Good day, ladies and gentlemen, and welcome to Universal Display’s Second Quarter 2019 Earnings Conference Call. My name is Doug, and I will be your conference moderator for today’s call. At this time, all participants are in a listen-only mode. A brief 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, and good afternoon, everyone. Welcome to Universal Display’s second 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 website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, August 1, 2019.During this call, we may make forward-looking statements based on current expectations. These statements are subject to number of significant risks and uncertainties and our actual results may differ materially. These risks and uncertainties are discussed in the company’s periodic report filed with the SEC and should be referenced by anyone concerning 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 second quarter 2019 revenues under ASC 606 of $118.2 million, operating profit of $48.7 million and net income of $43.4 million, or $0.92 per share. Under ASC 605, the prior accounting standard, our second quarter 2019 revenues would have been about the same at $119.8 million, operating income of $50.3 million and net income of $44.8 million, or $0.95 per diluted share.Including these results is approximately $15 million to $20 million of orders we estimate or pulled-in from the second-half of the year from our Chinese customers due to what we believe or trade-related reasons. With all of them as I’m continuing to grow, we’re raising our 2019 revenue guidance. Our new 2019 revenue forecast under ASC 606 is in the range of $370 million to $390 million. Under ASC 605, 2019 revenues are expected to be in the range of $425 million to $435 million. Sid will provide further details shortly.In the past three months, OLED activity has continued to increase across the consumer landscape. As a display of choice for premium smartphones, premium TVs and smart watches, OLEDs have been gaining strong traction in the consumer electronics market and emerging new segment is the IT market.From Samsung Display’s announcement in May that it was expanding its AMOLED commercial focus to the IT market to laptop makers, showcasing OLED products at Taiwan’s Computex Trade Show in June, including the Gigabyte AERO 15, Alienware m15, ASUS ZenBook Pro Duo, Razer Blade 15 Studio Edition and the Dell XPS 15, what’s driving this interest in OLED and IT.As Samsung noted in their announcement, AMOLED displays are known, not only for their outstanding color reproduction, but also for properties that enable low-power consumption, ultra slim bezels and thin…

Thank you, Steve, and again thank you, everyone, for joining our call today. Revenues for the second quarter of 2019 under ASC 606 were $118.2 million, sequentially up from first quarter 2019’s $87.8 million and Q2 2018’s $56.1 million.As Steve mentioned, included in this quarter’s results is an estimated $15 million to $20 million of sales to Chinese panel manufacturers, which we believe were pulled in from the second-half of 2019 due to trade-related concerns. Under ASC 605, our second quarter revenues would have been $119.8 million. This compares to first quarter of 2019 revenues of $101.6 million and Q2 2018 $73.6 million.As you can see, as revenues increase, the closer ASC 606 and ASC 605 become, and when we hit the inflection point, then ASC 605 will generally be lower than ASC 606. Our total material sales were $76.3 million in the second quarter, compared to material sales of $54.5 million in the first quarter of 2019 and $36.8 million in the second quarter of 2018.Green emitter sales in the second quarter of 2019, which include our yellow-green emitters were $60.2 million. This compares to $41.6 million in the first quarter of 2019 and $25.9 million in the second quarter of 2018. Red emitter sales in the second quarter of 2019 were $16 million. This compares to $12.8 million in the first quarter of 2019 and $10.9 million in the second 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 the number of these factors are moving variables for our customers, they are also moving variables for us.Before…

Thanks, Sid. OLEDs are not only inherently simple, beautiful and versatile, they are redefining how we design, feel and use consumer products. The broadening of the OLED display product portfolio from an ever-expanding array of wearables, smartphones, tablets, laptops and TVs, as well as the continued progress in the form factor roadmap leveraging flexible OLEDs, all this illustrates the immense growth potential of the OLED display market even in the nascent stage of adoption.Our mantra has been and continues to be vision, innovation and reality. The exceptional value of our proprietary OLED technologies and phosphorescent materials has resulted in Universal Display Corporation being an integral partner in the commercialization of OLEDs into the marketplace.We are proud of the leadership position we have created. With our extensive experience, steadfast focus on innovation and execution and expanding product portfolio of new materials and technologies, we’re well-positioned to enable our customers and the OLED industry with the most energy-efficient, high-performance and cost-effective emissive layer solutions.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. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Hi, thanks. Good afternoon. Question on the pre-buying. When did you notice the pre-buying activities in the quarter?

