Good day, ladies and gentlemen, and welcome to Universal Display's Third Quarter 2016 Earnings Conference Call. My name is Lisa and I will be your conference moderator for today's call. Just a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Lisa, and good afternoon everyone. Welcome to Universal Display's third quarter earnings conference call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer, and Sid Rosenblatt, Executive Vice President and Chief Financial Officer. Before Steve begins, let me remind you today's call is the property of Universal Display. Any redistribution, retransmission or rebroadcast of any portion 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 Web-site. This call contains time sensitive information that is accurate only as of the date of the live Webcast of this call, November 3, 2016. 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, such as those relating to Universal Display Corporation's technologies and potential application of those technologies, the Company's expected results, as well as the growth of the OLED market and the Company's opportunities in that market. These include, but are not limited to, statements regarding Universal Display's beliefs, expectations, hopes or intentions regarding the future. It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected. These risks and uncertainties are discussed in the Company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the Company's securities. Universal Display disclaims any obligation to update any of these statements. Now, I'd like to turn the call over to Steve Abramson.

Thanks, Darice, and welcome to everyone on today's call. For the third quarter of 2016, we reported revenues of $30.2 million, operating loss of $3 million and net loss of $1.5 million or $0.03 per share. These results were in line with our expectations for the year. As we noted last quarter, while our revenue growth expectations have been delayed until 2017, this year has continued to be a meaningful year to build and prepare for that future growth. Leading panel makers are building capacity for the next wave of high-volume OLED production to begin ramping next year, OEMs are building product roadmaps for new OLED applications, and we are building our infrastructure to meet the growing needs of our expanding customer base. As we prepare to resume our growth trajectory in 2017, we are building up our core competencies to accelerate our material and technology initiatives. From further expanding our global partnerships to growing our R&D pipeline, to acquiring contract research organization Adesis, Inc. and BASF's OLED IP assets, all of this buttresses our committed path of continuous innovation and next-generation solutions, a strong leadership position in the OLED ecosystem and our confidence in 2017 and beyond. Let me provide an update on the OLED industry and then discuss our framework for growth in this multiyear CapEx cycle, which is forecasted to drive our double-digit revenue growth in the coming years. The OLED industry is in the early stages of what we believe is a multi-phase build cycle for the continuous adoption of OLEDs across a broad array of consumer products. Today's OLED market is primarily driven by smartphones, but we are also seeing growing interest from a broadening list of end-users for OLED TVs, wearables, virtual reality and augmented reality, and for emerging opportunities including automotive OLED display…

Thank you, Steve, and again thank you everyone for joining our call today. Revenues for the third quarter of 2016 were $30.2 million compared to third quarter 2015 revenues of $39.4 million. Our total material sales were $23.5 million in the third quarter, of which commercial was $19.9 million. This compares to commercial material sales of $30.2 million in the third quarter of 2015. The year-over-year decline is primarily due to our customers' production efficiency gains and product mix. Commercial host sales were negligible in the third quarter of 2016, compared to $1.4 million in the third quarter of 2015. Green commercial emitter sales, which include our yellow-green emitters, were $14.1 million in the third quarter, down 6% sequentially from the second quarter 2016's $15 million and down from the comparable year-over-year quarter $21.4 million. Red emitter sales were $5.6 million in the third quarter, down 2% sequentially from the second quarter 2016 $5.8 million and down from the comparable year-over-year quarter's $7.3 million. As we have discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors to this include material ordering patterns, customer production efficiency gains, product mix and contractual pricing reductions. Our third quarter 2016 royalty and license fees were $5.2 million, flat from the comparable year. The quarter does not include any Samsung license fee, which is $75 million for 2016, half of which is recognized in the second and fourth quarter of the year respectively. Moving along to material cost, material cost for the third quarter of 2016 were $6.5 million, down year-over-year from third quarter 2015 $7.2 million, principally due to lower emitter sales. Third quarter 2016 material margins were approximately 73% compared to third quarter 2015's material margins of approximately 79%. Third quarter operating expenses, excluding cost of materials,…

Thanks Sid. The market opportunity in front of us is tremendous. The display and lighting industries are evolving and we are in the unique position with our exciting pipeline of innovation to continue to play a pivotal role in the OLED market's future. We are expanding our global footprint and fortifying our strategic initiatives to meet the growing needs of our expanding customer base. We have increased our headcount to approximately 200 employees, bolstered our IP portfolio to over 4,200 patents issued and pending worldwide and continued to broaden our rich portfolio of proprietary OLED technologies and phosphorescent materials. As we head into the next wave of high-volume capacity growth which is forecasted to drive double digit revenue growth in the coming years, our excitement for the future is stronger than ever. I would like to end by thanking our employees for their exceptional work and continued dedication to Universal Display's success. Their commitment to excellence in innovation is reinforcing our foundation for future growth. I would also like to recognize our customers, partners and valued shareholders for your ongoing support. And with that, Lisa, let's start the Q&A.

