Good day, ladies and gentlemen, and welcome to the Universal Display's First Quarter 2019 Earnings Conference Call. My name is Umer, and I will be your conference moderator for today's call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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. Good afternoon, everyone. Welcome to Universal Display's first 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 express 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, May 2, 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 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. We are pleased to report first quarter 2019 revenues under ASC 606 of $87.8 million, operating profit of $34.4 million and net income of $31.5 million or $0.66 per share. Under ASC 605, the prior accounting standard, our first quarter 2019 revenues would have been $101.6 million, operating income of $48.2 million and net income of $42.5 million or $0.90 per diluted share. As we look to the year, we continue to see solid momentum in the OLED industry and combined with better than anticipated first quarter results, we are now raising our 2019 revenue guidance. Our new 2019 revenue forecast under ASC 606 is in the range of $345 million to $365 million. Under ASC 605, 2019 revenues are expected to be in the range of $405 million to $425 million. Sid will provide further details shortly. Since our last earnings call, OLED activity continues to broaden in this multiyear CapEx growth cycle. At Mobile World Congress, form factor was a hot topic of discussion with foldable being the major theme. Samsung kicked things off just before Mobile World Congress with the unveiling of the Galaxy Fold. Less than a week later at the Barcelona show, Huawei showcased their foldable Mate X, which is expected to launch in June. TCL unveiled a new foldable OLED phone prototype using a 7.2-inch AMOLED display that folds inwardly, and Nubia demonstrated it's Alpha foldable device that turns a smart band into a smartphone, which begins shipping this week. Driven by a robust pipeline of activity from both panel makers and OEMs, we believe that the flexible foldable consumer electronic path is expected to lead to a myriad of new products, designs and applications. Earlier this week, Samsung announced strong Galaxy S10 sell-through in…

Thank you, Steve and again, thank you, everyone for joining our call today. Revenues for the first quarter of 2019 under ASC 606 were $87.8 million, sequentially up from fourth quarter 2018, $70.1 million and Q1 2018 $43.6 million. Under ASC 605, our first quarter revenues would have been $101.6 million. This compares to fourth quarter 2018 revenues of $92.9 million and Q1 2018 $68.2 million. Our total material sales were $54.5 million in the first quarter compared to material sales of $39.9 million in the fourth quarter of 2018 and $25.3 million in the first quarter of 2018. Green emitter sales in the first quarter of 2019, which include our yellow-green emitters were $41.6 million. This compares to $27.9 million in the fourth quarter of 2018 and $17.1 million in the first quarter of 2018. Red emitter sales in the first quarter of 2019 were $12.8 million. This compares to $11.8 million in the fourth quarter of 2018 and $8 million in the first quarter of 2018. 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, device recipes, 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 are also moving variables for us. Before we discuss Q1 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 in proportion to corresponding OLED material shipments. First quarter 2019 royalty and license fees were $30.3 million, this compares to $25.9 million in the fourth quarter of 2018 and $15.9 million in the first quarter of 2018.…

Thanks, Sid. As we approach the 25th anniversary of the company's founding, I would like to take a moment to reflect on the past two-and-a-half decades. We are founded in June 1994 with a vision of creating the next generation of energy-efficient displays, back when TVs were still CRTs. That pioneering technology was energy-efficient phosphorescent OLEDs. For most of our history, we are a R&D start up, investing significant resources to discover, develop and deliver innovative solutions to enable our customers and the OLED market. Today, our proprietary technologies and materials can be found in virtually every consumer OLED product around the world, which is forecasted to be approximately a $28 billion market this year. The proliferation of OLEDs continues in the marketplace. OLED is a display of choice for premium smartphones and TVs, and the only display technology that is substrate enabling and inherently conformable, bendable and rollable. Additionally, broadening market penetration into the mid-range smartphone segment and with new OLED tablets, laptops and automotive applications emerging, we believe that the OLED industry has tremendous momentum. 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 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 and materials for the industry, for our customers and for our shareholders. And with that, operator, let's start the Q&A.

Thank you, Mr. Abramson. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from C.J. Muse, Evercore. Please proceed with your question.

Question, I guess first question, as you think about the upside in Q1, looks like it's primarily Korea end materials. And so curious, if you could provide some more details on the drivers there, in particular around how you're seeing inventory levels at those two key customers?

That's a great question, C.J. So we – with our customers inventory levels, we don't see a lot – we don't get a lot of visibility regarding that. But we are just in time suppliers, so as we get orders, we ship the same day or within 24 hours. So there's not a lot of – our customers don't give us a lot of visibility into their inventory. Clearly, we had more material sales, because material sales drive our revenue under 606 today, as opposed to in the past under 605, it was not – it was driven by when you got the cash. So it is a little different today to way that the accounting works. And you know, we believe we are still in the middle of a multiyear OLED CapEx cycle. And how each quarter plays out, it's not always predictable.

