Darice Liu - IR Steve Abramson - President, CEO Sid Rosenblatt - SVP, CFO.

Brian Lee - Goldman Sachs Jim Ricchiuti - Needham & Company Jed Dorsheimer - Canaccord Genuity Robert Stone - Cowen and Company Hendi Susanto - Gabelli & Company Austin Fernandez - Cross Research Andrew Abrams - Supply Chain Market Research.

Good day, ladies and gentlemen, and welcome to the Universal Display's Second Quarter 2015 Earnings Conference Call. My name is Tom, and I will be your conference moderator for today's call. 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, Tom, and good afternoon, everything. 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 expressed written consent of Universal Display is strictly prohibited.

Further, this call is being Web cast 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 Web cast of this call, August 6, 2015.

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 marked.

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. For the second quarter of 2015, we reported revenues of $58.1 million, operating loss of $4.5 million, and GAAP net loss of $11.8 million, or $0.25 per share. Please recognize that these results included an inventory write-down of $33 million, principally of our existing host material.

Excluding the write down, our operating income was $28.5 million and non-GAAP net income was $19.4 million or $0.41 per share. Let me take a moment to address the inventory write down, which Sid will go into further detail in just a few minutes.

In the dynamic world of mobile products, recent shifts in market strategies have resulted in numerous new product introductions that utilize our new red and green emitters. At the same time, it also negatively impacted demand for established products that use our existing host material.

This occurred much faster than we had anticipated and led customers to significantly reduce their orders and forecast for this host during the past quarter. As a result, we have written down the relevant excess work in process as finished goods. Revenues for the first half of 2015 were similar to the second half of 2014.

Looking forward, as revenues are poised to grow, we expect a stronger second half. During the quarter we generated $20.2 million in operating cash flow and for the first half of 2015 we generated $75.2 million.

Turning to the OLED marketplace, the global consumer electronics market is moving more and more in OLED's direction, with new OLED products and new OEMs adopting the OLED technology, all of which is driving continued excitement in the industry and new investments in capacity.

In just the last three months, Samsung electronics launched two new Galaxy Tab S2 OLED tablets; a 9.7-inch and an 8-inch. It has been reported that Samsung will soon release the Galaxy S6 Edge's follow-up model, the Galaxy S6 Edge Plus with a 5.5-inch flexible OLED and the Galaxy Note 5 with an Edge type flexible OLED display.

The company also recently announced plans to launch a foldable display within one to two years. During last week's earnings call, Samsung reaffirmed its commitment to flexible OLED investments and stated that it expects flexible OLEDs will be a mid to long-term growth engine.

In April SDC started operations as its third OLED fab, A3, to ramp production of its small and medium sized flexible OLED displays. Samsung's flex investments are expected to continue in the second half of the year at the A2 plant and additional capacity for A3 is planned for early next year.

Two weeks ago LG Display reiterated its target for 600,000 OLED TVs for 2015 and reaffirmed plans to ramp its OLED TV production from 14,000 Gen 8 plates per month to 34,000 Gen 8 plates per month beginning mid second half of this year. From a yield standpoint, LG is reportedly seeing great advancements in OLED TV yields at an impressively fast pace.

Its full HD OLED panels are reportedly over 80% yield and less than a year since its commercial launch, LG Display's ultra high definition OLED TV yields are reportedly up to 65%. With that in mind, LG Electronics announced it would add five new OLED TV models in the coming months, doubling its Korean lineup to a total of 10 OLED TV models.

From a CapEx statement, LG Display noted that approximately KRW1 trillion or about $900 million will be spent on OLED this year and the company has already committed to another KRW1 trillion to build a new Gen 6 flexible OLED production line in Gumi, with the initial phase of 7500 substrates per month.

This line is expected to start ramping in the first half of 2017. In Taiwan, AUO announced last week that it is expanding its customer base for its wearable OLED displays and that their 1.4-inch full circle OLED display is already being mass produced for a Tier-1 Chinese customer.

