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Universal Display Corporation (NASDAQ:PANL)

Q3 2012 Earnings Conference Call

November 7, 2012 17:00 ET

Executives

Joe Hassett - Investor Relations

Steve Abramson - President and Chief Executive Officer

Sid Rosenblatt - Executive Vice President and Chief Financial Officer

Analysts

Brian Lee - Goldman Sachs

Andrew Abrams - Avian Securities

Darice Liu - National Securities

Susie Min - Deutsche Bank

Jed Dorsheimer - Canaccord Genuity

Rob Stone - Cowen and Company

Jim Ricchiuti - Needham & Company

Craig Irwin - Wedbush Securities

Hendi Susanto - Gabelli & Company

John Bright - Avondale Partners

Alex Gauna - JMP Securities

Jiwon Lee - Sidoti & Company

Jagadish Iyer - Piper Jaffray

Operator

Good day, and welcome to the Universal Display Corporation's Third Quarter 2012 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Joe Hassett. Please go ahead sir.

Joe Hassett - Investor Relations

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 the property of Universal Display. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Universal Display is strictly prohibited. Further, 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 7, 2012.

All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include, but are not limited to, statements regarding Universal Display’s beliefs, expectations, 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?

Steve Abramson - President and Chief Executive Officer

Thank you, Joe and welcome to everyone listening today. For the third quarter, we have reported revenues of $12.5 million and a loss of $5.5 million or $0.12 per diluted share. Results were obviously disappointing. We believe revenue and earnings in the quarter represent a temporary slowdown created primarily by global economic challenges and delays in our customers' commercial rents. Over the long-term, we are confident than the growth prospects for the OLED industry in general and Universal Display Corporation more specifically remains very strong and favorable.

In addition, as most of you are aware, the third quarter results did not include any of our semi-annual license payments from Samsung Display Corp, which would equate to $7.5 million per quarter have recognized equally throughout the year. We will receive another $15 million license payment from Samsung in the fourth quarter. The OLED industry continues to excite manufacturers and consumers always with its promise of improved performance and lower power consumption. For instance, Samsung recently announced that they have sold over 30 million Galaxy S3 smartphones. However, in this quarter, we saw announcements delay OLED TVs and OLEDs on plastic and products using our green phosphorescent emitter and host materials have not yet ramped. Consequently, our revenues in the third quarter were consistent with the first quarter.

AMOLEDs continued to project strong OLED display market growth. According to our October article in Display-Central more than 10 new AMOLEDs fabs will be installed or updated in the next three years. For example, Samsung and LG are both building Gen-8 AMOLED lines. DisplaySearch reported that OLED display revenue was approximately $3.5 billion in 2011. Their recently revived estimates are about $6.5 billion in 2012. They project $9.5 billion in 2013 as new capacity comes online and estimates a $34 billion OLED display market by 2019. Meanwhile, AUO continues to ship AMOLED panels to HTC Corp for certification. S.L. Peng, General Manager of AUO said they will be ready for mass production of AMOLED panels for cell phones in 2013.

According to a Korea Times article by the industry sources both Samsung and LG Electronics' OLED television will not be available on stores this year. A DisplaySearch official is closing the total shipments for OLED TV this year will be 500, down from the 50,000 we have previously expected. Despite the delays according to the DisplaySearch we are just a year away from a $1 billion OLED TV market, 2014 at which point growth will ramp and the market will reach $16 billion before the end of the decade. And a recent oled-info.com article, LG’s Chairman still plans to devote the company’s main R&D resources towards the development of OLED TV.

Going to reports, LG Display has started to build a mass production line, which will become fully operational in the first quarter of 2014 with the capacity of 32,000 substrates monthly or about 180,000 55-inch OLED TV panels per month assuming a 100% yield. In addition, LG has reported it will be ready to release its first 55-inch OLED TV in early 2013. While it appears unlikely, we will see production of any flexible OLED this year, LG is planning to start mass producing plastic-based flexible OLED panels by the end of 2013.

