Good day, ladies and gentlemen, and welcome to Universal Display’s Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Matt and I will be your conference moderator for today’s call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darice Liu, thank you. You may begin.

Thank you, and good afternoon, everyone. Welcome to Universal Display’s fourth quarter and full year 2018 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 the 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, February 21, 2019. 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’d like to turn the call over to Steve Abramson.

Thanks Darice, and welcome to everyone on today’s call. 2018 set the stage for the OLED industry’s next growth phase with new OLE capacity announcements and expanding lists of panel manufacturers entering commercial OLE production and the broadening landscape of consumer end products. All of this fortifies the foundation for a strong growth in the coming years for the industry and for us. Our 2018 revenues under ASC 606 were $247 million, operating income was $57 million and net income was $59 million or $1.24 per diluted share. Under ASC 605, the prior accounting standard, our 2018 revenues would have been $326 million, operating income of $136 million and net income of $130 million or $2.77 per diluted share. These financial results show the magnitude of the impact that ASC 606 can have on the recognition of materials, royalty and licensing revenues. For 2019, we expect meaningful growth to resume as new capacity comes online, new OLED products are launched and progress continues with our customers’ commercialization plans. Our 2019 revenue forecast under ASC 606 is in the range of $325 million to $350 million. Under ASC 605, 2019 revenues are expected to be in the range of $395 million to $420 million. As we look back on 2018, we made significant progress with our internal growth roadmap, despite the soft premium smartphone market environment and excess inventory in the channel impacting our sales. This includes new customer agreements, advancement in our R&D programs, new infrastructure plans, and expanding our critical mass, all of which further solidifies our leadership position in the OLED ecosystem and buttresses our long-term plans to enable this growing industry in conjunction with increasing our top and bottom line. On the customer front, we announced an expanded evaluation agreement with Sharp and new long-term agreements with…

Thank you, Steve and again thank you everyone for joining our call today. Let me review our 2018 results before commenting on our 2019 guidance. Just as a reminder, revenue before 2018 are under the prior accounting standard ASC 605. Beginning in January 2018, we adopted a new accounting standard ASC 606. Under ASC 606, 2018 revenues were $247 million. Material sales were $153 million, and royalty and license revenues were $81 million. Under ASC 605, 2018 revenues would have been $326 million. On an apples to apples basis, under ASC 605, our 2018 revenues look similar to our 2017 revenuers. 2018 operating expenses, excluding costs of materials, was$137 million up from a $135 million in 2017. Under ASC 606 operating income was $57 million, net income was $59 million or $1.24 per diluted share. Under ASC 605 operating income was $136 million compared to operating income of $146 million in 2017. Net income would have been $130 million or $2.77 per diluted share, compared to net income of $104 million or $2.18 per diluted share in 2017. We generated $122 million of cash from operations and ended the year with $515 million in cash and equivalent or approximately $11 of cash per diluted share. Now moving on to our fourth quarter results under ASC 606 revenues for the fourth quarter of 2018 were $70.1 million sequentially down from third quarter 2018 to $77.6 million. Under ASC 605 our fourth quarter revenues would have been $92.9 million. This compares to Q3 2018 revenues of $91.6 million in Q4 2017’s $115.9 million. Our total material sales was $39.9 million in the fourth quarter compared to material sales of $51.2 million in the third quarter of 2018 and $59.8 million in the fourth quarter of 2017. Green emitter sales in the fourth…

Thanks Sid. 2019 marks the 25th anniversary of Universal Display Corporation. In 1994, we were founded on the mission to develop and commercialize key OLED technologies. And today we are a leading player enabling the OLED industry, an emerging market as forecasted to grow to $30 billion this year. The extraordinary value of our proprietary OLED technologies of phosphorescent materials has solidified UDC as an integral partner in the commercialization of OLED into the marketplace. Looking to the year, we are energized by the great opportunities to expand the market and fuel our growth, as we work with OLED manufactures to broaden the commercial landscape and build on the OLED industry's momentum. With the ongoing proliferation of OLED products, we see a market environment poised for stunningly colorful thin and innovative products, including novel plastic-based form factors that we believe can forge new commercial product roadmaps in the display and lighting industries. As a fast moving, forward thinking company, we continue to target new opportunities for growth as we leverage our intellectual property, materials and technology and growing product portfolio to further enable the industry's growth. Our ability to leverage the breadth and depth of our knowhow and experience in the new materials and new technologies coupled with our expanding infrastructure that is designed to drive competitive speed and cost effectiveness. We believe that we are well-positioned to enable the growth of the OLED industry for the near-term, mid-term and long term. I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Displays accomplishments and advancements. We are committed to being a leader in the OLED ecosystem achieving superior long-term growth and delivering cutting-edge technology OLED materials for the industry, for our customers and for our shareholders. And with that, operator let's start the Q&A.

