Darice Liu - Steven V. Abramson - Chief Executive Officer, President and Director Sidney D. Rosenblatt - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Secretary and Director.

Robert W. Stone - Cowen and Company, LLC, Research Division Chad Dillard - Deutsche Bank AG, Research Division James Ricchiuti - Needham & Company, LLC, Research Division Alex Gauna - JMP Securities LLC, Research Division Hendi Susanto - G. Research, Inc. Osten Bernardez - Cross Research LLC Brian K.

Lee - Goldman Sachs Group Inc., Research Division Andrew Abrams - JG Capital, LLC.

Good day ladies and gentlemen, and welcome to Universal Display's Second Quarter 2014 Earnings Conference Call. My name is Matt, and I will be your conference moderator for today's call. As a reminder, this conference is being recorded for replay purposes. And now, I would like to turn the call over to Darice Liu, Director of Investor Relations.

Please proceed..

Thank you, Matt. 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 that 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, August 7, 2014.

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 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 We are pleased to report another record quarter of strong, solid results. Revenues reached $64.1 million, operating profit was $28.8 million, and earnings were $0.44 per share. Since our last call, the evolution of the OLED industry continued to advance.

From the launching of new OLED display and lighting products, the formation of the new OLED panel manufacturing company, and the confirmation of new OLED capacity, these developments in the past 3 months demonstrate progress and continued commercialization of OLED technology in the marketplace.

Samsung Electronics launched an 8.4-inch and 10.5-inch tablet, Tab S, to rave reviews about superior AMOLED display. Samsung Display confirmed that it is proceeding with A3, it's third OLED tab. HTC stated that new A3 line will be tasked to produce flexible OLED products, with the initial phase expected to start operation in the first half of 2015.

LG display reaffirmed it's M2 plans for OLED TV production ramping this year. This J line has a capacity of 26,000 plates per month. LGD also noted that it's doubling its M1 Gen-4.5 capacity of flexible displays to 12,000 plates per month this year.

Additionally, LG electronics announced in the coming months it would roll out 4K 65-inch and 77-inch OLED TV models into the marketplace. China is also gearing up for OLEDs. Not only from panel makers, including BOE, but also Chinese TV and mobile set makers.

And in Japan, Japan Display Sony, Panasonic and INCJ, Innovation Network Cooperation of Japan, announced that they are creating a new OLED company dubbed JOLED, which will launch in January 2015. OLEDs are not only inherently simple, beautiful and vivid, the technology is redefining how we design, feel and see displays.

Two new growth segments materializing from the benefits of OLEDs are wearables and flexibles. The lightweight nature, thinness, and pliability of OLED displays are paving the way for flexible consumer products. Recently, curved displays with a plastic substrate were introduced into the marketplace.

Some of the initial products include the LG G Flex and Samsung Round smartphones, and the Samsung Gear wearable watch series. In the future, we expect an all plastic display, enabling an unbreakable, thinner and lighter weight product.

These ongoing innovative efforts are leading up to the holy grail of a fully bendable, rollable, foldable OLED display. On the OLED solid-state lighting front, we continue to see the number of companies participating, and overall industry efforts, escalating.

At June's Life Fair, a number of companies showcased OLED Luminaire products and concepts, including Acuity Brands, who introduced its next-generation OLED product portfolio. According to this leading U.S. lighting provider, there have been continuous advancements in OLED lighting technology.

"These advancements include OLED performance enhancements in color rendering up to 90, a 13% increase, and the rated lifetime up to 40,000 hours at 3,000 candelas per meter square." The OLED lighting industry is primarily at the R&D stage, but in the coming years, we believe OLED lighting has a very bright commercial future.

As a company, we continue to fortify and expand our IP and materials portfolio. As we mentioned on last quarter's earnings call, our next-generation red emitter and next-generations green emitter were adopted for new product platforms. With respect to our host materials, it is a competitive business.

And there may be recipes or models that may not include our hosts. But we are committed to aggressively pursue high-performance, cost-effective host solutions.

We believe that we have the ability to develop the best host materials that complement our proprietary phosphorescent emitters to deliver the most energy-efficient, high-performance and cost-effective emissive layer solutions. Now, for a review of the second quarter financials, I'll turn the call over to Sid..

green emitter sales were $15 million in the second quarter, down 13% sequentially from the first quarter of 2014, $17.2 million, but up year-over-year from the comparable quarter's $13.1 million. While volumes were relatively flat quarter-over-quarter, we did experience some pricing pressure.