Samsung is also now reportedly expected to be in the market with flexible displays in 2013. We believe that the future success of flexible displays will be aided by the significant progress we are achieving with our encapsulation technology and that technology has applications well beyond just the flexible OLED display market such as OLED lighting and created new handheld designs, including bezel-less display concepts. As reported in October 23, OLED info article Korean site MK News is saying that Samsung plans to produce full HD AMOLED panels with a pixel density of at least 400 PPI in the first half of 2013, exceeding the Galaxy Nexus’ current record 316 PPI. That’s another exciting new opportunity to see our market expand through the further adoption of AMOLED technology.

We have never taken a short-term focus. We believe more strongly than ever that despite this near-term slowdown a road to greater OLED adoption continues to stretch far and wide before us. And we continue to work hard to make that vision a reality. Our sites have always been set on the longer term opportunities in the market. This is the beginning. Our strategy has been to strengthen the Universal Display franchise on a global basis. And you will see us take actions that add new materials to our portfolio, develop new technologies to aide in the manufacturing process, strengthen our intellectual property and create partnerships that provide a faster, more efficient path to greater market leadership.

In order to expand and extend our strong position as the leading OLED patent licensor this summer, we purchased Fujifilm of approximately 1200 OLED issued and pending patents for our Irish subsidiary, UDC Ireland Limited. This portfolio will add to our ability to expand our OLED materials offerings and continue our comprehensive OLED patent licensing strategy well into the next decade. We are also moving forward on solution-based OLED technology development. Our material systems demonstrated industry leading results and the partnership we recently signed with Plextronics will enable the acceleration of solution based OLED material system using our emissive layer materials and Plextronics’ hole injection and transport materials.

We continued to enhance our local presence and expansion in Korea by expanding our personnel there and signing an agreement with Duksan Hi-Metal Company Limited. Under this agreement, Duksan will initially provide a finishing step in the phosphorescent green host manufacturing process. Duksan has built a very impressive team and a state-of-the-art OLED manufacturing facility to produce cost effective OLED products using high-quality manufacturing standards. These new relationships help support the growth of Universal Display’s high-performance products expands our OLED manufacturing infrastructure in Korea, and brings us closer to our customer base, improving our ability to support their current and future needs. In addition, all pending patent and validation proceedings evolved in the two companies in Korea have been dismissed.

We also like to add an additional update on the patent opposition front. Earlier today, we received notice from our Japanese Council that a panel of the Japanese IP High Court announced that it would reverse the Japanese patent opposition board’s prior decision to invalidate all the claims in the Japanese '781 and '168 patents. These are the L2 MX patents. Although we are waiting to receive further information from our Japanese Council with respect to the substance of this decision, it's our understanding as the matter will be remanded to the Japanese Patent Office for further consideration of the arguments that were now previously addressed by the JPO.

We are obviously pleased with the decision. Although we know that no one patent or patent family in any one jurisdiction is critical to our operations, we look forward to addressing the remaining issues relating to this patent with the Japanese Patent Office. At this time, based on our current knowledge we believe that all the claims in our JP '781 and '168 patents should be upheld by the JPO on remand. Of course, we cannot make any assurances of this result.

In connection with OLED white lighting, we are working with about a dozen companies to help develop this market and are selling a full phosphorescent material system for warm white lights. While the quantities of revenues are small this time, we expect OLED lighting to be a growth area in the future. And (our overall) gross written premium, we are still in the early stages of the growth of the industry, many believe will expand dramatically over the next few years. We are very thankful we are helping to shape and develop a vibrant in dynamic market. As the OLED industry involved soon as our company, we are transitioning from a New Jersey company that does business in far market to an international company that is headquartered in New Jersey, USA. We appreciate your long-term support of our company and we believe the growth has only just begun.

With that, I will turn the call over to Sid.