[Operator Instructions] Our first question is from Brian Lee from Goldman Sachs. Please go ahead.

Maybe first one just looking at the mix of revenue this quarter, royalty and licensing ticked up to be a bigger percentage than you know the recent run rate we've seen over the past few quarters. How should we be thinking about that split and if you know you can kind of give us some guidance around what's embedded in the 2019 revenue outlook just what was driving the more heavily weighted royalty and licensing number this quarter away from that kind of two-thirds materials, one-third split you've talked about in the past?

That's a great question. Thank you, Brian. The customer ratios are different, but we believe that the average ratio for next year is likely to be between 1.5:1 and 2:1 really is based upon customer mix.

So just to be clear, 1.5:1 to between 1.5:1 and 2:1 on material. So skewing a bit more toward royalty and licensing than what you saw through 2018 that's fair?

That is correct. It really is due to customer mix.

And then you know maybe speaking about customers here for a minute. I know inventory was an issue that plagued you through different parts of 2018 at Samsung and I think towards the latter part of the year now LG as well. Can you give us kind of your latest thoughts around on what the inventory status material as you're aware of it. Is that Samsung and LG and how those factored into those out process for setting 2019 guidance? And then it just related to that the $2 million plus inventory write off what that might have been related to was that hosts or was that a different material that you can give us clarity around?

Sure. Based upon our most recent information Brian we believe that the inventory purchased in 2017 has essentially been flushed out of the channel, and so that that we think is not an issue going forward. And in terms of the reserve it is you know we are sole source phosphorescent emitter company and these relate to our phosphorescent emitters, and we build inventory to meet customer needs and sometimes these patterns shift. And you know based on our current forecast anything that's not estimated to be shipped in the next 12 months is subject to our reserves. But due to their long shelf life, and if the demand environment change, we can adopt – adapt as we move forward. And we review our inventory on a quarterly basis and estimate what will be sold over the next 12 months. And depending on material, we do make some adjustments to the reserve levels.

Last one for me, and I'll get back in the queue. Just the 70% gross margin guide for materials in 2019 and also the big jump in R&D spending year-on-year that you're forecasting. Those are unique dynamics we haven't seen in prior years. I'm wondering what is it about the next 12 months that's driving that dynamic? And then you mentioned some programs both internally and customer driven. Can you speak to how much of that is blue oriented versus other, and also if there is any concentration by product application, whether it be mobile or TV or smartphone or other, granularity around product applications you can give us? Thank you.

Regarding the first part of your question on gross margins, for the past number of years, our average annual material gross margins have been in a range of 70% to 75%. Last year was approximately 72% and we estimate it to be 70% average this year. Our material gross margins are impacted by product and customer mix. And frankly some of the new materials have higher costs. As we noted earlier with a growing number of customer list - customers and customer needs, our material design pipeline is really busier than it's ever been. As we continue to innovate and invent new materials, some of the new products are increasingly - have become more complicated and therefore it translates into additional costs. And in addition to that you know ASC 606 has about a 1% to 2% impact on our gross margins because we use average sale price. And in terms of R&D spending, R&D spending is you know two areas that we are focusing on this year is blue and OVJP. And so, if you look at the average over the past two years though if you take 2018 and we’re projecting for 2019 they actually is in the 10% to 15% range. It really depends some things get pushed from year-to-year or at different times.

Our next question is from C. J. Muse from Evercore. Please go ahead.

I guess first question, you know it sounds like the tone change you're on blue where you said it excellent progress, so would love to hear you know in more detail what you could share on that process?

That's a great question because we have been more positive. Our confidence in developing commercial phosphorescent blue and emissive system continues to grow you know dye to significant R&D progress that we're making and we believe that we are getting closer to initial commercial specs, but we're not yet able to provide a timeframe. I mean, blue is a work in progress and we are making progress but there's nothing that we can announce at this moment.

And I guess as a follow up and I guess a bit further out, can you talk about I guess where we are in terms of the roadmap for RGB OLED TV, so I guess within this, we’d love to hear on how you’re thinking about OVJP as well as perhaps other deposition technologies including printing that it could get us over the hump and drive commercialization?

Well, C.J., we've been focusing on OVJP for quite some time because we believe that it combines the benefits of evaporative small molecule materials with the printing process. So we recently designed a new prototype system and we have two chambers in already and the third chamber should be here shortly and we’ll continue to grow our development team on that. We think it's probably about three years to five years before we see commercial production with OVJP.

