Universal Display's Management Presents at Deutsche Bank dbAccess Technology Conference (Transcript)

| About: Universal Display (OLED)
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Universal Display Corporation (NASDAQ:PANL) Deutsche Bank dbAccess Technology Conference September 13, 2012 12:30 PM ET


Sidney Rosenblatt - Chief Financial Officer, Executive Vice President


Vishal Shah - Deutsche Bank Securities

Vishal Shah - Deutsche Bank Securities

Hi, good morning, everyone. Thanks for joining today. My name is Vishal Shah. I am the analyst on the Universal Display. With us today, is Sid Rosenblatt, who is the Chief Financial Officer of Universal Display and as many of you know, UDC is one of the leading OLED materials and IP company based out of New Jersey and has a very dominant market presence in the OLED market.

So with us, Sid is going to talk about the company in a couple of quick slides and then we will open it up for Q&A. Thanks, Sid.

Sidney Rosenblatt

Thank you very much and thank you for your time. All of you have seen this a zillion times, so I appreciate if you would read it. As I say, we pay our lawyers a lot of money and it would be nice if somebody would read it. So, we would appreciate if you would read all our K's and Q's.

We are an intellectual property development company. We started the company funding research at Princeton University and the University of Southern California. We have invested over $225 million. We have more than 2,700 patents issued and pending worldwide in the OLED space.

Our fundamental patents cover a process that we call phosphorescence and I will go into a little bit more detail as we have the Q&A but essentially our technology gives you a very power efficient light source. So that these emissive materials that are used in an OLED and an OLED is very different than any other type of display. We use 75% less energy than conventional OLEDs to get the same amount of light to power the molecule which when you translate, it means you can extend the battery life of the device that it is in.

We actually just acquired 1,200 patents from Fujifilm for $105 million in the last month and we have our patents issued and pending worldwide. I am certain one of the questions that I will get will have to do with some of the oppositions or issues with some of our patents and I would be happy to answer them during the Q&A.

The OLED technology is in all the Samsung Galaxy products. It's in the Galaxy Note. If you were here at CES, I can say it was January, you would have seen Samsung and LG both demonstrate 55 inch OLED TVs. These are prototypes. There is really no commercial product in the market place.

Samsung is the largest supplier of OLED technology in the market place today. We have a long terms license agreement with them and I will go through that in a little more detail. We also use our technology for lighting applications and OLED is a very efficient light emitter and we assigned a number of licenses to lighting companies.

The market, just on the display side, based upon display surge is one that is growing rapidly. This is a chart that we have actually used for 10 years and the only difference is that it looked the same for the past 10 years except the years have changed underneath.

Well, in the last six months, they have actually pulled their numbers in and have increased the market size as opposed to over the past six or seven years where it always looked the same except you just slid them for a year. The capacity is there. The manufacturers are there. The industry is really starting to take off.

We have got a long term license agreement with Samsung. It's through 2017. We have fixed license fees that we receive each year from Samsung in increasing amounts. We do not disclose what the future amounts are but the amount for 2012 is $30 million on the license side. In addition, they have guaranteed minimum purchases of our emissive materials in increasing amounts also through 2017.

We have short term license material supply agreements with a number of customers who are just getting into the market place, AUO, LG Display, Pioneer, Sony, Chimei. AUO has announced in the fourth quarter they are going to start shipping mobile size handsets, Chimei in the middle of next year. Pioneer, actually has been making OLED displays on all of their car stereos for the past 10 years. Sony has actually made all 11 inch OLED displays but they really have no manufacturing capacity.

As I said, on the lighting side, we have actually signed five long term license agreements. The difference on the lighting side is, no one is committed the CapEx to start high volume manufacturing.

From a historical revenue standpoint, our revenues from 2009, '10 and '11 have grown from $15 million to $60 million. Our guidance for this year is between $90 million and $100 million on a quarterly basis.