Its second generation square shaped 1.63-inch OLED display has been qualified by a number of international customers and is expected to begin shipping this quarter. In China, BOE announced that it broke ground on a new Gen 6 LTPS AMOLED fab in Chengdu.

This new production fab, with an investment of RMB22 billion or $3.5 billion is slated to have a design capacity of 45,000 substrates per month and begin operations in the first half of 2017.

And in Japan, it was reported earlier this week that JOLED intends to invest $160 million to create an R&D center which will include a Gen 4.5 pilot production line. The company is reportedly targeting to ship samples next year.

Additionally during the quarter, leading panel manufacturers showcased proof of concept OLED displays that illustrated some of OLED's key benefits, including color, contrast, power efficiency, transparency, and manufacturability on plastic.

In May LG Display showcased a 55-inch wallpaper OLED TV panel that is a mere 0.97 millimeters thin, weighs 1.9 kilograms, and can easily be stuck to a wall with a magnetic back. In June Samsung Display unveiled the industry's first 55-inch mirror and a transparent OLED display for digital signage.

The mirror OLED panel has a more than 75% reflective level and the transparent panel lets through 40% of the light. OLEDs are ushering in a whole new world of design possibilities and applications. On the OLED solid state lighting front, developmental activity continues to advance.

The benefits of OLED lighting, include the energy efficiency, novel innovative form factors, beautiful natural light that best replicates sunlight, no glare and cool operating temperatures, are all quite compelling; not just for the commercial and residential markets but as we discussed last quarter, there has been growing interest for the automotive market.

The interest seems to be culminating into commercial plans with reports that Audi's 2017 flagship A8 will have OLED lighting. Audi also recently announced plans to present its next step in automotive lighting technology, the new matrix OLED taillights at next month's IAA Frankfurt Motor Show.

As OLED lighting continues to improve, Audi said it believes OLEDs will soon be able to generate turn signal and brake lights, too. The OLED solid state lighting future is undoubtedly getting brighter and brighter.

With the OLED industry's positive investment momentum growing, OEM activity expanding on a global basis, and consumers realizing the outstanding benefits of OLED technology, the growth path of the OLED industry and that we are on is immensely exciting. Now let me turn the call over to Sid..

Thank you, Steve, and again thank you everyone for joining our call today. Revenues for the second quarter of 2015 were $58.1 million. As noted on prior conference calls, we expected our first half of 2015 sales to be similar to the second half of 2014 sales. Looking forward, we expect the second half of the year's revenues to grow.

When looking at our overall second quarter 2015 results, material sales were down due to hosts, emitter sales were basically flat year-over-year and quarter-over-quarter, material gross margins, excluding the write down, were up year-over-year and quarter-over-quarter, and royalty and license fees were up year-over-year.

Our total material revenues were $24.3 million for the second quarter of which commercial material sales were $21.8 million.

The breakdown of commercial material sales by color for the second quarter of 2015, the prior quarter, and comparable year ago quarter are, green emitter sales were $14 million in the second quarter compared to the first quarter's $14.4 million, and a comparable year-over-year quarter's $15 million.

Green host sales were $1.6 million in the second quarter, down 64% sequentially from the first quarter's $4.4 million, and down year-over-year from a comparable quarter's $13.2 million.

As Steve noted earlier, during the quarter we wrote down $33 million, mainly of our host inventory, to its net realizable value, of which two-thirds was work in process and one-third was finished goods. This was due to the significant changes in customer orders and forecast. Now to red emitter sales.

Red emitters were $6 million in the second quarter compared to the first quarter $6.3 million. And the comparable year-over-year's quarter of $4.4 million. Our second quarter 2015 royalty and license fees were $33.7 million, up from the comparable year-over-year's quarter up $28.1 million.

This includes the Samsung license fee, which was $30 million in the second quarter of 2015, up from the comparable year-over-year quarter's $25 million. The Samsung license fee, which is $60 million for 2015, is recognized in the second and fourth quarter of the year.