Green host sales were $13.2 million in the second quarter, compared to last quarter's $12.4 million, and up year-over-year from the comparable quarter's $9 million. Included in this quarter's revenue was a Japanese pass-through tax settlement of $3 million. I will elaborate on the pass-through tax in just a moment.

Red emitter sales were $4.4 million in the second quarter, up 13% sequentially from the first quarter's $3.9 million, and up year-over-year from the comparable quarter's $3.6 million. In the quarter, we saw increased sales of our new red emitter. Let me take a moment to discuss the Japanese pass-through tax item. This is essentially a VAT tax.

The company records taxes billed to customers and remitted to various governmental entities on a gross basis in revenue and cost of material sales.

In the second quarter of 2014, we recorded and recovered a pass-through tax settlement of $3 million in post-material sales and cost of material sales that was owed to the Japanese Tax Authority relating to certain host sales in Japan. Going forward, a Japanese pass-through tax will be included in quarterly revenues and cost of material sales.

Note that this has no impact on our gross profit. Moving to the material costs. Material costs for the second quarter were $12 million, up year-over-year from the second quarter 2013's $8.3 million. The increase was mainly due to the Japanese tax settlement of $3 million, higher material volumes and product mix.

Second quarter material gross margins were approximately 67%. Exclusive of the Japanese tax settlement, second quarter material gross margins were approximately 73%, compared sequentially to first quarter 2014's approximately 72%.

Second quarter operating expenses, excluding cost of materials, were $23.3 million, up from last quarter's $21.3 million, and up year-over-year from the comparable quarter's $19.3 million. The increase is mainly attributed to PPG's developmental expenses, as new materials are scaled up.

Operating income was $28.8 million for the second quarter of 2014, compared to $21.7 million for the second quarter of 2013. In the second quarter of 2014, we reported net income of $20.4 million, or $0.44 per share, compared to the comparable quarter in 2013 of $15.4 million, or $0.33 per share, respectively.

As we mentioned on our last earnings call, we are in the midst of restructuring our international business activity. Ongoing evaluation of these operations has resulted in a number of outstanding planning issues that are being resolved, or will be resolved, in the coming quarters.

This termination of some of the tax planning matters now has us expecting our 2014 effective tax rate to be around 30%. Moving to the balance sheet. We ended the second quarter with $291 million in cash and short-term investments, up from $267 million at the end of the first quarter.

The increase was driven primarily by $32 million in cash generated from operations during the quarter. This was partially offset by the repurchase of shares. On June 2, the Board approved a $50 million stock repurchase program over the course of 12 months. During the quarter, we repurchased 234,800 shares at a cost of approximately $7 million.

As noted in Steve's remarks, we believe that OLED activity remains robust. We did see some softness in the quarter, similar to other suppliers in the high-end smartphone ecosystem. We also are seeing new commercial OLED product launches, such as tablets, wearables and further penetration of OLED displays in mobile and TV.

With the OLED product roadmap continuing to expand this year into next, the stage is set for manufacturers to add capacity in 2015. Looking to our 2014 guidance, we remain comfortable with reaching the high end of our 2014 revenue guidance range of $190 million to $205 million. With that, let me turn the call back to Steve..

Thanks, Sid. Our customer pipeline activity is robust. In the past 3 months, we signed an extended evaluation agreement with BOE Technology, China's largest panel maker, and signed a commercial materials agreement with Philips, one of the leading lighting players in the world.

We are currently working with over 25 customers in the display and lighting segments, and we expect that number to grow. The company remains focused on enabling the industry, with our high-performance, proprietary phosphorescent emitters and host to the growing list of OLED customers.

At the same time, we are leveraging our 20 years of know-how with the world's largest phosphorescent OLED R&D team to expand our market opportunities.

From our material core competency of creating and commercializing new and next-generation highly efficient and exceptional OLED material solutions, to developing new stack structures, lighting architectures, out-coupling designs, manufacturing processes and equipment, we are paving a path for increasing profitable growth.

We believe that these efforts, coupled with the OLED industry's growth, will drive the company's trajectory, top line and bottom, to be exceptionally positive over the long term. On that note, Matt, let's begin the Q&A session..

[Operator Instructions] And at this time, we will take a question from Rob Stone with Cowen and Company..

Kind of a two part question. So the pass-through of the VAT -- if I understood that correctly, that contributed $3 million of sales in the quarter.