We record our Samsung license fee of $30 million in the second quarter and the fourth quarter. Just because it’s a fixed payment, we actually have to record it when we would have received the cash. So it will make each quarter look a little lumpy in the quarters that we have it, clearly, they will be higher, in the quarters that we don’t, they will be lower.

We have actually made money in Q2. We made $11 million when you compare it to Q1 which was a loss but the difference again is the fact that Q2 had a license fee from Samsung.

Our balance sheet at June had $350 million in cash. We spent $105 million to buy the IP from Fujifilm. So that number is about $245 million today. We have no debt, 46 million shares outstanding and we have licenses in place with a number of the major customers and I am only supposed to do this for five minutes.

So I would then answer questions.

Question-and-Answer Session

Vishal Shah - Deutsche Bank Securities

Thanks, Sid. So, maybe we can open up for Q&A. I will start off with a few and then open it up to folks here. Maybe you can talk about the composition of revenues just so we have a frame of reference to talk about. $90 million to $110 million in revenue, $30 million from Samsung. What's the composition is going to be between for the remainder of the revenues between the emissive materials and some of the other materials there?

Sidney Rosenblatt

Fir this year, I think materials will be 60% to 65% of our revenues, whereas the license fee, its $30 million from Samsung and we have some other agreements that pay us small license fees being that there is small quantities being sold but the second piece of the license fee is with some of our customers we have what we call material supplier license agreements whereas LG and AUO, I sell them materials and I sell the materials for 2X or 3X what I would if you signed a royalty bearing long term license agreement.

So we then report a portion of that material sale, essentially we will report the material sales what we would have sold if for and the rest of it is reported as a license fee. So the license fees maybe $35 million for this year and the total revenue number of between $90 million and $110 million.

We have about $5 million of grants from the Department of Energy and Department of Defense working on Department of Defense specifically on flexible displays, lightweight unbreakable displays for the soldiers. On the lighting side, on solid state lighting, very efficient OLED lighting where we have demonstrated over 100 lumens per watt in the laboratory.

Vishal Shah - Deutsche Bank Securities

That’s very helpful. Thank you. Going on to some specific material sales questions. On the last call you mentioned that you were building inventory in anticipation of a ramp in the second half for some customers, one particular customer. Can you talk about what are some of the factors we should be looking at and what are some of the things that could influence the ramp of that particular customer, especially in light of some of the recent regulatory decisions that were announced?

Sidney Rosenblatt

Well, that particular customer is Samsung, obviously and our licensed cover a process called phosphorescence in an OLED, and OLED is essentially seven layers of film between two pieces of glass and the entire display, the emissive layers is one/one thousandth of the thickness of a hair.

You use red, green and blue materials in all visual displays. Our red material in the emissive area is a material that we have been selling and on the call we reported that has been reported, we can't speak for Samsung and until we actually sell it or include it, we can't really talk about what will happen.

However, it was reported by a number of analysts that number of the chemical companies in Korea have said that UDC's green phosphorescence material is going to be used in the next generation Samsung display and they are host material. You usually mix host and the emitter together to get the emissive layer. We do not sell red host material because the material that was out there worked very well.

So we said we expect the third and the fourth quarter to be higher because we expect to be selling green emitters and green host and at the end of the June quarter our inventory number increased to about $8 million and we said that was really because we are starting to build inventory to meet the demand that we see in the third and fourth quarter of the year and we will report on November 8 and I really can't talk about vey much within it that’s happening in this quarter right now.

However, the issue that came up is obviously the Samsung, Apple decisions where Apple won the decision saying that Samsung violated their patents, its system patents or architectural patents on Galaxy II products, Galaxy Is, number of others. A lot of the products are actually at the end of their life cycle but there is also an injunction hearing that I believe is scheduled for December 8 and I believe that Apple has also asked to add some of the newer products in that.

I don’t know whether or not the Judge will let them do it or not. The lawyers say, it is kind of hard to add something into it that was not part of the lawsuit but who knows. Judges do what Judges want to do and we all want to protect our turf. So Apple has sued Samsung in the U.S., Samsung has sued Apple in 20 other countries around the world. So there is obviously a big dispute between them.

