Universal Display Corporation (NASDAQ:PANL)
Canaccord Genuity 32nd Annual Growth Conference Call
August 14, 2012 1:00 pm ET
Sidney D. Rosenblatt – Executive Vice President and Chief Financial Officer
Jed Dorsheimer – Canaccord Genuity, Inc.
Jed Dorsheimer – Canaccord Genuity, Inc.
Well, I think we can get started. I’d like to thank everybody for coming. My name is Jed Dorsheimer. I’m one of the Senior Analyst at Canaccord Genuity to run the display, lighting and energy storage sectors for the firm globally. And for those who just heard my talk next door in terms of solid-state lighting. This Universal Display will come as no surprise in terms of their opportunity in the OLED market, for those who didn’t were fortunate enough to have with us, the leading company in the OLED sector and OLED stand for organic light emitting diodes, very different in LEDs, which are based on inorganic solid, crystalline structures. And this technology is making its way into displays, cell phones right now, tablets and TVs later on and eventually the general lighting market.
In terms of housekeeping, all our Q&A will actually be across the hall in the breakout session. And I’d point you to our conference materials for important disclosures.
And with that I would like to introduce Sid Rosenblatt, Chief Financial Officer of the Universal Display to tell us more about the company.
Sidney D. Rosenblatt
Thank you, Jed. I’m Sid Rosenblatt, CFO of Universal. We are an OLED technology development company. And we are in the forefront of developing OLED technology for displays, lasers and light generating devices. Everybody has a Safe Harbor statement. We’d appreciate it, if you would read all of our 10-Ks and 10-Qs as I usually say we pay our lawyers a lot of money to write this and we’d appreciate it, if somebody would read it. But we are a intellectual property company. We license our intellectual property and what we call phosphorescent OLED technology, and a number of other architectures. We also make and sell the emissive materials that actually go into an OLED device. And the OLED market is rapidly growing. It is in all of the Samsung Galaxy products.
In addition to that, it is in Toshiba Excite, all of these actually come from Samsung, but these are other products that have OLED technology in them, organic light-emitting diode technology as Jed said, it is actually thin-films of emissive materials. An OLED is a solid-state device, and the entire OLED stack is 11,000 to thickness of a hair. So it is a very thin technology. Samsung and LG has each demonstrated 55-inch OLED TVs at SID and at a number of other conferences, there has been reports that they’re going to introduce them at anytime from this summer to the end of the year, to the end of next year, realistically I don’t think anybody is going to have any volume at least until the end of next year. They are making them today in pilot facilities and prototyping facilities. Even though they just reported LG will sell 15,000 units. I think when they do that, you’re talking about $8,000 or $9,000 a unit. So it is really not a real product that is in the marketplace.
Jed talked a little bit about lighting I believe next door. OLEDs are very efficient light generators. We can get almost a 100 lumens per watt in the laboratories, but in an OLED light source really gives you some things that other technologies cannot. If you look at the top right hand picture, that is an Acuity Brands light source. It is literally each one is as thick as two pieces of glass. So architecturally you can make things that blend into the walls, the ceilings, it does and it generates very little heat and I’ll talk a little bit of more about that, but OLED lighting is something as we move forward, we’ll start to get commercialized in the next few years.
We have more than 2,700 patents issued and pending. We actually just purchased 1,255 patents from Fujifilm and the OLED field and I’ll talk a little bit more about that as I move forward. And we have fundamental intellectual property in the architecture of making an OLED using our phosphorescent and in the actual materials that we make and sell. We have that made for us by PPG Industries. We’d always qualify them and shift them from our facility in Ewing, New Jersey.
This is a what an OLED architecture looks like, just to give you an idea, as LCD technology, which is on this laptop and a number of others if you actually pulled it apart you would see a bright white light in the back then you see a piece of glass that has transistors and on top of that you put layers of liquid crystals and if you pushed on your screen you would actually see them move around.
OLED is very different, there is no backlight. These are self emissive materials. You have your transistor play and then you put about 7 to 9 layers of film on that transistor play and then you put glass on top of that. That’s the entire device, there is no light bulbs, it’s not reflective, it doesn’t use ambient light, but the materials themselves lied up. This entire stack is 1,100 to thickness of a hair.
So if you put it between two pieces of plastic your entire display is as thin as the two pieces of plastic or between two pieces of glass. We actually work in the emissive material, which is the stack in the middle that you mix red, green and blue colors you get all the colors of the rainbow and we work on host materials, these can be made flexible, these can be made transparent. So when they are turned off, they are about 80% clear.
So you can architecturally for lighting applications, you can have wall sconces to disappear. For display purposes, you literally use the transparency to get light out of the top and bottom. There is not a lot of applications for display that lights up on both sides, but there maybe as we move forward.