Sid Rosenblatt - Executive Vice President and Chief Financial Officer

Thank you, Steve, and again thank you everyone for joining our call today. Revenues for the third quarter of 2012 were $12.5 million compared to third quarter of 2011 revenues of $21.8 million. A quick review of the third quarter compared to last year can be summarized in four parts. One, overall royalty and license fee has decreased to 396,000 from $4.6 million in Q3 2011 mainly as a result of our new license agreement we entered into with Samsung Display Corporation, under which we do not report any license fees in this quarter.

Two, our host revenue was down by approximately $5.9 million compared to Q3 2011. Green emitter revenue was down by $2 million from Q3 2011. And on the positive side, our red emitter revenue was up by approximately $3.3 million compared to Q3 2011 and where we saw a volume increase in excess of 89%. The results in the third quarter of this year do not include the recognition of any license fees under our license agreement with Samsung Display Corporation under which SEC it's obligated to make payments to the company of $15 million in each of the second and fourth quarters of this year.

Accordingly how the company recognizes payment on a pro rata quarterly basis over the year, it would have resulted in additional $7.5 million in royalty and license fees in the third quarter of this year. We will receive another $15 million license payment from Samsung in the fourth quarter. In the third quarter 2012, revenues from material sales were $11 million compared to $15.4 million for the third quarter of 2011. Material sales in the third quarter of 2012 include the sale of red, green, yellow, and light blue phosphorous emitters as well as green and yellow host material. The number of customers purchasing OLED materials in the third quarter increased by approximately 15% from the third quarter of 2011.

Red phosphorescent emitter sales in the third quarter increased by 89% compared to September 30, 2011 quarter. On a sequential or a linked quarter basis volume of red phosphorescent emitter materials shipped in the third quarter were little changed from the second quarter of this year. Therefore, as industry capacity increases, we will see increased red phosphorescent emitter material revenue.

As previously discussed, the terms of our material supply agreement with our largest customer contain provisions for pricing concessions once their orders reached specified volumes. Green emitter sales were down in the quarter ending September 30, compared to a year ago and the proceeding second quarter. Green host material sales were relatively stable over the first three quarters of 2012. Sales of green emitter and host material spiked in the third quarter of 2011.

Revenues from outside North America represented 93% of our total revenues for the third quarter of both 2012 and 2011. This year 62% of total revenues were from South Korea and 27% from Japan, whereas 52% were from South Korea and 41% from Japan last year. Total operating expenses for the quarter were $18.6 million, up 17% from a year ago. The increase was primarily due to a $2.1 million increase in amortization expense as a result of the Fujifilm patent portfolio acquisition. In addition research and development expenses increased by approximately $2.1 million mainly due to an increase of approximately $1 million incurred under our PPG Industries agreement for development and scale up of new materials and a $500,000 increase in sponsored research and development contracts, as we continued to invest in the future.

For the third quarter reported a net loss of $5.5 million or $0.12 per share. Our balance sheet remains strong with cash, cash equivalents and short-term investments of approximately $239 million as of September 30. The duties in our cash at September 30, 2012 from December 31, 2011 was mainly due to the $105 million used this year to purchase Fujifilm’s entire worldwide patent portfolio of more than 1200 OLED patents and patent applications.

With the nine months ended September 30, 2012, cash provided by operating activities was approximately $7.2 million. Given our long-term focus and early stage of the industry comparing our financial results from quarter-to-quarter was not appropriate. We believe our performance can be best be evaluated on an annual perspective. We expect the full year revenue to be between $80 million and $82 million which will be a 30% to 34% increased over 2011. This is down from our previous estimates of $90 million to $110 million for 2012. Based on the trend in the adoption of OLED technology and handheld devices and research efforts underway on larger format displays, we believe there is good reason to continue to expect significant market growth over the next few years.

With that, Steve and I would now be happy to take your questions. Operator, could you please provide instructions for the questions and answer portion of our call.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) And we’ll begin with Brian Lee with Goldman Sachs.