Will that impact us? I honestly can't answer that. I don’t believe it will. I believe that Samsung is using its OLED technology as technology that’s differentiating its product. The OLED screens were never part of the lawsuit. It had nothing to do with us. We are not a party to it, nor were they ever mentioned in it.

They are using the OLED screens in all their products to sell more Galaxy phones than they do iPhones. So that’s probably all I could say about that.

Vishal Shah - Deutsche Bank Securities

That’s very helpful. Thank you.

Unidentified Analyst

So they don’t have the new products (inaudible)

Sidney Rosenblatt

It should not and also we believe that even if there were, the hearing is December 8. Probably most of the stuff for the U.S. will be shipped in and secondly they do sell them around the world. It's not just in the U.S. that the Galaxy products are sold.

Vishal Shah - Deutsche Bank Securities

So worse case, it may impact for the next year ramp but as far as the second half goes, there is no reason why Samsung should pull back from the plans that they may have in the U.S. market.

Sidney Rosenblatt

I don’t believe so. I think that they will continue to do what they are doing. I can't really speak for either one of them but Samsung is the largest component supplier to Apple today and so it is a love-hate relationship and I really don’t believe either one of them will blow the other one up because I think in the long run if they try to do that, they blow both of them up.

So that would be pretty dumb. Not to say that people don’t do dumb things.

Vishal Shah - Deutsche Bank Securities

So just moving on to the other big potential customer for you which has been talked about all also quite a bit and you guys have also been working with LG, for instance for a long time. They seem to have some plan to accelerate their production. Are you happy with the kind of agreement that you have in place. What's the longer term vision there? Are you thinking about a similar Samsung type license agreement with LG? What are the catalysts for that to happen? Do you need to see them actually gaining some traction in the manufacturing process before they start doing that?

Sidney Rosenblatt

We are negotiating long term agreement with LG today. LG has not focused on mobile devices because they actually were the supplier originally of the Retina display to Apple. So they focused on TV applications. So they have been focusing on 55 inch OLED TVs and they actually have their own architecture that’s been reported that they are using because they got IP from Kodak Corporation or what are called the white with the color filter as opposed to Samsung which is using red, green and blue pixels direct view.

We have been working with them for five or six years. We have a great relationship with them. They know what our licensing terms are. The Samsung agreement is pretty much a one-off agreement. It has fixed license fees that increase each year. Doesn’t matter whether they sell product or not. Most or all of our other licenses are royalty bearing license bearing agreements. We would expect the next agreement would be royalty bearing.

Somebody says well, they want the same deal as Samsung gets,, would you give it to them? My answer would be sure but they are not going to sign that deal because they are not going to pay me $30 million in the year that they haven’t sold anything. So if they want it scaled down relative, we would not do that.

They know what our royalty rates are. They know what the material pricing will be when they sign a long term agreement and it really is up to them when they need to make sure that they fix their cost structure. We are constantly working with all of our customers to help them.

We won't say to any customer, if you don’t sign a license agreement at X price, we are not going to sell you material. That’s Qualcomm, and that’s not who we are and to some extent when you go to Korea and they say if you think you are Qualcomm you can go home today because the industry is new. We are doing everything we can to help the customers build the industry.

So we will work with the R&D groups. They issue purchase orders. They sign the agreements that says, we will sell the material that says you have the right to put this material into your device. It doesn’t give you access to any of our other IP and we, as I said, mark that up and we report a portion of the license fee. Makes it very simple. You don’t have to spend two years negotiating before they can get material.

There is an economic crossover point that everybody knows when you go to this volume it is cheaper to pay a royalty than to pay for the material this way and we work with all of our customers, started out with Samsung the same way.

So I think once they start building real capacity as opposed to pilot capacity, everybody is going to wonder what the cost structure is. So that would be the impetus to sign the agreements but we won't say you have to do it. To some extent, if you are the person who says I have signed a deal you are the guy who gives out the most.