Got you. All right. And I guess as my follow-up, how should we think about the linearity of revenues as we proceed through the year? Particularly, as you think about some of the, I guess, non-Korean customers as they ramp into the second half of 2019?

Again, quarter-to-quarter are difficult to predict, but Q2 is tracking in line with our guidance with our short lead times, we expect to see – we still expect to see significant growth, which is why we raised our guidance, but quarter-to-quarter, it's still really difficult for us.

Okay. Thank you.

Thanks, C.J.

Our next question comes from Brian Lee, Goldman Sachs. Please proceed with your question.

Hey, guys. Thanks for taking the questions. Just had two. May be as a little bit of a follow-up to the prior question. You know in general, I think, most people appreciate that smartphone demand and utilization cost industry have been kind of weak to start the year, maybe just point-blank question on do you think your over shipping actual demand right now. And if that's the case, just given the short lead time, it doesn't feel like customers necessarily need to build inventory for materials. So is there any recipe or something else that we might be missing as to why your specific growth seems to be much better than the trend some of your customers are generally seeing? Any thoughts there would be appreciated.

Well, as you said, sometimes production and sell-through by customer doesn't really relate directly to our revenues, but it's up across the board. So, all of our customers are up. So, production and sell-through are really different, and they're not always linear. And so, if you look historically, back in Q3 of last year, our top customers had a strong quarter. And in a few days afterwards, we had to report lower guidance. So it's difficult to put those two together because there's inventory bills, there's lots of things that impacted revenue by our customers as opposed to demand for our materials.

Okay. Now that's fair enough, I appreciate that. It's not been historically co-related as tightly as we would all like. The second question, I'll pass it on, the ratio of green materials to red materials revenue spikes this quarter are quite a bit. And just looking back at the model, it's never been this skewed toward green relative to red. Just wondering is there anything to read into this? Is there been new recipes or maybe some new adoption of green almost any of your customers that maybe haven't been using it before? Historically, we're just red-only customers?

It's not really that. I mean, you can see customer B was up quarter-over-quarter and customer A was – we don't really disclose it, but you can figure it out but it's our yellow, green materials that are really increased that number in the quarter, and that's customer B.

Okay. Fair enough, guys. Thanks.

Thanks, Brian.

Our next question comes from Mehdi Hosseini, SIG. please proceed with your question.

It's actually Mehdi Hosseini from SIG. Thanks so much for taking my question and congrats on a great quarter.

Thanks Mehdi.

Last quarter, you had constructive commentary on the blue material. This time, I didn't really hear much, and I don't want to make a big deal, perhaps if you could put things in perspective and give us how we should be thinking about the progress in commercialization of the blue emitter, and I have a follow-up.

Okay. Fair enough, Mehdi. We continue to make excellent progress in our commercialization of the blue emitter or blue emissive system. As you know, we're focusing on color point, efficiency and lifetime. And the progress, sometimes there's more progress on one of those three elements. The object is to get all of those three elements into a commercial product and that is what we're focusing on. Sometimes we continue to make strong incremental progress, sometimes we'll have a significantly leap up in progress, but the progress is continuing to be there. We still cannot predict when it will be commercially available.

Fair enough. Thank you. And for the purpose of modeling, how should we think about the ratio between material and licensing royalty under ASC 606? I think last quarter you talked about a ratio closer to 1.5 if I'm not mistaken. If you just could give us an update, it would be great.

Yes. Each customer's ratio is a little different. We believe the average is between 1.5:1 and 2:1 for this year, and that's where it is. And I think this quarter, it came in the middle.

Great, thank you.

Thanks, Mehdi.

Our next question comes from Atif Malik with Citi. Please proceed with your question.

Hi thanks for taking my questions and good job on the quarter. Your sales at the Chinese panel maker increased quite nicely in the March quarter by, I think, about $10 million or so. There have been news that the yields are progressing better with some of these Chinese projects. Can you just provide us a sense on where you think the yields are with these Chinese panel makers? And how should we expect the trajectory of the growth in -- with the Chinese panel makers?

Yes. We're very happy with the progress that's being made by Chinese manufacturers. And we've got a number of customers in China, which includes BOE, Tianma, Visionox, China Star, all investing in OLED capacity. So we're very happy, I mean. We think that, as Steve said, when you look at BOE's torque and capacity, they are going to have a significant amount of capacity in 2021 to 2022. So we're very pleased with what they're doing and we're working closely with them.

