Good day, ladies and gentlemen, and welcome to Universal Display's Third Quarter 2018 Earnings Conference Call. My name is Dana, and I will be your conference moderator for today's call. [Operator Instructions] As 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 proceed.

Thank you 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 that today's call is a 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 website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, November 1, 2018. 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 applications 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 would like to turn the call over to Steve Abramson.

Thanks, Darice and welcome to everyone on today's call. Our third quarter 2018 revenues were $77.6 million. Operating profit was $26 million and net income was $22.8 million or $0.48 per diluted share. Under ASC 605, the prior accounting standard, our third quarter results would have been $91.6 million in revenues, $40.1 million in operating profit and $34.2 million in net income or $0.72 per diluted share. During the quarter, we began to see a pickup in the smartphone market, as new OLED products were launched, including the Samsung Note 9, Huawei Mate 20X and 20 Pro, LG V40, Google Pixel 3 and 3 XL and others. Also notable was Apple moving from one model with an OLED display last year to two models with OLED screens this year. We believe that these launches are indicative of the increasing demand and value of OLED in leading OEM product roadmaps and reinforces the strong secular OLED growth story. Near term however, the magnitude of the pickup to our material sales was not to the degree we had earlier anticipated. As a result, we are lowering our 2018 revenue guidance to approximately $240 million to $250 million. Under ASC 605, we estimate that our 2018 revenues to be approximately $315 million and $325 million. And as we look to 2019, we continue to anticipate it to be a meaningful year of growth, driven by a number of factors. These include continued growth in the smartphone market. We believe that new, innovative OLED product launches, implementation of 5G and other factors will help drive the continued pickup in the smartphone market. We also believe that the proliferation of OLEDs across the consumer electronics market will continue to broaden. We have seen OLED adoption in myriad applications, in AR/VR, wearables, tablets, laptop, automotive, TVs…

Thank you, Steve and again thank you everyone for joining our call today. Before I discuss our third quarter financial results, I want to remind you that revenues before 2018 are under the prior accounting standard ASC 605. Beginning in January 2018, we adopted the new accounting standards ASC 606. Revenues for the third quarter of 2018 were $77.6 million. Under ASC 605, our third quarter revenues would have been $91.6 million. This compares to Q2 2018 revenues of $56.1 million and Q3 2017’s $61.7 million. Our total material sales were $51.2 million in the third quarter compared to material sales of $36.8 million in the second quarter of 2018 and $47 million in the third quarter of 2017. Green emitter sales in the third quarter of 2018, which include our yellow green emitters, were $35.9 million. This compares to $25.7 million in the second quarter of 2018, and $32.8 million in the third quarter of 2017. Red emitter sales in the third quarter of 2018 were $14.6 million. This compares to $10.9 million in the second quarter of 2018 and $13.7 million in the third quarter of 2017. As we have discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors to this can include consumer product demand cycles, capacity ramp schedules, production loading rates, product mix, material ordering patterns, customer inventory levels and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they're also moving variables for us. Before we discuss Q3 royalty and license revenues, we want to remind you that under ASC 606, irrespective of when billings occur, we will recognize royalty and license revenues on a quarterly basis in proportion to corresponding OLED material shipments. Third quarter 2018 royalty and license fees were…

Thanks, Sid. Since Universal Display was founded, we have been steadfast in enabling the OLED industry’s tremendous potential and while that potential has been affirmed through these past 2 plus decades, commercial growth of the industry only began a few years ago. We are still very much in the early stages of the incredible long term growth path of OLEDs and displays and lighting. UDC is in a unique position, as we continue to play a critical role in the OLED market future. As a leading player in the ecosystem, we have the largest, deepest and strongest team in the world, focused on phosphorescent OLEE emissive layer technology. We're expanding our team to fuel our long term growth and increase our competitive edge. Building on the depth of our experience and know how, we are continuously innovating and inventing the embedding the best OLED immersive layer materials, while also strengthening our global IP portfolio. As we head into this next wave of high volume capacity growth, we are well positioned to leverage the vast opportunities in this thriving market to drive profitable growth and deliver the most energy efficient, high performance and cost effective emissive layer solutions to our customers and partners. I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart and elevating and shaping Universal Display’s accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long term growth and delivering cutting edge technologies of materials for the industry, for our customers and for our shareholders. On that note, operator, let’s start the Q&A.

[Operator Instructions] Our first question comes from the line of Brian Lee from Goldman Sachs.