Moving down the income statement, material costs for the second quarter of 2015 were $39.1 million, up year-over-year from second quarter 2014's $12 million. The increase was mainly due to the inventory write-down of $33 million.

Exclusive of the write-down, second quarter material gross margins were approximately 75% sequentially, up from first quarter 2015's 68% and up year-over-year from the comparable quarter's 66.7%.

Second quarter operating expenses excluding cost much materials, were $23.5 million, up from last quarter's $20.9 million and essentially flat from the comparable year-over-year's quarter of $23.3 million. The operating loss was $4.5 million for the second quarter of 2015.

Absent the inventory write-down, non-GAAP operating income was $28.5 million compared to $28.8 million for the second quarter of 2014. We reported a GAAP net loss of $11.8 million or $0.25 per share. Excluding the inventory write-down, non-GAAP net income was $19.4 million or $0.41 per diluted share.

Shifting to the balance sheet, we generated $28.2 billion of operating cash flow and ended the June quarter with $356 million in cash and short-term investments or over $7.50 of cash per share. Moving along to guidance, our outlook for the year remains unchanged. As we noted on last quarter's conference call, we expect 2015 to be a transitional year.

We continue to expect our 2015 revenues to be around $200 million, with a downside range of approximately 5% and an upside potential of approximately 15%. Our revenue guidance includes Samsung's license fee of $60 million for this year. It also reflects the impact of the quarter's lag of LG's royalty taking effect.

Where we will only recognize three quarters of LG preponderance royalties this year with the fourth quarter royalties to be recognized in the first quarter of 2016. With that, I'll turn the call back to Steve..

Thanks, Sid. With the introduction of new OLED wearables, mid and smartphones, tablets and TVs, we are encouraged and enthused by the growing interest and investment in OLEDs that we're seeing from global OEM and panel leaders.

The thriving opportunities in the OLED display and lighting markets are just beginning to develop, and with it, so is our growth trajectory. At UDC we're constantly exploring ways to innovate and unable OLED's growth for the industry, for our customers and for our shareholders.

I would like to take this opportunity to thank each of our employees for their contributions in elevating and shaping Universal Display's accomplishments and advancements.

We remain focused on our strategic commitments to remain a market leader in the OLED ecosystem, achieve superior long-term growth and deliver cutting edge technology and materials to our customers. On that note, operator, let's start the Q&A..

Thank you, Mr. Abramson. [Operator Instructions]. We'll take our first question from Brian Lee with Goldman Sachs..

Hey, guys, thanks for taking the questions. Actually, I had three so I'm going to try to squeeze them in.

One, on the inventory reduction, was there anything other than green hosts written down?.

It was substantially all green host. There was some other legacy materials that we just felt was -- hasn't been moving so we wrote them down, but it's substantially all green host..

Okay. Fair enough.

And then just related to that, Sid, have you -- did you guys manufacture any host materials year to date or is the entire inventory write-down related to material that was already on your books entering the year?.

These are -- some of it was work in process. Two-thirds of this was work in process, and one-third was inventory that was finished goods. There was inventory at PPG that we purchased during the first half of this year that we had on order.

This material had some very long lead items in excess of nine months, so it has taken -- we had a lot of material there when it came to the point where we knew that we needed to do this, we stopped all the work and we took all the inventory in..

Okay. Okay. That's helpful.

And then last one from me and I'm jump back into the queue, I know you're not changing the full year guidance here, but given the specific comments that the host reduction was much faster than anticipate, I'm wondering, has there been any other upside in the other assumptions baked into the guidance that are giving you the confidence in shot changing the range share?.

Clearly, we see a shift in the material and what we have, and there are a number of moving parts that we -- that are in our forecast, and when we provided our guidance back in February, we had noted there were a number of moving variables in our forecast. Well, some are lower than anticipated; some are better than anticipated.

And the sum of all the moving parts reaffirms our belief that $20 million is viable revenue baseline for 2015 -- $200 million, I'm sorry. $200 million. I'm sorry..

Okay. Thanks, guys..

Thank you..

We'll take our next question from Jim Ricchiuti with Needham & Company..