Brian Lee – Goldman Sachs

Question, I guess first off, can you help me sort of think through the inventory build last quarter and also little bit this quarter. I guess I’m just I’m struggling with why you have built inventory and if there was any sort of unexpected changes with respect to your large customer giving your visibility that they were going take some of that inventory off your hands and that having been delayed for whatever reason?

Sid Rosenblatt

Well, we did we – as we said we built inventory because we expected green and host materials to be adapted in the second half of this year. And we built some additional inventory in this quarter expecting that to occur. We believe that it will occur but we don’t believe that will occur probably until early next year. We expect the fourth quarter to look somewhat like the third quarter based upon our guidance of 80 to 82. It’s really is a day-to-day we’re going through quite a bit of customer evaluation over the past few years with our customer and we still expect them to purchase green emitters and then host materials from us. I think it’s just the timing issue.

Brian Lee – Goldman Sachs

Okay and maybe just to begin to that a little bit more what were some of the indications that your were basing your expectations of second half ramp that now sound like they are more like early 2013 ramp?

Steve Abramson

Brian, we’re in fairly constant communication with our customers and we operate off on the best information that we have from them at that time. And we are constantly updating that information. The ramp was continuing to be pushed out fairly slowly.

Brian Lee – Goldman Sachs

Okay, just two quick ones, two last quick ones from me and I’ll jump back in the queue. Any sense for how many products I know the visibility seems like it’s moving around here on you, but how many products do you think could be supplying green emitters and hosts for next year for your largest customers – for your largest customer?

Steve Abramson

To be honest, the products that it goes into is up to our customer. I mean we would expect once they adopted to adopted slowly and then scale up to more and more of their production. But specific products we really can’t – we don’t really know to be honest.

Operator

Okay. And we’ll move to our next question from Andrew Abrams with Avian Securities.

Andrew Abrams – Avian Securities

Question about red being roughly flat in the quarter, if I understood that correctly. And Samsung’s volumes have been particularly strong on a unit basis is there an inventory issue do you believe where Samsung had built inventory of red and was not matching up their red purchases with their unit volumes or is there some other factor there?

Sid Rosenblatt

Well, its interesting DisplaySearch the second and third quarter and the fourth quarter pretty flat for mobile devices. So, their purchases really are on by weekly or a quarterly basis and they may have purchased a little bit more at the end of one quarter. We literally shipped as we said in 24 hours. So, there could have been some purchases in Q2, at the end of Q2 that would have normally fallen into Q3, but I don’t believe that there is any specific inventory build. I think it matches what DisplaySearch is looking at the market and what their production quantity is.

Andrew Abrams – Avian Securities

You mean on a unit basis on an overall?

Sid Rosenblatt

On an overall dollar basis they literally have Q2, Q3 and Q4 fairly flat.

Andrew Abrams – Avian Securities

Got it. And in terms of Samsung’s minimums with you based on your new guidance would you say that Samsung is still going to meet those kind of set minimums and obviously do the increment against that for next year?

Steve Abramson

It’s not clear whether they will meet it but they do have the ability to roll them over into next year.

Sid Rosenblatt

We are really looking at it day to day in terms of purchases.

Operator

Alright. And our next question will come from Darice Liu with National Securities.

Darice Liu – National Securities

Good afternoon. So just following up on the prior question on materials based on your customer’s revised forecast and what you’re planning for capacity and as well as product roll out. Can you provide some color on what type of material sales trajectory you still be expecting in the coming quarters notably from the host side which has been relatively flat for a few quarters now?

Sid Rosenblatt

Well, as we said we expect the fourth quarter right now to look like the third quarter. We do expect the market to grow by about 50% as Steve said next year and we would expect our material sales particularly red emitters obviously to follow out. But as green and green host gets put into commercial production those will increase obviously faster than just the market does because we haven’t sold very much this year. But we do – we are in constant contact as Steve said with our customer and we are – we do with the best we can with the information that we get.