I guess just wanted to start off with the guidance, given a pretty expected shift here so late into the year. The 50 million cut to the 606 guidance and then the $12.5 million revenue cut to the 605 guidance, I guess I'm still trying to reconcile how this all works. So your expectation of material shipments over the course of the licensing contract dictates how you pro rata recognize licensing revenue. So how often are you, I guess, re-marking the baseline of expected material shipment and the reason I ask is, when do you kind of see the catch up on some of these licensing revenues that are being received, but not recognized. That would be the first question.

Thanks, Brian. One of the primary reasons for the wide range between ASC 606 and 605 is really the product mix. Under 606, we use an average selling price for all materials sold over the life of a contract. Under ASC 605, it's actual billings and each material has its own pricing and therefore depending on product mix, it will impact the revenue profile differently under 605 and 606. For this year, lower material sales caused a larger discrepancy between 606 and 605. Under 606, the declining sales has magnified across the board. As ASC 606 revenue guidance is approximate 240 to 250, under 605, we expect 2018 revenues to be approximately 315 to 325. This compares with 2017’s revenues of 335.

Okay. That's all fine. I understand and I appreciate you guys continuing to provide the delta and bridge between the two different accounting methodologies, but when I look at the material revenue for 3Q and then what you're inferring for 4Q, it actually looks like you're in line to maybe slightly up versus the second half of 2017, when we adjust out for the 15 million or 20 million of pre-buys you had. So if that's kind of the baseline, I guess, I'm still trying to figure out how much higher does materials revenue have to be for some of these step downs and the ability to recognize royalty and licensing revenue to sort of flip back the other way?

Based upon 606 and the way that we have to interpret 606 is, as we've gone through a number of times, as you estimate the number, the number of grams you saw over the life of the equipment. And when you are below the amount that you estimated, it has an impact not only on our material sales, but on our license fees also, since they're tied together and it magnifies the problem. So when your material sales are lower than we anticipated, you end up with a much bigger decline just on the material side.

Okay. Fair enough. I'll take the accounting questions offline. Just two more and I'll hop back in the queue. When I look at the customer split, it looks like LG revenues fell almost $10 million sequentially, any color you can provide as to why that customer might have slowed to that degree, just looking back at their second half revenues historically, they're stronger, not weaker, which would make sense given the seasonality of TV as their main product.

It's difficult for us. I mean, customer ordering patterns are really difficult for us to anticipate. Quarter to quarter, forecasting is always an issue for us.

Okay. Last one, Steve, in your prepared remarks, you alluded to a few developments at Samsung, one specifically being the QD plus OLED approach to making TVs. I think, they also mention that that that process is in R&D stage on their third quarter call earlier this week. So, there's also the expectation that as part of that material stack, the OLED component would be blue. Can you comment on your involvement there if any and then just maybe even at a high level, what the implications would be for your own blue development because you know what we hear from industry chatter is that the blue fluorescent, that's in the white OLEDs might not be the best long term solution, given the lifetime and burning issues that we've been hearing about on that product set. So would be curious to just kind of hear your guys' take since you brought it up?

Sure. Well, we think it's a really good movement in OLED that Samsung is moving towards QD OLEDs for TVs. We think it's an exciting development. And as you know, we work with our customers on a number of different projects, but we don't talk about any of the specific projects, but I will say our customers are obviously very interested in our progress in phosphorescence blue.

Our next question comes from the line of CJ Muse from Evercore ISI.

I guess first question, trying to isolate the material that you reported versus what we're modeling and to get your thoughts on it. So, it looks to me like you're roughly 10 million to 15 million lower Korea, 8 million upside China and so just curious, as we isolate kind of your material sales to the September quarter, how much of that and I presume Korea, how much of that was lower unit demand versus perhaps better customer efficiencies that you didn't anticipate?

There's a number of factors that impact our revenues, obviously, whether it is customer demand, inventory, efficiencies. So all of them really have an impact on our material sales, but I mean to look at the quarter and look at what has occurred, I mean, we saw a pickup in the beginning of the second quarter and material sales and further, we saw an even bigger pickup or in -- during the summer. But orders then began to slow down in September and then continued through October. And as a result of that, our material -- we believe that our expectations for material sales are going to be lower for the rest of the year. What compounds this reduction is ASC 606. The impact of 606 magnifies the effect of lower than anticipated material sales, however, as we head into 2019, with utilization rates increasing and new capacity ramps, we believe that 2019 will be a strong year of growth.

Okay. That's helpful. And I guess thinking about the prior question, regarding 12 million shortfall on a non-ASC 606, translating to 50 million. And I get the impact of royalties. For you talked about roughly two-thirds, one-third relationship between materials and royalties, is that relationship changing and/or has your refined guide on ASC 606 basis reflected perhaps the change in accounting that you've come to in terms of how you think best to adopt 606?