[Operator Instructions] We will take our first question today from Brian Lee, Goldman Sachs.

I had a couple here. Maybe first, do you guys have any incremental feedback that you can comment on from Samsung or visibility on your part with respect to any recipe following the Note 7 issues here recently, how likely do you see the timing of adoption in Q1 versus laying out those expectations three months ago?

Brian, the Note 7 issue is unfortunate. We believe that Samsung is a great company and a leader and well-respected in technology, and right now we don't see any impact on our business of what has occurred with the Note 7. In terms of timing, it's always difficult for us to predict the timing of it, but we do expect that it's highly likely that some of our new emitters will be introduced next year and we expect new capacities that continue to drive our revenues next year.

Okay, fair enough. Second question, a bit more of a housekeeping one and I could just be missing something here, but Sid, in the release you mentioned operating cash flow for the first nine months of 2015 included an upfront $42 million license and royalty payment. I think Samsung accounted for $30 million of that. So, can you help reconcile what the remainder came from, and if you could also provide maybe similar metrics for the first nine months of 2016, just wondering if there's other upfront license and royalty revenues beyond Samsung that we should be aware of?

That was for the first nine months of last year, that was 2015, that the cash flow last year was significantly higher. For the first nine months of this year, which includes upfront payments – that's 2015 we are talking about.

Yes, that's my question. I guess if Samsung paid $60 million in licensing payments in 2015, presumably $30 million in Q2 and then $30 million in Q4, so that $30 million would have counted in the first nine months of 2015. So there is a $12 million upfront payment from other customers or other customer. Is there some additional disclosure that you can provide on that end?

Samsung payments are not upfront payments. Samsung are current payments. So we didn't get anything from Samsung that's in upfront. Most of that payment last year is LG. They made an upfront payment when they signed the license agreement in the first quarter of last year. There is nothing in deferred revenue that flips into revenue that relates to the Samsung license agreement. They are just current payments that are due at the end of June and the end of December. So we don't put them into deferred.

Okay, thanks for the clarification.

Next up we'll hear from Shannon Cross, Cross Research.

Looking forward to speaking with you more often now. I guess my first question is just looking at the materials gross margin, is there anything specific that you would point to that drove it down to 72% this quarter?

We always guide gross margins to be between 70% and 80%, and within each of them, within the margin profile, there is always some shifting and it really depends on the materials that are purchased and the quantities of material. Even though our emitter margins are between 70% and 80%, some of them are a little bit higher and some of them are a little bit lower. So it really depends on the mix of what is purchased.

Okay, so it's not a pricing issue, it's just a mix issue then?

I think it's more of a mix issue.

Okay, great. And then can you talk a bit about what you're seeing from some of your customers in terms of efficiencies that they've been able to drive on the production side, and if you can give any idea of sort of when that tops out or how you are thinking about it as – I assume with more and more capacity ramping that some of the new customers like – I mean when Sharp and Japan Display, I'm sure that your efficiencies will go down because they will be new to this effectively, so how should we sort of think about the efficiency of material usage as it ramps or improves this year and then versus what you think may happen in the next couple of years with new capacity coming on?

The customers always are working to be more efficient, and the efficiencies really depend on recipes and if they are using older or new emitters, dopant concentrations, efficiencies in manufacturing process and stack composition, and even what's in the other common layers. So they are always working on that. We have seen I believe some significant efficiencies in this year. We don't expect to see that as we continue down the road. I mean the efficiencies that you see usually relate when – after they've been using a newer material, they get more efficient, but once they've been using material for a long time, it's difficult to get step-function efficiencies.

Great. Thank you very much.

Our next question will come from John Quealy, Canaccord Genuity.

This is Jason on for John. So just following up on that efficiency question, do you have anything warped into the material supply component of the contracts that would make it maybe not a one-for-one relationship with the efficiencies? So for example, if shipments double but the scrap rate gets cut in half, are you still selling the same amount of material?

I'm not so sure if I understand exactly what you mean. I'm sorry. Would you just repeat it?

Sure. So I guess on a like for like basis, if Samsung improves their efficiency two-fold but they also ship double the amount, are they using the same amount of material? In the words, is the material revenue the same to you?

I think the answer theoretically is probably yes, assuming it is the same quantity that's being produced if they get 50% more efficient, and then that doesn't mean they buy half, but I don't think that's really the issue. It's really, it's yields or output, and we actually coat the entire substrate. And 50% efficiencies are really nothing that we've ever seen. So, that's really not the case.

Okay. I was just throwing out some numbers as an example, but I guess next maybe on licensing, if we're trying to look into future agreements or contract renewals, around at least the details you can discuss, can you give us a history on maybe timeline of the new negotiations, when does the manufacturer come to you to start related to when they will ramp production, or in Samsung's case, how has that renewal gone in the past?