Great. And then on foldable phones, there have been delays in some of the phone launches because of the panel bending and what not. Is it fair to assume that the impact from the foldable phones in terms of units is very small to your full year outlook?

Yes. It has a small output -- impact, but we are very excited about the future of foldable phones and the whole foldable market. And as you heard, Samsung talked about this and they delayed the launch, but we really expect this product to be a game-changer as we move forward.

Great, thanks.

Thank you.

[Operator Instructions] Our next question comes from Shannon Cross, Cross Research. Please proceed with your question.

Thank you very much for taking my question. I'm curious given the strength of material sales and something we saw, I think, Samsung a year or two ago, could break point in terms of the contracts from the volume standpoint that we should be aware of as some of your customers really start to ramp their volumes?

We -- as we've said, all of our contracts have cumulative volume discounts and when you reach a terminal value it is there. So, it is in -- it's -- we just had a strong quarter from them when you compare it to last year when Samsung purchases were very low. And obviously, the difference between 605 and 606. Under 606, it's the average selling price over the life of the contract versus the 605 taxable) prices.

Okay. And then I guess, when you think about the guidance that you gave for the -- back in January or early February, what's really changed? I mean it's -- I guess, what I'm trying to figure out is I know you sold more, which make sense, but you didn't take up numbers dramatically beyond the upside that we saw in the quarter this time. So, I'm -- your typically conservative, but I'm just trying to understand, sort of, what behavior you saw specifically with your customers that lead you to raise your numbers, and maybe lead you not to raise them as much as one might have thought given the upside?

Sure. If you're asking this -- as you said, we're being a bit cautious then the answer is yes. Given our forecast history where we are in the year, which is early and the dynamic nature of the consumer electronics industry and the impact that has on OLED panel makers, we believe that the new range is a prudent forecast.

Okay. Thank you for translating for me. The last question I have though is on incremental manufacturing capacity. I realize you had it raised it that much, but just to make sure I'm sure PPG has plenty of space given the investment you made last year, but is that correct? And at what point you think you need to add more?

That is correct. And as I think we may discuss as soon as we finish one project of adding capacity, we are looking at when we need to add the next one. But we believe where we are today as we are in great shape for 2019 through 2020.

Okay, great. Thank you very much.

Thank you, Shannon.

Our next question comes from Jim Ricchiuti, Needham & Company. Please proceed with your question.

Hi guys. This is Mike [Indiscernible] on Jim Ricchiuti. Just wanted to get a better understanding of the R&D dynamic that you guys have going on. Is there anything we should be mindful of as we're looking out across the rest of the year, especially as you guys are investing in blue?

We've talked about R&D and our R&D growing year-over-year. I mean blue is clearly one of the areas that we're focusing on. In addition to that, it's OVJP, which is another one of our major R&D products that's going forward. In addition to our ongoing R&D in terms of our business with red emitters, green emitters, yellow emitters, so that's really what we do and we focus on what we think is necessary over the next 12 to 24 months. So, we do expect it to go up about 10% to 15%.

Thank you for that. And then you may have gone through this earlier, I might have missed it. But can you help me understand the year-on-year decline that we're seeing in the materials gross margin?

Let me just -- our -- historically, our R&D is going up about 10% to 15%. This year we actually expect it to go up much more significant amount because of the effort that we are putting into blue and into OVJP. So, it's more like 20% to 25% for this year over last year.

20% to 25%, okay. Thank you.

And the gross margins change quarter-to-quarter, there's lots of things that impact our gross margin whether it's new materials or some materials have higher costs, and we expect it to be around 70% for the year. But historically, you've seen it go up and down quarter-over-quarter depending on product mix.

Our next question comes from Hendi Susanto, Gabelli & Company. Please proceed with your question.

Good evening and thank you for taking my questions. If I may ask two questions? First, with regard to foldable phones, how similar are the materials and how transferable accessing high manufacturing yield can be transferred and implemented for foldable displays?

Foldable phones for us, there is no difference between glass and plastic. I mean we've been making -- Samsung has been making plastics substrate in 3, 4 number of years, and it's a plastic substrate. So from the substrate standpoint, there is not very much different. So for us, it's pretty much the same, whether it's glass or plastic.

Got it. And then Steve or Sid, can you share more information about UDC ventures? I read that it will fund products and technologies that may be synergistic to your company. First, I would think that synergistic area to OLED display are somewhat limited by nature. Can you define what areas that are synergistic and off your interest in investing? And second my I enquire, how much capital it has to invest?