We think that the ratio of 2 to 1 under 606 is still appropriate for our materials to royalties. But as we've said, because everything is tied to materials, when your material sales are lower, your royalties and license fees are going to be lower, because they literally are tied together now.

But how does 12 turn to 50, I guess is the question that we're all trying to figure out.

Well, it’s product mix, in that, our products that are sold with customers are priced differently whereas under, each material has its own pricing and then they’re printed on the mix. They’re different under 606 versus 605. Under 605, you use the actual price that you sell the materials. Under 606, it's an average price over the life of the agreement. So they can be different. And so when you do that, you do see a difference. And as I said, product mix really does make a big difference in this case.

Our next question comes from the line of Jim Ricchiuti from Needham and Company.

I’m just wondering, as you started seeing the orders slowing in September/October, can you -- help us understand which areas you started to see that and was it -- did it seem to be coming more from smartphone applications or the larger area screens?

Pretty much we believe it's on the smartphone side. I mean, this -- even though our sales to customer A went up from Q2 to Q3 significantly, over 100%, it was not what we expected and that really would be the smartphone side.

And Sid, as you saw that happening, did the slowing accelerate as you saw you is it has it stabilized? I'm trying to get a sense as to whether there's the potential that this is going to start to reverse in the next couple of months and I'm wondering what's going to drive that?

As a just in time supplier or provider of material, we have very short lead times. We do talk to our customers and based upon customer discussions that we've had recently, pretty much what we see over the next couple of months is what we recorded. The range is not that large. And, I've said there's always multiple variables that could impact ordering patterns from customers, which would include timing of introduction of new products and inventory levels, but pretty much when we saw the slowing down in September and October, we see that carrying through, through November and December.

And are there any contributing factors, either more broadly price breaks or volume price breaks or just are you able to tell if -- questions been asked just increased efficiency of the materials?

No. We don't have anything specific that we can point to. It really is what our customers have said us. It's not our customers have said, we need to do this or do that. It really is the customer, it's their demand side that's driving what they buy from us.

Okay. Are you seeing the same thing in China or is it just because so many of those producers are at very early stages of ramping?

China is really early and it is, going forward, things should get easier to predict, but as you're aware, particularly when guys are ramping up early, there are volume of material that they buy is always very volatile. They start buying, they do some production testing and then they look at it and see what the results are. So, once they get up to a consistent run rate, it's a little bit easier.

Our next question comes from the line of Sidney Ho from Deutsche Bank.

Just following up on the Q4 guidance. Are you expecting the decline quarter-over-quarter to come primarily from one large customer or is it more widespread? The reason I ask is it's kind of strange that the large OEM have, the smart OEM have SKUs this year and the fact that you started seeing slowdown so early after the launch, it seems like it should be the, I know it’s just one customer being the driver for Q4.

Based upon our initial estimate, it’s across the border, but we -- as we just said, it is smartphone related that seems to be the larger part, because they have to start within our largest customer.

Maybe a follow up to a questions earlier on ASC, well, I guess it’s ASC 606. I understand that the lower expected unit shipment for Q4 is driving a change for the full year guidance, but are there any major changes in your ASC 606 assumptions, whether it’s unit ASP assumptions over the life of the contract as a result of what you've seen this quarter or do you assume the revenue is now being pushed out to future years?

Pretty much that’s correct. That's being pushed out to future years. We have not made any change in assumptions. I mean after three quarters of ASC 606, we're refining things and getting better in terms of estimating what will occur, but there's been no significant changes in how we do this.

And my last question is on the customer C and customer D. For customer C specifically, 10% customer this quarter, is that the same customer as last four quarters as customer C and if they are the same, I'm curious if this is volumes starting to ramp or is it just part of the seeding process that kind of started in Q2.

Yeah. Customer C is the same as customer C in the last quarter. They did open a new line in the last quarter.

Our next question comes from the line of Atif Malik from Citi.

At the start of this year, you had a little bit of inventory problem with your top customers. For your best understanding, do you think that inventory has been worked down with the utilization going up in Q3 or is there still some inventory there.

It's our understanding that inventory levels for each specific material at our customers vary and that's depending upon changes in OEM customer orders and corresponding impact to fab utilization rates. So there may be still some excess inventory in the channel.

And then Steve, in your prepared remarks, you talked about a bunch of drivers that are incremental to next year, foldable phones, QD OLED, Samsung, the premiums of mobile OLED panels have come down versus rigid. So what does all mean qualitatively in terms of the seasonality for first half next year?

I'm not sure, given our history, there's really less seasonality in the marketplace. It’s really dependent a lot on the new fabs opening up, the increased utilization rates of our customers, which then are driven by or can drive new product introductions. So it's really when the fabs are going to open and how they're able to increase the utilization with the product developments.