I mean every customer is different. Some companies want to enter into long-term license agreements very early in the process. So they understand exactly what their cost structure is. Some customers that we have we negotiate valuation agreements with and then work through that, enter into commercial supply agreements. And all along, there is discussions, and to be honest they kind of know what our ask is, what our royalty rates are and what pricing will be in high volume. So it doesn't mean you have to sign an agreement just to know what your costs are going to be once you get into full high volume production. In terms of when agreements start, our last agreement with Samsung ended in June of 2010 and we signed the next, we signed the extension of that in August of 2011, but we did start speaking sooner than that. It really depends. I mean our current agreement ends at the end of next year and there isn't much else that I can say about that at this time.

All right, thanks guys.

[Operator Instructions] Up next is Rob Stone, Cowen and Company.

I wanted to ask about the CRO business, how we should think about the run rate for tech development and support and whether that's something that's seasonal or episodic in any way? Thanks. That's my first question.

Good question, Rob, because the CRO business that is non-related to us, as we said in the Q, it's under technology development. Technology development revenue was about $1.5 million, of which most of that is CRO business non-related to UDC, and we expect that to grow over the next year and we are encouraging them to have it grow over the next year. At this time, it's difficult to predict where it will be.

Okay. But in terms of your understanding of the business, is it more project driven, does it have a seasonal pattern that's discernible?

It is a little bit of each actually. They have some customers that they do ongoing work for. There are some jobs that come in that are 'do it now', 'hurry up and complete it'. I do not in looking at their historical numbers see a lot of seasonality in those numbers.

Okay. My second question is, plus/minus $10 million is a fairly wide range with just one quarter left to go in the year. I know things are lumpy and you don't really know till it's over, but any color you can provide on what might drive the range to that with just part of a quarter left to go?

It's still difficult even though we're into the quarter. Just to give you some history, a couple of years ago we expected, and it was the same timeframe, and we really narrowed the range, and to be honest there were a lot more purchases and we ended up going over it. So it is still difficult for us to predict. We know that there is new capacity coming on next year. Question is, when will the customers start to order for that capacity? So, to be perfectly honest, it is still a wide range that we are still comfortable with at this time.

Okay, thanks. I'll jump back in the queue.

Our next question will come from Hendi Susanto, Gabelli & Company.

Sid, in Q3, technology development and support saw a nice increase. I assume that came from OEMs outside of your major customers. Should we expect that level to be sustainable going forward, although there is some lumpiness I think that [indiscernible] should acknowledge?

Hendi, the technology development revenue in this quarter is mainly from Adesis. That has to do with revenue as a contract research organization. That is not related to UDC business. So that is from the consolidation of them. A lot of our technology development revenue, because of the stage of the industry, has been going down and it has been going down. And so, you may see it grow but the growth will come from Adesis.

I see. And then Sid and Steve, the press release mentions that Universal Display is building infrastructure to meet the growing needs of expanding customer base coming in next year. Would you elaborate on that, should we expect significant or small CapEx in order for the Company to enlarge its capacity?

We are always evaluating our manufacturing process needs and what we need to do. One of the things obviously is the acquisition of Adesis and whether or not we're going to have some CapEx expenditures at Adesis. As you are aware, we are fabless, so we don't have to build huge facilities, but I do think that next year you will see our CapEx grow. I don't think it's going to grow to anything that will make anybody nervous that we're spending a lot of money on CapEx, but it will grow over this year.

Got it. Thank you, Sid. Thank you, Steve.

We are fabless. The PPG makes our materials for us.

Okay.

[Operator Instructions] Next up is Andrew Abrams, Supply Chain Market Research.

Question on whether you have had any discussions with LG or seen any impact from there, potential change from yellow, green, blue to RGB in terms of their stack materials? I know it's probably early, but I'm assuming you've at least discussed it with them at this point.

I mean, to be honest, we can't speak for our customers, and our customers to be honest are constantly tweaking and changing recipes to get the highest performance and the highest efficiencies. So, they are always doing that.

Okay. And in terms of your patent costs, was there one-time patent cost in there or should we be looking at the number for the quarter being kind of a run rate going forward?

There's $2.7 million of additional amortization in that number. Most of it is based upon that BASF IP portfolio and a little bit is based upon the Adesis acquisition. So the big increase is related to amortization expense.

Got it, okay. And lastly, and this is a hard question to answer, but if you were to see volumes lower, material sales volumes lower than where they are now, does that impact your purchase margins with PPG, is there a sliding scale that you need to keep up with in order to maintain your margins or is it not related to a volume number?

Obviously we can't talk about pricing that we get from our manufacturer. But at this stage, we have our cost of our materials and the process down pretty well and we know what our costs are going to be per kilogram of material. If it was a significant change one way or the other, there may be some changes obviously, but I don't believe that's anything that's material.