Darice Liu – National Securities

Have there been any shift in terms of the host market share or is it more of a factor of them deploying the new red materials?

Sid Rosenblatt

Really it’s not been a shift it’s really been they have not yet red, green phosphorescent.

Operator

Okay and we’ll go next to Vishal Shah with Deutsche Bank.

Susie Min – Deutsche Bank

Hi, this is Susie Min on behalf of Vishal Shah. I had a question on the inventory and makeup as you’ve said just give a little bit more details, should we think about the makeup of the inventory its the more Q the breakup of your material sale so about 60% of that being red emitter and 30% being a green emitter,. 10% being host as we think about 2013?

Steve Abramson

Well, we don’t give the breakdown of that but we really built up host inventory and green emitter inventory in anticipation of host and green adoption. And our host volumes are much higher than the emitter volume. So, we have red emitter material in our inventory because we want to make sure that we always have enough, but its predominantly host and green emitters that we have built up inventory in anticipation of them adopting green and green host.

Susie Min – Deutsche Bank

Okay great. And then I have just one more question as it relates to the Fujifilm acquisition I know there was that you talked a little back that you weren't interested in getting into sort of the commodity layers, transporters, and holes and stuff. And I was just wondering if you guys had, had time to evaluate the patent portfolio and if that view has changed?

Sid Rosenblatt

Well, we are looking at if any materials all throughout the stock and so with our existing patent portfolio in the Fujifilm acquisition it does give us some broad freedoms to operate within those layers.

Operator

Okay. And we’ll go next to Jed Dorsheimer with Canaccord Genuity.

Jed Dorsheimer – Canaccord Genuity

So much for taking my question. I guess just a couple, the first the timing and the miss in sort of the timing delays are push-outs if you will. Can you comment is that primarily a function of the flexible line in the delays the Samsung is experiencing there or is there anything that you were factoring in before that you are expecting that's been shifted in addition to that?

Steve Abramson

Jed, I think it’s a lot of the things that we have expected have been pushed out, so the green wrap is pushed out, so that’s the green host emitter. TV for both LG and Samsung has pushed out as well as flexible. So, a lot of the emerging growth that we expect in the second half of the year has not materialized, because it’s been pushed out and what we are seeing is a continuation of the red emitter itself.

Jed Dorsheimer – Canaccord Genuity

And Steve, how would you sort of weight those three, is it equal on all three in terms of the expectations as you were coming into this year versus the push-outs, is it sort of equally weighted or is any one of those three or two of the three sort of I have greater weighting?

Steve Abramson

It’s always tough to say, it probably pushed more towards the green.

Jed Dorsheimer – Canaccord Genuity

Okay, that’s helpful. And then I was wondering if you can provide a little bit more color on the relationship with Duksan, in particular, on the green host materials. How that will basically flow through the model, if we say that say a gram of whatever the number, let's just call it, a 100 to make the math easy, $100 per gram. Will you receive that $400 from your customer and you will pay Duksan for a portion of the manufacturing that material, so that the COGS would be higher on that product or will you receive say $10 or $20 of that 100 in terms of revenues that the margins will be commensurate with the rest of your material sales?

Steve Abramson

We are selling – we are continuing to sell the material. Duksan is simply taking the place of one of the manufacturers in the manufacturing sequence. Frankly, I do not expected there to be an additional cost from that process.

Operator

Okay. And we’ll go next to Rob Stone with Cowen and Company.

Rob Stone – Cowen and Company

Hi. I wanted to follow up on Duksan a little bit too you mentioned that initially you are going to be doing this finishing step. Can you provide anymore color on where you and they would like to go with that relationship?

Steve Abramson

Rob, we are having those conversations. We do realize that as we grow into a global organization and Korea being such a key element in the OLED industry, so have a more localized presence in Korea is important and we are having those conversations.

Rob Stone – Cowen and Company

Do you find just also with issues either on one side of exclusivity in current part to your supply chain or strong indication from customers about wanting to do first thing on things?