Thanks for the question, Jim. It kind of happened throughout the quarter. It was – we did talk to our customer and we understand what they were doing. We think they were trade-related issues.

Sid, can you say, I mean, looking at in your queue and Customer B, there’s a significant increase in revenues from Customer B. Is the – was the bulk of that pre-buying with that customer?

Yes. Customer B is leading Chinese panel maker. And it is not just one customer, but it is across the Board for our Chinese customers.

Okay. Did you guys see any of this in Q1, or is this mainly what you noticed in Q2?

It’s pretty much just Q2.

Okay. Got it. And just moving if I could just quickly on OpEx. Any change in how we should be thinking about operating expense in the second-half?

No, I think, as we said in the past that – we expect R&D to be up higher than 20% to 25% year-over-year, this year, and G&A is probably in the 10% to 15% range, I think, as we said in the past. So there’s no change.

Okay.

There’s no change.

Thanks a lot.

Thank you.

Our next question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, guys, thanks for taking the questions. Maybe just to follow-up on that. The $15 million to $20 million pull-in from China, can you give us some sense of how you’re sizing that? And what sort of visibility, or I guess data you’re working off of to give you confidence that it’s that amount versus something higher or lower?And I guess, reason I asked that is, if I take the full $20 million out of China this quarter, the – so-called normalized revenue would have been more like $35 million, which is still up 70% sequentially, so big – pretty big number for that region. Just trying to parse, I guess, how comfortable you are with the $15 million to $20 million? And then if it is that sort of $35 million run rate, that would have been the one you would have sort of normalized off of to build for the second-half year?

It’s great question. Thanks, Brian. In conjunction with our internal analysis, we look at things. We also get input from our customers. And we think that pre-purchases this time are a little different than we’ve had in the past. So, we’ve got more Intel from our customers this time around and this is different than the last time, which they were contract-related pre-purchases.

Okay. And I guess, if we do look at the Customer A, B, C, Customer B from China, they actually represented, it look like a little over 50% of all China revenues. So it doesn’t seem like it’s all concentrated in one customer. So would you say the general trend across the Chinese customer base is pretty consistent in terms of how they’re pulling-in some materials purchases? And then I guess, related to that, it seems like the diversification of revenue that’s going to hold pretty steady through the back-half in China, specifically?

Well, the Chinese customers are – it’s across – it – that all of our Chinese customers are up. However, sales to a – to China include our Korean-based customer. Yes. So, included in the China sales – our sales, so it’s not all Chinese panel manufacturers. We determine where it is going based upon where we ship the material.

Got it. Okay, fair enough. That makes sense given the JV out there. Okay. And maybe on that point, materials inventory, that’s always something that has been kind of a challenging thing for you guys to get a handle on. I know, you’re calling out the China pull-in. On the Korea side, just given order run rates and visibility you have into key customers in that region, are you seeing normal buying patterns? Anything there on the inventory side that you think could impact what would be normal seasonality into the second-half year?

We see – we actually saw growth across the Board from all of our customers in the quarter, even without the inventory – without the pull-in of inventory. And so, it was strong across the Board.

Okay. Thanks a lot, guys. I’ll take the rest offline.

Okay. Thank you.

Our next question comes from the line of Sidney Ho with Deutsche Bank. Please proceed with your question.

Thanks for taking my question. So I have a couple. The first one is going back to the same pull-in question. You mentioned that the pull-in was coming from the second-half of the year. Do you expect that to mostly unwind by the end of this year, aka, you’ve raised the full-year guidance. Is that just moving from first-half to second-half, or you actually raises $25 million in the midpoint?

Well, we do believe that it is a pull in from the second-half to the first-half. And we do see, obviously, we’ve raised our guidance. So we do expect, compared to last year to this year, strong growth for this year.

So most of that pull in will be used up by the end of the year is what you expect in your full-year guidance?

Yes, that is correct.

Okay, great. If you just look at the full-year guidance raised by, again, $25 million, where’s the most upside coming from versus your prior guidance, either by region or by application?

It’s really across the Board. It isn’t just one region or one customer. It’s like Q2 was stronger than we expected even without the inventory – excess inventory purchases. So we’re seeing strength across the Board.

Got it. And then in terms of the China revenue, have you back out the pull in, have you back out the Korean customer? It seems like it’s relatively flat from Q1 to Q2. Do you expect that to be kind of in that range as well in the second-half, given there’s a lot of preproduction material sales in the first-half?