And one last one for Sid, did you see an impact from China tariffs to your supply chain or did you hear it from your customers in terms of impacting their end demand.

We worked really closely with our customers in China on a wide variety of opportunities and continuing to grow our partnership with them. This includes discussions on how current trade issues may apply to our materials. We have not seen some pre-tariff purchases during the quarter, but I'm sorry, I said, we may have seen some, not we may not have. But we have not seen any indication that in the current trade situation that it will impact our business long term.

And the next question comes from the line of Hendi Susanto from Gabelli and Company.

I would like to understand more about ASC 606. So, how does higher or lower material sales affect your gross margin?

On our gross margin, because of ASC 606, we use an average selling price. So it would not affect our gross margins very much. It's always product mix that affects our gross margins, but it is not 606 that's going to specifically impact our gross margins.

And then secondly under ASC 606, how about if you change your assumption on how much material your sales is across multi-year contracts, like, if you make a judgment of whether your sales of Montreal is higher or lower during the say the multi-year period?

We do change our assumptions as over the life of the pot, but we haven't -- we have not seen a significant change in our, what we believe, our business will be over the foreseeable future and over the life of all of these long term agreements. Quarter to quarter, things change, but overall, we don't see any real difference today that we did two months ago or six months ago.

And I’d like to say if hypothetically you change your assumption on the model materials and then it's lower, will it drive like a higher license revenue because the license revenue will be spread across like a smaller volume?

That is correct. If you sell less material than you estimated, then because it is a direct correspondent, if you sell less, then you have what your license fee is, then you will have an increase in the license fee per gram or per kilogram that you sell. That is correct.

That's helpful. And then Steve, is there a way to tell how different materials for QD OLED for those current OLED display materials?

Could you repeat that question again?

The materials flow QD OLED, that Samsung mentioned in the call, like how different the materials will be in QD OLED versus current materials in regular OLED?

Well, the way that QD OLED works, as I understand, is you have a blue emitter and then our center blue emitters and then you use the quantum dots to convert them into red and green as well. So Samsung would be designating the specific types of materials that they would be looking for, for both the OLED portion and the quantum portion.

So like they need the blue emitter materials, but they don’t need the red OLED and green?

That is correct. The way it’s currently configured. That is correct.

And then one last question, is there a way to tell whether the short update in sales and sales projection is due to, let's say, like lower display unit production or whether customers may experience higher manufacturing efficiencies.

As we stated earlier, we do think that -- obviously the smartphone market has been much softer. We anticipated there's always a number of variables that impact our material sales, whether it's utilization rates, whether it's inventory. So, there is always a number of things. It is difficult for us to predict which one of those are the reason that material sales are down.

[Operator Instructions] Our next question comes from the line of Andrew Abrams from SCMR.

Hi, guys. Just one quick question. Do you have any backplane changes or had you had any backplane changes in your assumptions for 2018 and do you see that in 2019, as you start to look forward?

Your question is whether there's new materials are going to be adopted or whether the same materials are being adopted. And, we're constantly giving our customers new materials to evaluate and they're constantly asking us for materials that have different performance characteristics. But, we really don't talk about which customers by which materials.

And just to clarify, would you expect any major change in a backplane? I know, there was a point, I think it was last year where one of those backplane changes got delayed. Is it the same kind of process going forward or are these more incremental changes that are made in terms of materials.

I'm not trying to avoid your question, we can't really speak for our customers and when they adopt new materials. As you're aware, it does have some impact on pricing, but under ASC 606, there really is not, because when you build your long term model with your customer, you actually have to build in when you think or when will they adopt new materials because that affects your average price. So even if they adopted new materials under ASC 606, you would not see a spike in price of the materials because it is an average.

Our last question comes from the line of Brian Lee from Goldman Sachs.

Yeah. Hey, guys. Just one quick follow up. I don't know if you called it out, but the $1 million inventory writedown, I think it was materials related. Can you speak to what material type that was related to and just maybe provide any color there?

Sure. As you're aware, from an accounting standpoint you look at your materials and you do estimates of material utilization over 12 month period and so we do do that and our materials actually have a very long shelf life. So we did reserve about $885,000 this quarter. We review our inventory on a quarterly basis and estimate what it's going to sell and depending on the material, sometimes, we'll adjust our reserve levels as we move forward, but these materials have a long shelf life and then based upon forecasts, things change and we may end up selling these materials, so we're always looking at that. We have a lot of materials, we have new customers, so there are materials that we will have to continue to keep an eye on.

Thank you. This concludes the question-and-answer session. I would 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 we hope you all have a good night. Thank you.

Thank you.

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