This is display searches estimates of the market. OLED market was about $3.5 billion. Last year it’s estimated to be about $8 billion. I think our latest estimates are somewhat less than that. There is really very little in the way of TVs and other technology. It is mostly mobile devices and it is mostly Samsung. Samsung Display Corporation is about 95% of the OLED market today.
And these numbers actually over the years have slipped in the last couple of years as the first time they’ve actually been pulled in and estimates for 2013, ’14 and ’15 have started to grow and that’s really based upon manufacturing bringing capacity on. Samsung’s [capacity] at the end of this year is going to be somewhere around I believe a 100,000 substrates starts from on an annual basis per month and by the end of next year is estimated to double. I think the revenues are estimated in OLED devices this year for about $6 billion to $6.5 billion.
For displays, what’s very important particularly for mobile devices is power efficiency and conventional OLEDs were invented by Kodak Corporation and there what are called fluorescent emitters. The way that these molecules, I say these are self emissive actually work as you put current into the molecule, it goes into an excited state, it create energy, and had energy that are creates when their molecule relaxes the energy comes out either in a form of light or heat.
And from the physics of the basic fluorescent molecule 25% of the energy is converted into usable light and 75% was wasted as heat. What our scientist were able to do and the way we form the company is fund the research at Princeton University and the University of Southern California and we continue to fund that research. Is they figure got a process of converting that 75% of the energy that comes out in the form of heat into usable light. So we get a much more efficient device, so we use 75% less energy to get the same amount of light out of our device. And we are talking about handheld devices, we are extending the battery life. So that is really the key Universal technology on the material side, gives you a beautiful displays, there is 180 degree viewing angle, there is no offset when you look at the OLED device from the side there is no distortion as of course these material is actually light up in 360 degrees.
We get a thin device and you get form factor if you can make them on plastic, you can have conformable devices, you can have the number of different ways of using or of doing this. And as Samsung as now they’re going to make these on flexible on plastic which it’s not going to bend or conform. However, it will be a much lighter device and it will be an unbreakable device particularly for smartphones.
For TVs you get a very thin form factor the 55 inch TVs are about a core of an inch thick. And again you get all the attributes of OLEDs in that you get great viewing angle. These molecules inherently switch on and off three times faster than video rates. So you have no ghosting and you have no correction to make, because you get really extremely fast switching of the picture and the issue with TV is the larger you get is not so much power efficiency, even though a wall plug efficiency is important, but you have less heat to manage and when you have less heat to manage you have less cost in the device. And for lighting, you can see that you can get a thin form factor and a number of others.
Universal Display we actually collaborate with a number of different companies and we partner with research institutions around the world. We continue to fund research at Princeton and USC and University of Michigan where our principle researchers are. We fund the research and we get all the intellectual property that’s developed in the OLED field for displays, lasers and light generating devices from these universities and we’ve extended that to a number of universities around the world.
In addition, if you go back to the picture that had what an OLED stack looks like it had HTLs and ETLs and cathodes and anodes, there is a number of other companies that make those materials. If you work together as a team you can then get the most efficient devices. So we work with Idemitsu Kosan and it will to make so many other materials in the stack SFC, Nippon Steel, chemical company in Japan LG Chem and we just announced one with a company called Plextronics. Plextronics actually it makes some whole transporting materials for solution based OLED technology. Right now the way that OLEDs are made in vacuum chambers, the essentially used powders put them into vacuum chamber at the bottom and you heat them and when you heat these materials they vaporize and in vacuum they rise. And you have your substrate that goes across the top and these materials stick to your substrates because there is a different temperature that’s actually high and make the OLED films and all the films in the stack. If you can use a printing technology, whether it’s nozzle printing or inkjet printing or other technologies, you can make that process much simpler.
Today, nobody really has a process that works. But, if you can do that and eventually you will, we want to make sure that our material is compatible with whatever manufacturing process is a long-term winner, whether it's vacuum chambers or whether it's printing technology. So, we just announce an investment in relationship with Plextronics.
We have about 110 employees, we have a research lab in Hong Kong. We have offices in Korea, Japan, in Ireland, and we have a branch office in Taiwan, Asia is where all of our customers are.
We have a license agreement with Samsung, which is now Samsung Display Corporation. That is a long-term license that runs through 2017. It is a multiple parts, one is we get a fixed annual license fee from them and increasing amounts each year. For 2012, that amounts to $30 million, we reported $15 million of it in the second quarter. We will report the other $15 million in the fourth quarter. Last year that number was $10 million.
We have a license, royalty bearing license agreement with DuPont Corporation. They have not gone into the OLED manufacturing business. On the lighting side, we have royalty bearing license agreements with five different companies. So, it's actually interesting because most of it in Japan that is really where OLED development started, but they’ve really never capitalized on the display side of the business for a number of reasons. But, they're looking at the lighting side, because I think the barriers to entry on the lighting side are much less, the CapEx to make an OLED light facility is very different and the CapEx necessary to make a display facility, where you need to invest billions of dollars and TFT technology.