Vishal Shah - Deutsche Bank Securities

Okay, just a clarification on Samsung. The $30 million number. I know you said that it's a blanket license fee but that negotiation happened at the time when you were only selling red materials. Now that you have green in the mix, how does that impact the outlook for license fees going forward?

Sidney Rosenblatt

License portion does not change. When we negotiated we actually built in what we thought they would add. The thing that will change is that the material sales that they add and then extra color, the material sales would double and if they by our host materials that should be an incremental increase also.

Vishal Shah - Deutsche Bank Securities

Okay, just to clarify, another question that comes all the time, is the LG technique or technology. Is that going to make the use of materials more or less for you versus the Samsung RGB technology?

Sidney Rosenblatt

Kind of a wash. There are a number of ways that you can make white. You can use, red, green and blue, co-evaporate them or evaporate two and then put another one and you get a white. You can also use two colors to get white. You can use a greenish yellow and a blue and it gives you white.

The question is how white do you need it. What's the color spectrum that’s necessary? We know that each of them, Samsung and LG are working with both. We do sell red green materials. So we have red emitters, green emitters, blue emitters and then we have the yellowish green which you would use for white with color filter.

White with a color filter instead of telling red material and green, so you get two thirds of the material. It is a 50-50 mix between that so you have 50-50 and eventually we expect to have blue phosphorescence that could go into the device.

So I don’t think it is very different but to be honest since there is no one that has any real volume in making TVs we don’t know what the real answer will be and I honestly don’t know whether you put 60% green, yellowish green and 40% of the blue to get white, it really depends. Everybody plays around with their own recipe.

Vishal Shah - Deutsche Bank Securities

Just a basic question. Samsung obviously have a lot of success with its current AMOLEDs into the handset using something for green. It has something in that today. What is it about your green that makes it better that they would make a transition? Is it so much more efficient that it's going to be an extra hour of battery life? Is it brighter somehow? Do they get better yields at manufacturing? What is it that would drive them to change from what they have today?

Sidney Rosenblatt

The technology that’s being used is what is called fluorescent and the green fluorescent materials and these were invented by Kodak in the 80s. Pretty efficient material. The green is more efficient. The red fluorescent material really is not very good at all.

What they get by adding green phosphorescence emitter is about another 15% to 20% less power utilization in the device. So it would then extend the battery but it is an incremental 15% to 20% power savings on the screen and your screen uses anywhere between 60% and 80% of your battery depending on your utilization.

Vishal Shah - Deutsche Bank Securities

Just so I understand the math here. The total display power consumption improves by 20%. So the green power efficiency of phosphorescence versus fluorescent, that’s going to be orders of magnitude given the amount of green material versus the other two colors within the display, right?

Sidney Rosenblatt

It is about the same amount of material that’s on the device.

Vishal Shah - Deutsche Bank Securities

Well, it's one of three colors and if you are getting the total display. Am I understanding you correctly that you are getting the total display power consumption improvement of 20% or is it 20% just as it relates to green?

Sidney Rosenblatt

It is 20% on the screen.

Vishal Shah - Deutsche Bank Securities

So it is much more for green. It has to be, right. The green has to be significantly greater than 20% better. Phosphorescence has to be more than 20%.

Sidney Rosenblatt

Yes, that is correct. I am sorry.

Vishal Shah - Deutsche Bank Securities

Then, maybe moving on to the IP question that you talked about. There were some recent challenges, especially in the Japanese (inaudible) on that and how do you see that backing your penetration in some of the other markets, especially in (inaudible)?

Then some of the recent acquisitions you have made from FUJUFILM. Can you talk about how that helps you longer term, especially given the licensing with Samsung and the (inaudible)?

Sidney Rosenblatt

We have had three or four or, maybe more patents challenged in Japan by a company called Semiconductor Electron Corporation. They are not a display manufacturer and they are not a licensor of phosphorescent materials. They are actually a patent holding company.