Hi, thank you, good afternoon. Maybe just a follow-up on that topic. If you could maybe talk a little bit about the main variables in this over and under forecast.

Is it mostly coming from the TV market?.

Yes, that is correct. I mean, at the end of the day the key take away are Samsung and LG are committed to OLEDs, we believe that Samsung is, you know, looking for business as a merchant. We want to see that the utilization rates of Samsung are up.

And the TV, clearly the ramp is in the second half of the year, which is what gives us the confidence of the second half clearly being better than the first half..

And, Sid, maybe operating expense, how might we think about that in the second half of the year?.

I think the operating expenses are still going to be in line with what we anticipated. You know, we talked 10%, up to 10% increase. From quarter to quarter it is a little difficult to predict. There are some things that are based upon some variables that are out of our control.

But overall, our OpEx guidance which we gave you, up 10% to 15% is in the ballpark. You can see it wasn't up very much in this quarter, particularly when we compared it to last year..

Okay. Thank you..

And we'll take our next question from Jed Dorsheimer with Canaccord..

Hi, thanks. I guess first question, Sid, just looking at the deferred revenue, just tick down a little bit, non-Samsung licensing was $3.7 million during the quarter.

Should we look at the deferred as basically LG's licensing, and that $24 million would be recognized by the end of Q1 if LG ships all of its products that they intend to sell, i.e., the 600,000 TV number?.

When you looked at the royalties, you are correct, substantially all of the difference between the Samsung and our royalty revenue is from LG. It ticked down slightly because we reported some, but that is correct. That is our estimate for the next 12 months..

Okay. And then just on the host, it looks like that you guys did a good job of getting several new -- your new emitter materials, red and green, into several new products. I had always thought that your host worked best with your new materials.

So has that changed where that's -- that's a result of the -- or we're seeing that write-down, that this is a C shift change that we should expect as you continue to -- that host is basically out of the model going forward?.

Well, hosting for red, we've never been in the red phosphorus and host business. In the green host, there was never a green phosphorescent emitter that was in the marketplace, so we felt early on that we had an advantage when we first introduced it.

But it is today looks clearly we're going to try to compete in this going forward by reducing our cost, by working and have brought in a bunch of folks to work on the supply chain side of it, and we hope that our new coasts are going to be competitive, but it is somewhat out of the -- genie out of the bottle in that there is, they have got some green phosphorescent materials that they have out there and that clearly is the one that was able to take that business away.

We think we can be competitive moving forward, but we don't know whether -- how much and when we would win..

Okay. Thank you..

Thank you..

We'll take our next question from Rob Stone with Cowen and Company ..

Hi guys. I have a couple more questions related to host material also.

Sid, how should we think about your comments on materials gross margin excluding the write-down, how should we think about what margin to attribute to the little bit of host material sales that you did have in the quarter?.

I don't think you can attribute much to it. Clearly they were not very high in our overall margin for the quarter was 75%. I think that's probably what we should be looking at moving forward..

Okay.

So I'm parsing this write-down and opposed to write-off, are you expecting to have any of the first generation host material sales in the balance of the year?.

We do expect some, which is why we said we haven't written all of it down. We've written it down to what we believe its net realizable value is but we do expect minimal amounts moving forward of our commercial host..

Okay.

And with respect to keeping the guidance range, are you assuming any new generation host materials this year?.

Not really..

Okay. That's it for me. Thanks..

Thanks, Rob..

We'll take our next question from Hendi Susanto with Gabelli & Company..

Hi, Sid and Steve. First of all, I would like to understand more about the size of the inventory write-down, the $30 million is sizable and somewhat comparable to 2014 sales. And then assuming 40% to 50% gross margin on the host, and if I calculate the corresponding sales, that's a large number.

So I think if we move back to several months ago, is this related to the green host materials for Samsung and then Samsung decided to buy it from [indiscernible] or its affiliate, that's one.

And then second is, if I look at the non-GAAP calculation, the tax impact of inventory write-down was $1.9 million, so you were unable to deduct tax much from that $33 million.