And are you expecting something like that in the second half as well?.

It is a VAT tax, a pass-through tax. It is approximately 5% to 10% of the sale price of the product. So we do expect it in the second, third and fourth quarter. We don't expect it to be at that magnitude, but it is dependent upon how much we sell to our customer..

This is only on wholesales?.

The sales in Japan. The customers in Japan..

Okay. But I thought your sales in Japan were principally host or....

That's correct..

So, with respect to your comment about seeing some softness, even excluding the $3 million, the quarter seems a little bit better than we were expecting.

Are you suggesting, since you had higher revenue, but you kept the same upper end of the range guidance, that maybe there'll be a little bit of an adjustment in Q3 along the lines of inventory balancing?.

Based upon our revenue guidance, which costs were approximately 35% to 40% year-over-year growth, we believe the second half revenues will be similar to the first half of the year..

At this time we will take a question from Vishal Shah with Deutsche Bank..

This is Chad on the line for Vishal.

Can you talk about operating margin differentials between the red and green emitters?.

We actually talk about our emitters and our hosts with gross margins in total. We don't really break them down between different colors..

Got it.

Well do you see any [indiscernible] are you seeing any margin pressure? Can you talk about the specific environment there?.

We're not seeing it -- I mean, what we have historically talked about is we believe our gross margins on our emitters are between 70% and 80%. Our margins on the host materials are between 40% and 50%..

Got it. And then maybe more of a bigger picture question.

Can you talk about your outlook for OLED TV sales for the second half of year, and perhaps touch on 2015?.

As I said, we've reiterated our guidance for the high end. We kind of expect the second half of the year from the revenues to look like the first half. And we really don't go beyond that. We really can't say anything.

We do believe that there is great potential for growth in 2015, but in -- we will give guidance at the end of year, I'm sorry, when we file our 10-K. But in this -- in 2014, we have not baked a lot of TV revenue..

Moving forward, we will hear from Jim Ricchiuti with Needham & Company..

Did you allude to any -- some pricing action in one of the emitter -- in green? Was there some pricing pressure, did you say?.

That is correct..

Can you elaborate on that?.

Well, there is always negotiations in business. And there's always purchasing folks trying to negotiate price. So there is some pricing pressure..

And how do see that going forward in well, near-term second half?.

It's going to continue. I can tell you that..

Okay. Should we anticipate any -- you gave some, I think some good color on how we should think about revenues in the second half.

Anything that we should be aware of in terms of OpEx? How we should think about OpEx in the second half of the year?.

No, I think our guidance of 10% to 15% OpEx increase for the year is still good. I mean I don't see anything unusual..

At this time, we'll take a question from Alex Gauna with JMP securities..

I was wondering, Steve, if you could talk about how it is you're able to maintain your guidance at the high end of the annual range, when Samsung, which I would assume is your largest customer here, was talking about some shortfalls for its own OLED business.

Where did you make this up, because by their own admission they missed their own play on OLED in the last quarter?.

Well, there has been some softness in the smartphone market. But we also have other customers that are growing. And we believe that there is a number of variables that do affect us, but we still believe that we can achieve the high-end of our guidance. And diversify our customer base..

That answered it I think.

Is there some -- any risk at all, that there is more overhang from that, or do you think you are real time working with your large customer to keep things balanced and there is some inventory risk out there?.

There are always variables that may be out of our control..

Okay. And then going back to that pricing pressure question. If my understanding is correct, you're the exclusive provider of phosphorescent green materials.

I would think that if there are pricing negotiations, you're doing it collaboratively, so that together you can hit the price point, is that fair to say? Or has some dynamic changed that's given them some leverage over you in pricing?.

There is no dynamics have changed. I think we try to work with our customers so that each of us can have a win-win..

And you mentioned JOLED in your prepared remarks, I'm wondering, is there any reason with this consortium that, to expect that they will be more successful than Japan Inc.

has been in the past? And if they are successful, does this represent a new potential licensing customer, or will some of the standing agreements with those partners fall into place?.

Japan has been working on OLED for a few decades now. And they're -- I think, they are really trying to figure out what's the best forum to compete into this business. So we're hopeful that this new consortium is going to become very active, become a major player on the OLED stage..

And we'll move to Hendi Susanto with Gabelli..

First question, may I know the term and pricing for BOE? Is it similar to LG?.

We don't really talk about pricing to customers..

Okay.