I'm sorry, can you repeat what you said in the first part?

About the synergistic area that will be of interest for UDC ventures?

Well, we've always looked at different opportunities and we've said that we purchased Adesis, and we are always out looking for opportunities that either enhance or are in areas as to round our OLED development. So we were always, as we've said, we keep a lot of cash on hand, one that as a licensing company you need to have it. And two, if there are opportunities that we think are synergistic to what we do, then we will look at making an investment.

So Sid by nature, is it more on the materials side?

We’ve always been looking at a wide variety of opportunities, and we're looking at things opportunistically.

And then my second question was that whether you can share like how much capital it has to invest?

We don't talk about how much we have available to invest in different opportunities at this time. Operator

Okay, yeah. Thank you.

Thanks.

Our next question comes from Andrew Abrams, SCMR. Please proceed with your question.

Hi, guys. And congratulations on the quarter, a lot better than the last quarter. And I was just wondering if you could give us a little bit of information on your soluble material research. And any of those type of materials that you might be sampling to or providing to some of the other panel producers?

Yeah. We've talked about piece where OLED for a number of years, which would relate to printing technology. We had a relationship a number of years ago with Epson Corporation on printing. We are focusing our efforts today on OVJP, because we believe that, a dry printing process is one that you're essentially are using proven technology, which is back and deposition and being able to print the materials. If this folks need principal materials piece for OLED we have them. That is not a focus on us, because we spent a lot of time. And we really believe that the answer for printed OLED, large area displays is OVJP.

And in that regard with OVJP, have you guys got into the point, where you are selecting a manufacturer for the device or at least an R&D type of device?

We expect a third chamber of IT. So in the next couple of months we are doing a lot of basic science to make sure that the design is what we think it is. And we are not at a point where we're going to start looking at a manufacturer today. We have a lot of work that we still need to do internally.

Got it, thanks very much.

Our next question comes from Nam Kim, Arete Research. Please proceed with your question.

Hi, thank you for taking my time. Congratulations, great quarter. You said, your customers are doing correlate with your business, but in terms of the OLED production. They stated about lower utilization in Q1 during earning call. And Samsung case guided another tough quarter in terms of utilization. This quarter before picking up in second half and LG Display don't seem to ramp fix line anytime soon. I don’t know how much difference in TV panel production sequentially last quarter. So, you are materially fairly increase a lot and to avoid some inventory situation next quarter. I mean yeah, I mean not necessarily inventory maybe revenue growth next quarter given this cautious guidance either customer. I just tried to concern this connection between your customers' utilization and your material revenue growth. Thank you.

I mean the production and sell-through are different, obviously, and revenues aren't always linear. But we shipped based upon what our customers need. And we have a strong quarter across the Board, and we don't believe that there is any inventory build, significant inventory but, there could be some. And that's one of the reasons why our guidance is where it is. We are still cautious because it is still very early in the year.

Okay. Thank you.

Thank you.

Our next question comes from Sidney Ho, Deutsche Bank. Please proceed with your question.

Thanks for taking my question. I have a few. The first one, looking at the full-year outlook, you raise the ASC 606 revenue by $15 million to $20 million, but your ASC 605 is only up -- I think it's less than that. Is that because the upside is primarily from your largest customer or is there other factors that we should think about?

While it's really due to customer and product mix.

Okay. Staying on with the guidance, I appreciate your answer early question that you maybe a little bit more cautious in the past, but from a high level how much of that upside comes from higher smartphone versus TVs or maybe preproduction cells, and have you changed your forecast for foldable phones based on what we've seen today? And maybe on the TV side, are you expecting any meaningful revenue outside of your largest customer today?

I -- to answer your questions backward LG is the largest supplier of TVs. So they are the only one that makes OLED TVs today. So I don't see anybody coming into the market this year are making OLED. There is new capacity that's coming on for LG in the second half of this year. Though in terms of TVs, that's where would be we also have new capacity coming on for mobile devices from BOE and LG. So we see increases across the Board.

Okay. Last question from me, if I look at your revenue in China, outside of customer C, which I believe is BOE. It’s been relatively stable in the past three quarters, and I understand there are a lot of new capacity being built and tested that's still relative to, maybe not in full production yet. But when do you expect that part of the business outside of BOE to grow more meaningfully?

There's -- the ones that Steve specifically talked about in his remarks are still small capacity facilities. I think it's still really early in the ramp and they talk about production in 2020, 2021. And I think there is like 15,000 substrates starts. But so, I don't see a big grab outside of BOE for this year.

Okay. Thank you.

Thank you, Sidney.

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 have a good night. Thank you.

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