Steve Abramson

No, we have really not seen those issues as of now.

Rob Stone – Cowen and Company

Okay. And then you said – in your prepared remarks, you said something about the Samsung agreement having volume driven price breaks, but it wasn’t clear exactly whether that was an impact in Q3 or a prospective impact in Q4 or could you just go over that please?

Steve Abramson

It had some impact in Q3 in terms of the price program as they reach certain thresholds and we would see a little bit more in Q4. But pretty much they are – I believe that they are at threshold probably for what we expect them to buy for the fourth quarter of this year. So, I don’t expect to see it, but I would have seen throughout this year.

Operator

And we’ll move next to Jim Ricchiuti with Needham & Company.

Jim Ricchiuti – Needham & Company

Yes. Hi thanks. Question regarding the license payment from Samsung, I’m wondering at what point you might be able to give us some guidance as we look out to 2013, is the plan to talk about that after you report Q4?

Sid Rosenblatt

I think we will talk about that when we report Q4 or when we report Q1. We’re going through that right now we are trying to what specifically what we will be able to say and when we can say it.

Jim Ricchiuti – Needham & Company

Okay. But, Sid if we think about that it’s still probably helpful for us to just think about in terms of what the current market forecasts are for the OLED market next year?

Sid Rosenblatt

I mean they are fixed.

Jim Ricchiuti – Needham & Company

Yeah.

Sid Rosenblatt

So it doesn’t really matter what the OLED market forecasts are. Their payment is a fixed amount.

Jim Ricchiuti – Needham & Company

What is in that fixed amount baked in to the expectations of the market wasn’t that their structure initially?

Steve Abramson

It’s basically Jim, the expectations when we negotiated the deal.

Jim Ricchiuti – Needham & Company

Right.

Steve Abramson

How we’ve fixed them.

Sid Rosenblatt

That’s correct.

Jim Ricchiuti – Needham & Company

And one other question I’ll jump back in the queue. I was wondering if you can say whether there was any meaningful legal expense associated with the IP litigation that has now been terminated with the time in the quarter just in a sense where that expense may go away in the current quarter?

Steve Abramson

Oh, we are no longer paying (indiscernible).

Sid Rosenblatt

It was not a significant amount in the quarterly patent legal costs. The bulk of the patent legal costs are applications and obtaining patent as opposed to litigation.

Operator

And we’re going next to Craig Irwin with Wedbush Securities.

Craig Irwin – Wedbush Securities

Good evening gentlemen. Can you talk a little bit about the linearity of demand for your emitter during the quarter?

Steve Abramson

Can you repeat that that didn’t come through Craig?

Craig Irwin – Wedbush Securities

Thanks. So, can you talk a little bit about the linearity of demand for your emitter and host materials during the quarter?

Sid Rosenblatt

It is literally if we get orders each month as we said the red emitter material in Q2 and Q3 were pretty much the same. And we get literally ship as we get orders it just depends when we get it. So, it is difficult for us to predict even though we do get some estimates from the customer, it’s difficult for us to predict exactly when things will occur.

Craig Irwin – Wedbush Securities

Okay. And then my follow-up question relates to one of your previous comments in this call. You seem to suggest that Samsung can roll their minimum purchase requirements from one quarter to another. Could you clarify for us whether or not they can actually roll their minimum purchase requirements from one fiscal year to another or if this is something that maybe anniversary set a specific date of the agreement or had another predetermined rate?

Steve Abramson

They do not have quarterly minimums they have an annual minimum that they purchase from us and they can be rolled into subsequent year if they don’t meet that minimum.

Operator

And we’ll go next to Hendi Susanto with Gabelli & Company.

Hendi Susanto – Gabelli & Company

Good evening Sid and Steve. I want to understand what drives the push out and what will determine the timing of the ramp up on the customer side. I am considering that AMOLED display manufacturers are moving into different side of AMOLED platforms let’s say every 6 to 12 months, is there any indication that this type of transitions was the reason or the one that will determine the timing of the ramp up. Furthermore, are there other variables that we just think of when it comes to seeing the ramp up early next year?