Our next question is from Mehdi Hosseini from SIG. Please go ahead.

Thanks for taking my question. A couple of follow-ups. Given how you describe the difference in ASC 606 versus ASC 605, $1.5 million to $1.0 million. It seems to me that TV revenue or revenue attributed to TV end market of customer B is going to grow at a faster rate compared to revenue contribution from customer A. Is that level of reconciling these multiple data points that it was discussed earlier?

I mean, Mehdi we really can't talk about customer specifics because each of our customers have different terms in terms of pricing of materials, based upon their cumulative volume discounts and how much is paid, either a fixed royalty that's allocated over the entire life of the agreement or whether they're royalty base and we have customers that are both. So what you see when you see the result is a blend of all of them which is an average which is why things do swing from one way to the other depending on it. But we really can't talk specifically one customer.

Let me repeat the question, is it fair to assume that a customer A, does a bigger difference between a ASC 605 and ASC 606 than customer B?

Again I can't really go through specifics. We do we have seen a large increase in deferred revenues and in our cash that we receive and you know as you're well aware over the years we've had a customer array that has paid us a fixed license fees that we had is paid each quarter now over the life of the agreement that is not the only amount that goes that is in the increase in deferred revenue but they are a large customer.

And then given your incremental confidence in the growth that is coming back from multiple customers, what are your plans for increasing capacity or asking PPG to increase capacity?

As many as you're well aware we're always on top of how much capacity we have. And we've added capacity a couple of years ago and we are looking at this based upon what we see the forecast for the next couple of years to be, we believe today we have capacity to meet the needs for the foreseeable future. But we are always looking at when we need to start the process of adding new capacity because we always want to be ahead of the game and we never want to be in a situation where we are not able to manufacture the phosphorescent materials that our customers need. Since we are a sole source, we will always build excess capacity and excess inventory.

I know. I think we're all trying to figure out when the timing of when these conversations with PPG will start.

I'll be honest with you, we always have these conversations and it isn't that it's up to PPG, it's up to us. So we are constantly looking at what our forecasts are for the next what we believe 12 months and 24 months. And it is an evaluation process that is ongoing and I can tell you we're talking about it right now.

Our next question is from Sidney Ho from Deutsche Bank. Please go ahead.

Thanks for taking my question. I've got a few. So the first one I have is first off is on the revenues -- deferred revenue side. And thanks for providing that ASC 605, that’s super helpful. But looking at the cumulative revenue deferred between 2018 and 2019, you'll be probably be around $115 million by the end of this year. Understand maybe smartphone premium is a little weaker but just trying to understand how this balance will refers itself. And in the case that you believed that over the life of the contract your largest customer may not buy as much, how is that impacting your revenue, how does that flow through in ASC 606 revenue?

Thank you, Sidney. And your question is really the deferred revenue, it's difficult for us to predict because as you're well aware, as we shift more to the customer we will take more of that deferred revenue. And under 606, you have to constantly be looking at the future. You have to take all of the revenue, that is in the contract over the life of the agreement. So with the assumption that the OLED industry will continue growth through the terms of our long-term agreements, and our material shipments will grow – you'll likely see preferred revenues begin to be recognized in the latter part of the agreement terms. And all the deferred revenue will be recognized by the end of the term of the respective customer agreement. So it is something that you're constantly adjusting.

Maybe on - my follow-up is a question related to your second largest customer. The number of OLED TV has increased what 50% last year – in 2018, and your revenue from that customer is roughly flat. Can you give us some more color on why that is the case? Is that a learning curve? Is that some pre-buy is going on? And if you look at what they guided for this year, I think Steve you mentioned another 30% increase. How should we think about the revenue growth there?

Yes. We believe that LG made significant efforts in this manufacturing efficiencies, which means for them better material utilization. It's been about three years since LGD really started producing OLED TVs in volume. It was 900,000 in 2016, 1.7 million 2017, and 2.9 million at 2018. And just like we saw with Samsung, the first few years they're really focused on improving manufacturing efficiencies. And then once you get to a steady run rate, the step down in efficiencies are not expected to be a significant. And for us, additionally any yield improvement mean more product end products not necessarily more material sales, but will be more royalties for us when they sale them. And so that’s what happened, and then also there is some impact on based on the ASC 606 using it average selling price versus a actual selling prices that ASC 605 users.

Okay, that's...

I hope that help.