They have challenged our patents. We have had a number of patents significantly narrowed in Japan. There is three, I believe, specifically. In Japan, different than other jurisdictions. Just to give you an example. The one patent that was narrowed is what we call our Iridium Organometallic complex patent.

It's an architecture that if you use iridium in the phosphorescence molecule, it is covered by our patents on the architecture. So if you use it in a device, it would be under the royalty side. Within the patent we named three specific compounds that use it.

The court said, since you only talked about three, that's all you get. That same patent, which has been issued in U.S. and never challenged is a patent that we actually won in Europe. So that patent was one of the patents that was challenged by a group in Europe which is BAS, Merck, Osram, Philips and Sumitomo Chemical, all of whom either want to make materials or want to license technology and want a good deal. The OLED piece of the organometallic patent in Europe was upheld and in the U.S. it has been issued and in Korea it has been issued.

Japan is known pretty much around the world of being very provincial, in that, if you are a Japanese company, you tend to get broader patents, but as an outsider, in the U.S. you get very broad patents. The U.S. will issue a very broad patent whereas more than any other jurisdiction.

We don’t believe that decision occurred before we signed the Samsung license agreement. You would have figure out how to make and sell that molecule or that architecture that is covered by these three patents which you can make and sell in Japan and not violate of one of our other 100 patents in Japan by doing that. So we do not believe that any of them will impact our business worldwide.

The second piece, subsequent to that we have just acquired 1,255 patents from Fujifilm. Fujifilm almost sold them to Kodak. Kodak invented it. This is thin film technology that is when they started it, they had more than 600 of the patents that we have acquired from Fujifilm are Japanese.

They are much broader than any of the patents that we have. Half of them are on devices or architecture where you would get a royalty and half of them are on materials, specifically, iridium and platinum compounds and their work has been mostly done in blue emissive materials.

So we don’t believe that the decision really impacted our ability to license our technology. When you add to it the IP that we now have from Fujifilm we don’t believe that there is any issues and no one brings these issues up from a business side. The issues that we hear about IP are pretty much from investors. Not from customers.

Vishal Shah - Deutsche Bank Securities

Great, maybe you can talk about what you feel about the balance sheet, use of cash. You have got about $245 million cash available (inaudible) proceed further up, for the next 12 to 18 months, how do you feel for growth opportunities (inaudible) use of cash?

Sidney Rosenblatt

We were cash flow positive. We have actually made two other small investments that we disclosed. One was a $4 million note, the convertible note with a company called Flextronics. They actually work on solution based materials and they have vertical hull transporters that actually work very well with our solutions base materials.

Then we have a small investment actually in an equipment company that has been working with on our capsulation technology. I don’t see any large acquisitions. When we raised the capital last spring the portfolio that we had in mind was the Fujifilm portfolio and to be honest we really didn’t know what it would cost us to get it.

So we don’t really have any significant cash needs. I don’t expect to use up cash and I expect to generate cash.

Unidentified Analyst

Going back to the comment you made earlier about 55 inch TV market. Can you talk about, from your standpoint, is TV going to be a big contributor to your revenues for 2013 or are you talking more about 2014 for that? How should we think about the next year (inaudible)? Would it be driven mostly by Samsung and some of the other (inaudible)?

Sidney Rosenblatt

Well, what's important to us is increased capacity or substrates that are coated. So today, with Samsung in the facility, they are coating, I think the number is about 70,000 substrates a month that they start. Whether they make them into handsets or whether they make them into notes, tablets or even TVs, my material content is not going to change. I quote to whole piece of glass.

Where we will see increase is where they add capacity. They talked about adding at least four lines by the end of this year in their existing facility. TV applications, historically, everybody has really looked at TV applications as end of 2013 to 2014 with the hoopla over CES, each of them talked about maybe introducing them for $8,000 and $9,000 a piece. I know you can believe they are selling them today.