Sid Rosenblatt

I’m not sure that we know specifically that is based upon specific changes out in product structures. We expect them to use our green and green host materials as they design devices that need to be more power efficient and it made to high end to what you said. I don’t think there is anything else that we can look at it really is capacity-driven and the product that they are making and what the requirements of those specific products are. And we believe as they add functionality and make new devices that they are going need to be more power efficient, because they are putting more and more functionality into the devices.

Hendi Susanto – Gabelli & Company

Okay. My follow-up Sid, you mentioned that you can draw out the minimum annual purchase into next year. How will that affect the pricing?

Sid Rosenblatt

Their pricing is based upon purchase quantities in any given year and then its reception in the subsequent year.

Operator

And we’ll go next to John Bright with Avondale Partners.

John Bright – Avondale Partners

Thank you. Good afternoon. Follow-up on that question quickly, Sid can if you roll it over to next year, can they then roll it over again the same amount or an increasing amount of the following year for the minimum?

Sid Rosenblatt

Yeah.

John Bright – Avondale Partners

Okay. And to Sid, Steve I think to you a question regarding the license pay-out next year, what was the market growth forecast for calendar '13, when you negotiated the deal for '13?

Sid Rosenblatt

Hello, John. On top of my head, I did not remember that.

John Bright – Avondale Partners

Okay. And then Sid how much of the miss was the related or how much did you have baked into this quarter for TVs, materials for TVs?

Sid Rosenblatt

We don’t really break it down in terms of TVs. When we do our estimates for the quarter, we look at material purchases what we expect. There is clearly some that we would have expected to be TVs, but TV specifics I mean the green and green host materials and TVs really were the differences in our ranges for the year, and it really was how quickly some of these were adopted and then it ends up that these have been each pushed out.

John Bright – Avondale Partners

Final question, on the R&D expense, you mentioned $1.5 million of expenses one for PP&G and another 500,000. Is that recurring?

Sid Rosenblatt

That they as we continue to develop new materials, I expect those cost to be reoccurring cost.

Operator

Okay. And we’ll go next to Alex Gauna with JMP Securities.

Alex Gauna – JMP Securities

So much for taking my question, I was wondering is there a connection between the TV adoption in the green meaning that those are one in the same in terms of when we start to see the ramp up? Thank you.

Steve Abramson

We are actually not really we are looking for green adoption on the mobile products and then TV adoption is a different set.

Alex Gauna – JMP Securities

Is my understanding some of those your customers are sampling flexible display now, I wonder if you can comment on that and how that plays in, again is there a connection between the green and the flexible display as well and how confident you are in the outlook on that 2013? Thank you.

Steve Abramson

We are selling – obviously, we are selling red and green materials to a number of customers who are using them in their various products. And we do believe that there is a trend to go from red through to green and that will become a massive used product.

Alex Gauna – JMP Securities

And then with regard to the flexible display is that in deep sampling now at the end market customers from your customers?

Steve Abramson

You have to talk to our customers for that.

Alex Gauna – JMP Securities

Okay, thank you.

Operator

Next we’ll go to Jiwon Lee with Sidoti & Company.

Jiwon Lee – Sidoti & Company

Yes, hi, thanks. A quick question back on the Duksan side, whatever Duksan sells as part of the agreement that would be part of the minimum purchasing with your biggest customer correct?

Steve Abramson

Duksan is simply doing, performing some manufacturing services for us in connection with the fabrication of one of our materials. So, that’s not related to the minimum purchase of our largest customer.

Jiwon Lee – Sidoti & Company

Okay. Well, that's helpful. And you alluded to some other efforts with the Duksan, could you elaborate a little bit?

Steve Abramson

Well, before the question was asked this is just the initial – we talked about this being the initial that was Duksan as the industry grows and as it grows significantly in Korea of – it is our intention to continue our localization efforts in Korea. And we are talking to Duksan about that.