We also work with customers on what we call a license material supply agreement. We will sell new materials with a license to put those materials in new device. We will charge you some multiple of what we would charge you if you signed a royalty barring license agreement as a license fee. And as you move forward this is the way we always start out with customers, it’s easy for the purchasing agency R&D groups to buy materials from us even at significantly higher prices.
In the long run, we will sign license agreements with each of these as they move forward with building their facilities and expanding, because to be honest in the long run it’s cheaper for the material when you buy it from us in higher volumes and you signed a license agreement. We are very comfortable with this relationship today by building a license fee in and we work not only on the display side with AUO, Chi Mei, LG, Pioneer and Sony, but on the lighting side with a number of companies also. So this is a way that we’ve really been able to get into pretty much all the display companies and anyone who is working on lighting applications for OLED technology.
I talked a little bit about our phosphorescent technology which a lot of folks look as the key to our technology and we do also, but we also have a number of other architectures that we have in terms of, if you make it on a flexible substrate we have basic patents on flexible displays, we have basic patents on stacked OLED technology on outcoupling which is a way to enhance the light that comes out. We’ve really worked on what we call a single layer encapsulation, if they’re going to make these on plastic or any other substrate besides glass and eventually on glass can eliminate the top layer by having a one step single layer process today the technology is going to be used.
It’s a multi-step process that is really not high volume manufacture of both. And transparency and a number of others, before we acquire the Fujifilm patents, we had about 1,700 patents, I’m sorry 1,500 patents in multiple jurisdictions issued around in the U.S. 336 and pending in the U.S. 225 we’re actually filing patents almost weekly at this point. And then in Korea, Japan, China and Taiwan, we have patents. In Europe we have a number of patents.
There have been a number of challenges, those of you who know we are. There has been some challenges in Europe and Japan and in Korea. There has been a couple of decisions in Europe. One on our flexible technology, which we won, and the companies that filed the opposition are appealing it. On the latest one, which (inaudible) which is iridium complexes, we won on iridium complexes, but we did not win, outside of the OLED field. We are appealing it, and the other side is appealing it. And then our basic phosphorescent has not been heard in Europe. In Japan, we’ve had a number of patents that have been narrowed and in Korea Duksan Hi-Metal, who is one of the company’s that makes some of the other materials in stack bio-proposition to seven of our patents and in our 10-Q last week, we disclosed that they have withdrawn two of those claims.
So it’s down to seven patents, so there are five patents they are opposing, but they withdrew two of them, but when you add Fuji patents to our portfolio. We’ve been looking for quite a while at the intellectual property portfolio, we paid a $105 million for the rights to all these patents. Most of them are very young, about half of them are on what we call devices and half of them are on material related patents. Device is architecture related where you’ll get a license fee or a royalty. And it is on long lifetime and highly efficient devices. And on the material side, they have broad claims in a number of areas on phosphorescent emitters, including iridium and platinum complexes. And we also see that there is an area that we can focus on looking at these as we move forward for the next-generation materials, and they have some other materials in the stack, which include transporters and house materials.
And part of our strategy, as we move forward is to move from the emitter. We’ve moved into the host business for our green emissive technology. And now with the acquisition of Fujifilm’s we maybe able to move into some of the other stack. We would like to become the One Stop Shop for OLED materials and OLED architecture as we move forward.
The key as I said our phosphorescent technology is power efficiency, and when you have long lifetime, great display quality, and you don't want to impact the battery life. And as we use our smartphones for more and more things and at some point you actually even make a phone call on them. Your display is what uses 90% of your power on your device. So the key is making your display more efficient, and that's what our technology does.
We have a material systems, for those of you who’ve actually followed this industry, one of the reasons that OLEDs have taken longer to take off then a lot of people would have anticipated. To some extent the OLED industry has been its own worst enemy and saying they’re here, they’re here, they’re here, but they really are here today because there is a lot of capacity. But the materials themselves needed to have much longer lifetimes and these materials are measured from initial brightness to some level of brightness, whether its 50% brightness or 95% brightness and you can see here we’ve got materials that have 50,000 hours to 95% brightness, which is essentially no degradation from when you turn it on.
When it gets down to 50% your eye can see the difference. So it’s very similar to the OLED, cathode-ray tubes, if you have a big OLED TV set in your house. Over time you said it’s time for a new one it still work it just wasn’t as bright as it used to be and that’s because the phosphorus, which are different phosphorus in that device got tired. They were excited by having a gun scan across the back. OLEDs are excited by having a transistor behind each pixel.