But can you say whether it is similar to LG where like license fee is embedded in the material price?.

Yes. That is -- that is a material supply agreement, which has the same result. That is correct..

Okay.

And then given the maturity of green emitter materials, is it reasonable to assume that the tax rate of green to red emitter material now is approaching 1:1?.

Well, when you look at the dollars, it's clearly not. I mean, the dollars on green are 4x to 5x what they are for red. So I think that's really in the appropriate range. I mean, green has -- green emitters, you put more green emitters in a device than you do red..

[Operator Instructions] At this time, we will take a question from Osten Bernardez with Cross Research..

I guess, to begin, with respect your red emitter sales, are we -- was the June quarter a peak for this year from a red emitter sales standpoint?.

Well, it was the highest quarter from this quarter to last quarter. We don't really talk about components of our guidance. So it's hard to tell whether it's the peak. I mean, there clearly is more capacity out there. So....

Okay.

And then with respect to the -- some of the announcements, the more recent ones from BOE and Philips, what's the timing to sort of seeing that activity flow through to your revenue line?.

These are the beginning stages. Each of them are doing development work. We don't -- to be honest, I don't see much impact from either one of them this year. Neither one has announced capacity. So -- but they do -- they are working on it. And we do expect it to grow over time.

We think that Samsung and LG will be our biggest customers as we move forward into next year. But there are a number of developments in different jurisdictions, which includes Japan, China and Taiwan..

And then lastly, before I head back in the queue, with respect to the tax pass-through in Japan, is that -- is this only a 2014 event?.

No, it will continue. It is a VAT tax that relates to our host sales in Japan. There was a period that the dollar values were so low that we were exempt from the tax, but they now have kicked in, and we're not..

And at this time, we will take a question from Brian Lee with Goldman Sachs..

I apologize if some of these have already been asked. I jumped on a little late. First off, can you comment at all on JOLED, the recent OLED company that JDI, Sony and Panasonic formed recently.

Do you have any visibility into what technology process they might plan to use, materials? And then, what the timing might be for them to become a customer for you guys?.

We know that they've just started to put it together. Japan, as I mentioned, Brian, has been working on OLEDs for a couple of decades now. And we're hopeful that JOLED is going to become a big player in the OLED business..

Okay. Fair enough. I guess switching gears a little bit.

Market share in green phosphorescent hosts, have you seen any share loss that you can comment on there, given new product launches from Samsung in recent months? Or are you hearing or seeing any feedback that would suggest that, that might be the case?.

As we have said a number of times, this is a price and performance business. We don't expect our materials to be in every product. But we believe we have the best host that works with our phosphorescent emitters. And will we be in everything? Probably not. But there's been nothing specific that we can talk about..

Okay. Last one from me, and I'll jump back in the queue. But if I look at your customer breakout in the Q, it looks like LG Display bought about $10 million, or just under that, of materials, both this quarter and last quarter.

Is this an inventory build ahead of the expected ramp in the back half of the year in their TV facility, based on the feedback you get from them? Or maybe you can specifically, comment on whether you'd expect LG contribution to be flat, up or down in the second half versus what they bought in the first half of the year?.

Not to not answer your question, but to talk about specifics by customer is difficult. They clearly have been growing as a customer. And we're very glad that our customer base is diversified. And we expect it to grow as their production line grows.

Specifics of the materials that they purchase are difficult for us to tell whether, what the actual uses are. But as you've read, they've introduced a number of new products, and we would expect this business to grow as their production continues to grow..

At this time, we will take a follow-up from Rob Stone from Cowen and Company..

I just wanted to ask for a little more color on the license and royalty revenue that was not from Samsung. I assume LG is in there.

Can you say how many customers contributed to that?.

I can't say specifically how many customers, but based upon increase in sales to LG, you would assume that that's most of it..

[Operator Instructions] And at this time we will move to Andrew Abrams with JG capital..

Just 2 questions. First, can you give us some perspective on red and green two. I know both are out.

Has either been a bigger than other competitor, or grower, let's put it that way, in second quarter? And do they represent some reasonable number, or are they still relatively small compared to older red and green materials?.

I mean, these were just introduced in the quarter. And they are higher performance materials, but the breakdown between, we don't really do that..

Okay.

And, were there any blue or yellow sales in the quarter, outside of red and green either, in commercial or developmental?.

There's always a little bit of those in developmental..

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, again, for your time today. We appreciate your interest and support, and wish you all have a good night. Thank you..

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