Jiwon Lee – Sidoti & Company

Okay, helpful. Thank you.

Operator

Next we’ll go to Jagadish Iyer with Piper Jaffray.

Jagadish Iyer – Piper Jaffray

Thanks for taking my question. Two questions, first on the – can you give us the puts and takes of the Duksan agreement was PPG given on option to do this and what is the incentive for Duksan to be a part of this, can you elaborate more on that and I have a follow-up please?

Steve Abramson

We’ll I can’t speak to the former question but to the later question we’re generally viewed in the industry of having key materials and technology essential for the growth of the industry and anybody the partner with us should be able to benefit as this industry moves forward.

Jagadish Iyer – Piper Jaffray

Then on the follow-up just a quick one, you talked about the push out by one of your key customers here. I was just wondering why are they not adopting the green emitters for their existing lines which are A1 and A2. What is the challenge and what are they currently using is it still florescent green?

Steve Abramson

I would imagine they would use florescent green and I don’t think it would be appropriate for me to speculate.

Operator

And we’ll go to a follow-up question from Darice Liu with National Securities.

Darice Liu – National Securities

Thanks. So, Steve you have mentioned the encapsulation technology, I’m just wondering if you can talk about the revenue opportunities from that technology and if you’re bidding that product with anyone yet?

Steve Abramson

We are actually in process of developing our business model for that encapsulation technology. So, we’re talking to a number of our partners about how to proceed to commercialize that technology.

Operator

And we’ll go to another follow-up from Vishal Shah with Deutsche Bank.

Susie Min – Deutsche Bank

Hi, it’s Susie Min again. I just had a quick question on the lighting side, I know couple quarters back you said exposure was about 10% and since then you kind of additional agreement with customers on the lighting side has that changed at all meaningfully?

Steve Abramson

No, it has been somewhere between 5% and 7% of our material sales pretty much all year. There are number of different customers but they are very small quantities because they are really are just working on very small power lines.

Operator

And we’ll go to a follow-up from Hendi Susanto with Gabelli & Company.

Hendi Susanto – Gabelli & Company

Hi, Sid and Steve. I want to understand how much material flexibility you have with regard to your inventories. Let’s say if you pile up your likes any inventories and then your customers on later question of your emitter materials let’s say in February or March. Can you use that inventory build that you have or and then also want to Steve that there is any recent inventory write down if some host materials are no longer purchased by customers?

Steve Abramson

At this point, once the material is designed into a product we do generally understand the life of that ramp, so we don’t think there is an inventory albescence position.

Hendi Susanto – Gabelli & Company

Okay, thanks.

Operator

And we’ll next go to Rob Stone with Cowen And Company.

Rob Stone – Cowen and Company

Just a follow-up on one of your smallest segment technology development was quite a bit higher in the first half any color you can give there?

Sid Rosenblatt

We have a number of agreements with customers and some of our government programs and they are starting – they are going down a lot of joint development technology, development agreements customers are moving more towards commercialization and on the government side some of those programs are starting to wind down.

Operator

And we’ll take our final question from Andrew Abrams with Avian Securities.

Andrew Abrams – Avian Securities

Just a follow-up on the Japanese court issue, what’s your next step and what you think the timing would be on getting a final release on this or is that another step back to the Patent Office for their review again?

Steve Abramson

The patent is valid, now it was remanded not to the trial court to – we haven’t see the whole opinion but generally the way that would work. You remand it back to trial court for proceedings consistent with the appeal, with the appeal courts version or the person on the other side can appeal to the Supreme Court, so we are still talking about a many month process. These opposition proceedings have different levels of proceedings then take a while. The good news is that we did get this trial court issue reversed on appeal, which is very important especially in Japan.

Operator

And that concludes our question-and-answer session for today. And that also concludes our conference call. Thank you all for your participation and have a great day.

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