What you need before it is going to really impact us is them to build Gen 8 size facilities and have a lot larger substrates and more substrates to coat. I think, realistically for us, it’s the end of 2013 and all of 2014. I think you will see TVs probably but you will not see any real volume because you won't see any that have prices that are lower. I would be very happy if it was sooner.

Unidentified Analyst

Question on the manufacturing deals, typically all the display guys the go through a process of improving their yields and getting more out of their plants. Are you guys able to track how efficient Samsung has gotten over the past year working with you as they have gone and ramped up their capacity through their existing lines and as they move to TVs, do we see a change in terms of how much material from an yield standpoint is utilized and does that affect the math for you on your material sales? How should we think about those improvements because obviously that affects the volume of material that you are going to sell?

Sidney Rosenblatt

I will give you an example. The red emissive material, when they first started out, they probably used more. The simple analogy is that emissive layer has a host and an emitter or doper.

I use chocolate milk and white milk. You have white milk which is a host and chocolate milk is the emitter. The chocolate syrup. You only put 3% or 4% in and you get a glass of chocolate milk.

We give them a recipe that says if you want the perfect glass of chocolate milk, you put 5% of the chocolate in and you get a delicious chocolate milk or you get a great emitter and you get really long life time. Now these are fairly expensive program but the per unit cost is very low, pennies.

They will then, over time, say, I am not going to put 5%. I will put 4.9% and then 4.8% and see if it affects the performance of the device. At some point, you get to a point where your life time gets too short for the product. So we are going through that with red. We believe that they can't really get much more efficient in the terms of how they use red.

When we then start adopting green, I think they probably will use a higher concentration and then eventually work it through that point where they get to be efficient. We don’t see much of a change in our red utilization on each substrate because of where they are.

I think if green material seems to be higher in terms of dollars and quantity in the beginning, I think eventually it will migrate closer to where it is. So they do get efficient. In terms of their actual yield on the devices, we don’t get that information but it really doesn’t matter to us because if we coat the whole piece of glass, if their yields are 50%, I still coated the whole piece of glass.

If their yields are 90%, I still get the same material sale. If we had a royalty, it would matter but this a fixed license fee. So we get $30 million this year no matter what their yields are. With other customers, it will matter.

Unidentified Analyst

Sid, you guys hope to see better strong and the leading company, IP company in the emissive layer, would you talk about the other layers in the OLED space for a second and how important you consider them to be and whether you would also leverage into your knowhow if that is possible into those layers. Thanks.

Sidney Rosenblatt

We have always worked on the emissive layer and in our laboratories, we actually have developed host materials because we work with developing the emitter and you have to have a host and to be honest a lot of the companies wouldn’t sell us their host material because they think we are trying to steal it they say you send us your emitter and we say no. We think you are trying to steal it.

So we have actually developed one. So for green phosphorescence, when we gave it to the customers they said we are not getting the same performance that you are telling us because they were literally using the same green host that they used for fluorescent.

What ends up that our guys have actually developed a very efficient host material for green. So we are now selling green material. We sold a significant amount in the third quarter. Of course it was in some specific products and we expect to sell, as we said, in the second half of this year.

We have not, and in some of the IP that we purchased from Fuji, they actually do have some other materials in the stack that we are going to look at and see whether or not, the IP landscape in a host business, let's say, there is a lot of it.

Nobody has fundamental IP as we do in the emissive material. So you really have to find a material that works and then you have a const competitive material. We believe that the blue phosphorescence solution which will be a deep blue emissive material, actually maybe a system where you literally need to develop a transporter, hull transporter, electron transporter, host material, the whole stack essentially of a system which we may have to develop in order to get the life time of deep blue to meet their specifications.

So we will look at other areas but we tend to or want to work in areas that are high margin that are protected by IP.

Vishal Shah - Deutsche Bank Securities

Any other questions? Thank you very much.

Sidney Rosenblatt

If anybody has any specific questions, I will give my cards, I would be happy to answer them at anytime. Or you can contact through these guys or anyway you like to do it. I would be happy to help.

Vishal Shah - Deutsche Bank Securities

Thank you.

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