We do expect some growth. I mean, if you put –for China, I think for second-half based upon what occurred, the second-half will not be as strong as the first-half. If you turn, if you would put the inventory pre-purchases in the second-half where they should have been, then we would have seen growth in the second-half of this year in China. But because of what occurred, we will not see growth in the second-half.

Great. My last question is on the Japan-Korea trade restriction on the certain chemicals. Have your customer indicated whether that export restriction will impact their OLED panel production? And have you seen any changes in the OLED patterns just following the restriction?

So far, we have not seen any impact on our business, Sidney.

Great. Thank you.

Great. Thank you.

Our next question comes from the line of Mehdi Hosseini with SIG. Please proceed with your question.

Yes. Thanks for taking my question. Thanks for all the detailed color. And perhaps this question is for both, Steve and Sid. When you look at the 50% square foot or square inch growth from 2017 through 2019, how does your assumption change when you look – when we look into the next two years? Do you expect the same intensity in capacity add to sustain, or is there a change in the growth rate? And I have a follow-up.

Well, we do see, as we said earlier, that we do – it – we did see installed base grow 50%. We still see growth, it – we’re in the midst of a multi-year CapEx cycle. But any specifics going from 2020 to 2021 at this point, we really are not ready to make any projections.

Sure. I asked this question, because you have been pretty much on target for 2019, and these targets were put together in 2017. And perhaps, has visibility change, or do we need to wait for the second phase of investment in China to materialize?

Right. Well, there’s a number of reported starts of fabs and production facilities that are going to be built, as Steve said, we’re going to be 10 in China. But probably, the beginning of next year, we will do a deeper dive and see where we think it is, because we use market data, we use internal data. And as you said, we have been pretty accurate and we will take a look at it. But look, everything that we and all the indications that we see is growth in the OLED industry will continue to be strong for the foreseeable future.

Great. Thank you. And then a follow-up – a quick follow-up. How should we think about the commercialization of blue? Any incremental update?

We don’t really have any incremental update. We’re continuing to make excellent progress on blue. And when we – we’re making excellent progress. We have nothing to announce at the moment.

Is there any lifetime metric that we could use to better help us? Any progress?

At this point, I don’t think it’s a metric. It’s key, because as you know, there are the three points as the color, efficiency and lifetime, and the customers are looking at the appropriate combination for their business.

Yes. And Mehdi, as we said, we’re not going to be making project – discussions about incremental improvements that we make, because we make them all the time. And we make them, as Steve said, across the Board, whether it’s color, lifetime or efficiency. But when we have something that we believe it meets initial commercial specs, that’s when we’ll start sharing information.

Okay, great. Thank you.

Thank you.

Our next question comes from the line of Matthew Prisco with Evercore. Please proceed with your question.

Hey, guys. As we think about your second largest Korean customer turning on capacity at Guangzhou in the second-half, how should we think about revenue growth into the back-half, particularly considering 2Q was a record level for the company?

We – it really depends on when the fabs really start to ramp up. We know that they have in – it’s installed. And the question is, what their schedule and what utilization rates are? What they stated is that, it’s – everything is completed. And they should start running the fab, at least, some initial phases at the end of this month into next month.

Okay, it’s helpful. And then on the margin side, can you kind of review what drove the material gross margins lower in the quarter? And it seems like you picked up your guide. I think, last quarter you guys were saying it averaged around 70%, 75%. So what drove that increased outlook? Thanks.

Well, the increase – we initially had talked about the lower-end, approximately 70%, and now we’re saying 70%, 75%. We expect revenues to be higher and customer mix and product mix all impact our margin. So when we look at our forecast for the year, we saw that the margins will continue to go – will be above the 70% range. And in this quarter, approximately 5% was an impact from the inventory reserve that we had.

Thanks.

Our next question comes from the line of Andrew DeGasperi with Berenberg. Please proceed with your question.

Thanks. Just as a follow-up to Matthew’s question in terms of the inventory reserve quickly. What was that related to?

As the just-in-time supplier, we have to keep the inventory, so that we can provide all of our customers with the material that they need when they need it. So we always will overbuild our inventory, so that we can meet all of our customer needs.And at times based upon our accounting standards that we use, if it’s anything that we estimate has, is not going to be sold over the next 12-month period, we will reserve it. That doesn’t mean that is not saleable and doesn’t mean that we may not sell it. But based upon customer estimates that we get. So we will always be reserving some inventory and it may shift from time to time different products that we have, because we have so many new products, because we have so many customers to that.