Got it. Thanks very much.

We'll go back to Rob Stone.

A couple of follow-up questions on some topics we've had over the years but I know there wasn't an update in the prepared remarks, and that is, progress on solution processable materials and also that elusive PHOLED blue.

The elusive PHOLED blue, blue is work in progress and clearly we have nothing to announce at the moment, or it will probably in our prepared remarks. But over the past few years, we've expanded the team, the resources and our capabilities. Most recently we bought BASF's OLED IP assets. That's furthering our blue research efforts and it's going to help us, enable us to meet our customers' demand for all phosphorescent emissive stack, and we're integrating the BASF patents and know-how into our program. On solution processable, we're watching that. We still continue to believe that's going to be a very difficult row to hoe in order to get the commercial viability.

And with respect to the vapor deposition, I guess you need a partner or someone who can provide the equipment. I guess that company was for sale or was going to be acquired by a Chinese company, but the Germans [indiscernible]. Any thoughts on if you perfect the process, who is going to make the machine?

That's an interesting question, and by the way that related to something called organic vapor phase deposition. This is organic vapor jet printing.

Sorry.

That's okay because they are two different technologies and we are currently examining our commercialization efforts. We believe it's going to be – OVJP will be commercially viable in a few years and we are evaluating the commercialization and partnering options because we do believe it's a strong contender for cost-effective larger-area TV production.

Okay, thank you.

We'll take a follow-up from Hendi Susanto.

More questions, Sid and Steve. One customer generated 7% of your total Q3 revenue. Would you be able to share insight into what kind of materials and stuff that go into your customers, does that come from Adesis?

That's customer C, and C in our mind stands for China, just to be honest. It's Chinese customers.

Chinese customers.

We didn't mean to make a joke out of it, Hendi, but that is Chinese.

That's where it is right now.

That's where it is.

I think everyone is taking China seriously.

No, no, so are we.

And then second, how much of Adesis business is tied or may tie into new emerging OLED display players? In other words, how much role Adesis can play into helping new emerging OLED display makers in 2017?

That's a great question because the Adesis acquisition was a strategic one, and we have been working with them for five years and they have a great team down there of chemists and scientists and they are helping us with all of our new material development, and so it is a great addition to our existing team. And so they are someone that we've been working with and it really will help us. One of the reasons we bought them is to help us in getting our new products to market faster, and their process development work is something that's very important to us. So, we believe that the acquisition will really help us in our display business and our material development business and working with our customers. We are very pleased the way it's going so far.

Okay. Do you see them potentially working with your customers on a contract basis to help them, let's say ramp up their production facility or ramping up yields?

No, we will deal with our customers. They are a subsidiary of ours. They don't make end product. PPG makes our end products. But they are part of our team here. If there is any work that has to be done with customers, we will lead it.

Got it. Thank you, Sid. Thank you, Steve.

Next is Shannon Cross of Cross Research.

Just one quick one. Can you let us know, have you locked in the Adesis employees with options, and I apologize if this has already been out there, but what kind of contracts do you have with them to ensure that they stick around?

We have done a lot of work in ensuring that we maintained all of the employees at Adesis and we have put in place what we believe our incentives for senior folks and going fairly far down to ensure that they stay and that they are actually very excited about being part of Universal Display because of the future that we show. And the shareholders, the executives, there's a number of benefits that we have put in place and we will continue to put in place to ensure that we keep everybody that we want down there and it is our intent to have them grow over the next few years.

And to that point, from a revenue standpoint, I know their revenue is very small, but what should we think about in terms of their opportunity to grow the contract revenue beyond what they do for you guys?

As we had about almost all the $1.5 million this quarter, we expect that to grow. We're working with them to bolster their sales team and development team and we're trying to support them as much as we can to help them grow. A lot of their revenue was us for the last couple of years. So this is something that they had been working on, and we believe that it's something that can be a very profitable business and can grow. Now the rate of growth is difficult to predict at this time.

How many salespeople do they have? I mean, what is the sales process for that?

Their whole headcount is in the low 40s. So, they've got – as in any little company, the CEO and a number of the folks are really the salespeople. They do have a team of salesmen that – a few folks, but it is like in any small business and us as we grew. You got sales guys out there but the closers are the executives.

I was going to say, I know that you and Steve closed an awful lot of deals over the years, and probably didn't get comps for them from a sales standpoint, but you've done okay. Anyway, thank you very much.

Thanks Shannon.

Everyone, this concludes the question-and-answer session. I would now like to turn the program back to Sid Rosenblatt for any additional or closing remarks.

Thank you for your time today. We appreciate your interest and support and look forward to speaking with you again next year. Good night, everyone.

This concludes today's conference call. You may now disconnect.