And our thin-film encapsulation technology is one for a lighting we’ll be able to give you essentially a light source that has no edge. You can literally put all those technology to the edge of it and for displays it can give you a very good barrier that as this as good a glass cover on it. However, it would make it you thinner and lighter. And there are a number of other techniques for our printing, as I said we are working each of these whether its inkjet or nozzle printing or even in vapor jet or working on a technology or instead of turning these materials into a solution or actually printing these in the vapor phase by using an inert gas. So we’re continuing to develop manufacturing processes and new methods for manufacturing all those as they start to become more mature and move into the marketplace.
Flexible displays are something that we really think as we move forward or it’s going to be a very important part of display business. These are some of prototypes of Samsung, even if it doesn’t bend you can have a conformable one, you can have a different shaped phone. The reason that all of these devices that we carry around are the shape that they are is because they all have glass. So if you can get rid of the glass you can imagine all the different things that you could do with all of these different devices. We’ve delivered a number of these to a number of government agencies. This is a risk management unit that we delivered to 6-inch flexible display that weighs about a pound and a half, replaces about 20 pound recognized laptop for the soldiers to use it.
This is actually our founder’s vision of having a device that you put in your pocket and you just pull out a screen and it does everything and you put it away and literally is your portable communications device, which we have a patent on also. Lighting opportunity, as I said is a little bit further down the road. There are a number of companies, we are not only the once that we have license agreements with, as you read about Philips and Osram and other companies working on OLED technology.
When you think about lighting, its illuminant, its efficiency and you are going to use phosphorescent. I mean the ballpoint of phosphorescent technology is it uses less power. So when you get the lighting you clearly want to use less power and that’s really what we’ve got 100 lumens per watt in the lab. And these are just some things from Acuity Brands, I’ll talk about the design factors and what you can do with OLED technology. And you really end up today when you look at fluorescent fixtures you got to be about 10% of it in the light ball, then 90% in all this metal. OLED be the opposite, most of it will be the light source and very little will be in the Lumiere and again, this is a little from Acuity Brands just talking about the different drawbacks of all these different technologies.
So, we think that today 22% of our energy is in lighting. So, if you can be efficient in lighting, you really can save energy around the world. So, this is something that, it is clearly going to happen. We think that, a lot of times those who talk about also talk about LED technology to say that LED guys they are OLEDs are competition. We’ve really don’t see them as competition.
LEDs are bright point sources, high intensity. OLEDs are surface emitters. We’re not going to be able to have very high intensity light sources. But, we can have illumination general illumination that’s very comparable with that. These are just some demos of what we think some of the applications will be and they really are very compatible technologies. And these are just some other desk lamps and things like that.
To give you a little bit of a history in terms of who we are in our revenue stream. Our revenues for the past few years have gone from $15 million to $30 million to $60 million. In 2011, we made it a couple of million dollars. In this quarter, the last quarter we’ve reported, in the first quarter it was $12.6 million and last quarter it was $30 million. So we’re worried about $43 million for the first six months of the year and when you compare that to last year, in this quarter we made about a $11 million and we made about $10 million for the first six months compared to a loss last year.
So in terms of moving forward, we are obviously this is the best quarter we’ve ever had. We’ve got $350 million of the cash in the back at the end of June except I spent about a $110 million of it in July. So it’s not quite 350 it sounds about 240, when the acquisition of Fuji and Plextronics.
We have no debt. We are cash flow positive. We were cash flow positive for the first six months of the year. We have given guidance for the year between $90 million in revenue and $110 million in revenue. And it really depends on the ramp of Samsung is our largest customer. They are adding [capacity] in the second half of this year. And we expect to be able to sell more of our red emitters, which is in all of their devices. And it’s been reported by a number of different folks including Jed that our green material and our green hosts are going to be used by Samsung and we expect that to occur also in the second half of this year.
The real question is how quickly they will adopt it. And how quickly their capacity will grow this year, which will determine which end of the guidance we fall. And you’re seeing Mobile, TVs, lighting, flexible. All of these are attributes of OLEDs, which we think really make OLED technology very, very different than any other type of display technology. So, there is a strong market drivers, high growth market.
Our business model is one we have very high margins on our proprietary materials. Our emissive material margins are in 85% to 90% of range. These are patented materials, in order when we sold our host materials in volume last year they were at 40% and we pay 3% of our revenue to the university partners. So, essentially our margins once you are pass break-even on our license fees, is 97%.
So it really is a very – it’s like a biotech model. We spent a lot of money. We spent $250 million developing this technology and but once it hits you really see a lot of it drop to the bottom-line. So with that, just little things as I have to sound that up. And we’re going to go right across the way. So if anybody wants this presentation, please give me a call I’ll make sure I send it to you. And thank you for you attention.
[No Q&A session for this event]