Got it. And then just quickly on the order activity, can you discuss maybe how July shaped up? And just with regards to the tariff, I mean, I know, just news today on potential increase in September. Are you concerned at all that, that could potentially impact your guidance for the year, or do you think at this point, it’s not going to affect the ordering – the order patterns?

Well, I believe the tariffs that were announced or tweeted today are stuff coming into the U.S. as opposed to shipping into China. So, will they impact us? If there are additional tariffs that are placed on material going in, it may impact us. But we’re enabling the industry. We have strong relationships with our customers, and none of this has impacted our relationships with our customers.

Got it. And lastly, the material sales to licensing ratio, do you expect that to be consistent with what you’ve seen in the first quarter, going into the second-half?

We expect it to be closer to 2 to 1 for the year.

Great. Thank you very much.

Thank you.

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

Hi, guys, and congratulations regardless of the [Technical Difficulty] OLED.

Thank you

And I have one question [Technical Difficulty].

Andy, you are breaking up, we can’t hear you.

Oh, all right. You were talking a little bit about partnerships with local material suppliers for host material. Can you give us a little bit of how you see this being sold to your customers? Is it going to be a license that you give your material suppliers and they sell directly, or will this go through you guys in one way or another?

The way we’re looking at it right now, Andy, is it we’ll work with our host partners to commercialize hosts that are complementary to our proprietary phosphorescent emitters. Local partners will then buy and manufacture those hosts and sell the host directly to specific customers.

Got it. Thank you. I appreciate it.

You’re welcome.

Thank you.

Our next question comes from the line of Hendi Susanto with Gabelli & Company. Please proceed with your question.

Good evening. Sorry, if I missed this. What is the main reason of customers pulling in purchase in China considering that your shipment time is relatively short and you have plenty of production capacity?

I think these are trade-related issues, whether the – tariffs that – where they are in other trade-related issues that may have come up. So that’s really what our customers told us.

And then with regard to strengths in China, will that lead to consideration of expanding your production capacity in collaboration with PPG?

We are always looking at where we are for our production capacity. This is – the industry is a – in a multi-year CapEx growth cycle. We expect our business to grow essentially as the OLED industry grows, and we will always ensure that we have excess manufacturing capacity to meet any shifts in customer demand. So once we finish one expansion, we are already looking at the next one.

Okay. And then one more question, can you characterize differences and similarities of customers purchasing behavior and inventory management practice between customers in China and customers in Korea?

This – our customers know that we are a just-in-time supplier that we are a reliable supplier and we have great relationships with them, with our management team and our technical team and our sales guys and customer support guys that we have around the world. And they work with everybody. And so, there may be a little bit of differences. But overall, our customers are professional manufacturers and work very well with us and we work very well with them.

Thank you, Sid.

Thank you.

Our next question comes from the line of Shannon Cross with Cross Research. Please proceed with your question.

Thank you. Given your cash balance and clearly, improving margins and strong revenue. Any thoughts on acquisitions, anywhere that you think you might be able to maybe accelerate, or is it pretty much – you’re happy with the investment level you have and the assets you – you’ve got right now?

We’re always open to any M&A. And we’re focusing on leveraging in our IP, so that we can increase our growth. And looking at any opportunity that we think will help grow our business, or help grow the ecosystem of OLED. So it isn’t that anything will be accelerated. If something pops up, we’re – we have always been ready to move if we can.

Okay. And then I’m just curious, given all the capacity that’s coming on, what are your thoughts about what you expect pricing to do next year? I mean, I would assume at some point, with all these TVs showing up, we would start to see more aggressive price cuts. But I’m just curious as sort of you talk to people in the industry, do you have any insights?

I mean, we on – consistent with typical consumer trends, all apply with OLED TVs as there’s more capacity, as volume grows, then you should see pricing come down for the end user. I mean, that’s just the way it is. We don’t have any specific insights, because we’re not the seller of the TVs.

Great. Okay. Thanks.

Great. Thanks, Shannon.

This does conclude our Q&A session for today. I’d like to hand the call back to Mr. Rosenblatt for any additional or closing remarks.

Thank you all for your time today. We appreciate your interest and support and hope you all have a good night. Thanks.

Good night.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.