Yes, that’s helpful. Maybe one last question for me. Following up to us earlier questions on RGB OLED the non I guess non-OLED TV makers have been quite aggressive talking about the price of 65 inch TVs going down below a $1,000. If I think about OVJP is there a way that I can think of how much it can help reduce the cost of TV panel do you have any time kind of estimate at this point?

It's difficult for us to estimate, however what we believe is that this process is one that is all that we think we can that can be used for large area displays and you know Gen 10 and above and it is for TVs, and it is a very scalable process and to be honest when you go from Gen 8.5 to Gen 10.5 or Gen 10 you can increase the number of 65 inch you can double the number of 65 inch TVs from a Gen 8 to a Gen 10 which really should help the cost per unit. So when you go to Gen 10.5 you literally go from per substrate, you go from 365 to 665 switch, we think is very good in terms of how it will help grow the industry because I personally believe that that LG has talked about making 10 million OLED TV in 2021, and this is the technology I believe and you're still talking about 5% of the TV market. OVJP technology, assuming that it does what we believe it will, will now allow you to start taking significant market share for TVs because I believe that the cost structure will – the cost will come down significantly.

[Operator Instructions] Our next question is from Jim Ricchiuti from Needham & Company. Please go ahead. Thank you.

Steve, I think it was in your commentary, your text, you talked about new red and yellow emitters, new host materials. And is this something we should be thinking about impacting revenues this year? And I don't recall you talking about host materials at least in recent conference calls, and I'm wondering if that's tied to the work on blue?

So, we are continuing – when we talk about blue, but we're continuing to invest red, new reds, greens and yellows, and we are continuing to improve the efficiencies and lifetimes, and we have a significant research program on that. We've also continued to work on host materials, we do not yet have any host wins to announce, but we're continuing to move forward because we do believe we have a competitive edge in the host business. So our hosts actually relate to the full color spectrum.

So not specifically - you’re not specifically calling that out as it relates to blue?

No, I was calling that out as it relate to a different material category.

And just on this modest downtick in material gross margins, Sid, you talked about the fact that with the larger number of customers and there's just more complexity to that part of the business. I'm wondering to what extent is pricing impacting this at all, impacting your margins in this area of the business?

It is really the cost side, it is not pricing. I mean, we do have cumulative volume discounts but as you're well aware is if we have new materials, we introduced we go back to a different price. And in addition, ASC 606 uses an average selling price which is depending on where you are on the contract is usually lower than what you're actually selling. But it is not the pricing side that is causing the margins to go down, it's the cost side.

Our next question is from Hendi Susanto from Gabelli & Company. Please go ahead.

Sid, you mentioned that 2019 gross margin is anticipated to be lower because new materials are more complicated and have higher costs. On the one hand one may think that new OLED display entrance in China may start from basic or less complex materials. On the other hand there's also a lot of talk about flexible OLED display. This is a multi-part questions. Like, first, can you shed some light whether flexible OLED display will require more compact materials or can the same materials be used for flexible OLED display? Second, would you elaborate characteristics of new materials in 2019? And third, do compact materials war on higher ASP when even it comes to commercial, commercialization down the line?

Yes obviously because we are really agnostic to the substrate, which is one of the major benefits of OLEDs and our phosphorescent emitters are prohibited and plastic can be the same or they can be different. But isn’t that you need to develop a whole new set of phosphorescent emitters just to work on the flexible side. And our materials are more complicated and as you get new customers, but to some extent, the new materials that get adopted are built into if you have a long term contract with that customer, they are built into our assumptions for the average sales price over the life of the agreement. So that we no longer see the benefit of a new material being introduced and seeing a spike in that - in the price, which is we do this assumptions over the life of the agreement, we make an assumption as to how many new materials we’re going to introduce during the life of the agreement. What they may be. And then, we build that into the average selling price. So it is built in, but it no longer see the benefit of the spikes.

And in terms of characteristics of new materials, would you be able to elaborate?

Well, basically the new materials, they can be a different color points, depending on the specific application, customers always want higher efficiency and longer life.

Yes, and then question for Steve. So Steve what calls you the strategic shift to invest in OVJP in 2019, are there some reason or potential catalyst that mobilized the company to put OVJP as your major investment in 2019.

Well, it was actually a few years ago that we had some really significant scientific and engineering breakthroughs and that's when we decided to move forward more aggressively on OVJP. So the one of the things we had to do was design a new tool because it’s never existed before. So with this design and development the new tool has been going on for a few years and now it's come online or it's about to come online and so we're getting even more excited about its potential.

Great, thank you. This does conclude the question-and-answer session. I'd like to turn the floor back to Mr. Rosenblatt for any closing comments.

Thank you all for your time today. We appreciate your interest and your support. Good night. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.