of those charts or slide one way or the other.
But you are seeing a lot of activity because this is actually a very simple device you’re seeing it. I think it’s different in the LED business because manufacturers in the LED business they ended up a patent they’re going to the luminary business to get into the marketplace and it was really not a lot of niche markets.
With OLED lightning, A, it’s inexpensive to build the facility. This is just a simple pixel and you can make transparent devices, you can make conformable light sources, you can have under cabinet and in-cabinet light sources because these give off very little heat. So we think there maybe some niche markets as folks can get into over the next few years, which then will fuel the much larger business which eventually will be competition for basic incandescent light bulbs.
And we’ve gotten pretty good results. We’ve got 30,000 hours of lifetime to 70% brightness, which it’s 12 years, six hours a day and it could be on different substrates. So we do have, I think lifetimes that are good enough for initial market entry by our customers and this is the rapidly emerging flexible display market.
Samsung has announced that they are putting a flexible display line in their facility and going to start shipping product from that next year. I believe that really will be an unbreakable not a truly bendable flexible one and maybe conformable but isn’t something that will actually roll up or bend, but it will be light weight, unbreakable and if you can do that you can then reduce the overall cost of all the products.
We’ve delivered some of this, this is actually a full-color 6-inch-diagonal display on stainless-steel substrate. LG made the back plain. We did the OLED piece and L3 Communications made this which we’ve delivered ten to the U.S. Government. This is about a pound and a half device that can go on the soldier’s wrist which replaces a 25 pound ruggedized laptop.
So full-color display just like the display that you have on your cell phone. So, we’re very excited about this. We don’t intend to go into this business but we want to enable this business to enable our customers to sell more of these.
And as I said encapsulation is one of the areas that we’ve been working because it goes hand-in-hand with the flexible business or the unbreakable display business and we’ve had very good laboratory results with our process that we have a patent on.
So, I think, as I said a little earlier, this is really the roadmap that you will see and it is starting to take off and it is actually accelerating. You’re hearing more and more about OLED technology and the little light is flashing. So I’m going to actually try to jump through this.
We are a, this last quarter I will talk about it was first profitable quarter that the company has ever had. Once you get the unbreakeven because of our business structure. We’ve got material margins on our proprietary emitters that are in the 85% range.
We have host materials that are we sold in this quarter about in the 60% gross margin range and our license fees and royalties are 97%, we pay 3% to the Universities as a group and we retain 97% of them. So if you look at 2009 and the 2010 our revenues doubled for the nine months of this year it actually $42 million. For the quarter – for this nine months period this year, we made a profit before warrant expenses which is something I don’t want to talk about because it’s gone, thank goodness.
But we’ve given guidance on the revenue side where really the market is very young. We’ve given guidance on a revenue side for the 2011 between $58 million and $62 million in revenue, and we gave guidance on next year between $90 and $110 million in revenue, which again would be doubled out and we’re doubling each year for the past three years.
And on a quarterly basis, obviously this quarter, the third quarter of 2011 was twice as much as Q1 and Q2. It was bolstered by a business called the host business, which we just introduced in the second quarter. We sold almost $8 million worth of host material in the third quarter. It is a business that is new for us and the question is going to be whether it is sustainable. We believe it will be but because it is a new business for us, it is one that we really are going to be a little cautious about how much we think it will grow and when it will grow.
We got plenty of cash. The company has $338 million as the cash in the bank. We’ve never been a cash burner. We’ve actually been cash flow positive for the past three quarters. We have no debt. We have 46 million shares outstanding.
So, the company from a financial position is in the best shape that it’s ever been in. We are actually in a process. We’ve raised the money in the first part of this year and we will use that money to acquire intellectual property either in the OLED space that we specifically working on the emissive materials or in other areas in the OLED stack if we think it makes some sense. So, we’re actively looking right now to see if there is IP that we can acquire.
So in summary, the market is starting to take off and we’re moving into multiple areas. We are the phosphorous and emitter company. If you talk to anybody in the industry, they will tell you the Universal Display has the IP for phosphorescent emitters and we have the IP on the materials themselves.
And we think it is long-term roadmap is very promising obviously it is still in its infancy. The flat panel display industry which includes plasmas and LCD is in excess of $120 billion annually and it is Asia Inc. there are no manufacturer of them in the U.S. So that’s where all of our customers and that’s where we are most of the time.
And I finished just when it got to zeros. So we do have breakout session, I’d be happy to answer your questions there. Thank you very much for your attention.