I'm wondering if you have any insight on that?.

Well, the tax effect of it was only that mainly because the tax rate is about 32% or 33%, and that's based upon full year amount. We believe we will be able to get tax benefits, but this is GAAP. This is not cash tax. And we did build a lot of inventory.

It was nine months plus of lead time to build this up, and the volumes that we anticipated were significant because, when we started, they were significant amounts. But we've clearly -- it is a big number. There's no doubt..

And then if I may [indiscernible] relate to Samsung's decision to buy it from the other supplier?.

Okay. Well, Samsung as we knew in the S6 that [indiscernible] was selected at its green host supplier, and it is a sister company.

We believe that we are working on new materials and new hosts, and one of the focuses is cost, manufacture ability, reducing the cycle to get things, reducing all the components in the supply chain, so we really are working to reduce the lead time for the components, the cost, and by bringing in additional experienced manufacturing and supply chain personnel, we expect to be able to compete, A, and react much quicker, and come up with a much more price-competitive product..

Got it. Let me go back to the queue. Thanks, Sid..

Thank you..

[Operator Instructions]. We'll go next to Austin Fernandez with Cross Research..

Good afternoon, thanks for taking my question..

You're welcome..

I just wanted to follow up on that last question with respect to the size of the inventory write-down.

You've noted somewhat of an extended he'd time, particularly around -- at least around nine months behind that inventory, and my question is, what are the implications -- what should we be reading into the lead times for your other materials given that, with respect to prior comments that you are able to ship products rather quickly, I believe, to customers if needed should they, for instance, turn on a new facility within, you know -- or give you short notice?.

One of the answers is, the volume of emissive material is significantly lower. The concentration of host in the device versus the concentration of emitter are 10 to 20 times different.

So we don't have to build up this significant amount of inventory in order to meet needs for the next three months, six months, or nine months and we are able to build what we need and we continue to maintain inventory levels that are above what our estimates are to make sure we don't run out of it, but the lead time for these are actually somewhat shorter lead times.

One of the issues with that host, it was the first host that was made to work with a green phosphorescent emitter, and there was a lot of stuff that we actually had to just design and make and have folks make for us, which really increased the lead time of doing it.

I think because there hadn't been a green phosphorescent host because no one had a green phosphorescent emitter that was in a product. So there were a lot of issues with building up the inventory of our host inventory, which we believe we will not have as we move forward..

And then secondly, I just wanted to follow up on an earlier question with respect to your outlook.

And given sort of all the positive new [indiscernible] that you've highlighted earlier in the call with respect to CapEx plans and development of new products, I'm just trying to get an understanding as to why or how -- what would lead you to be -- to actually -- to move your baseline from the 200 number that you've highlighted before, given where we are in the year and all the developments in the industry so far?.

Well, I mean, moving the baseline is, you know -- we looked at the baseline and we looked at our guidance, and we believe that, when you look at Samsung and what I stated before, talking about merchant versus captive markets and fab utilization we believe will go up in the second half with LG, quickly their TV production as Steve stated in there 80% of it will be in the second half of the year.

And with wearables and things like that, I mean, we felt when we looked at it that we did not have to change our outlook for the year at this time. I mean, clearly if some of these things go one way or the other over the next couple of months, we'll have to look at them again, but right now we're very comfortable with our guidance as it is..

Thank you..

We'll take our next question from Andrew Abrams with Supply Chain Market Research..

Hi, thanks for taking my questions.

First, Sid, on the royalty for LG that was in this quarter, which is really first quarter, am I correct that this was roughly two months of royalty rather than the full quarter, and also there was a fair amount of down time at the facility because of the nitrogen leak? Is that all correct?.

Well, this is the first quarter royalty report we got, and clearly, as was reported, there was a lot of down time in the factory so they could not have made product for that period. So that is probably a correct assumption, but we didn't specifically get a report that said, this is two months; we got one for the quarter..

Got it, okay.

And is your yellow emitter imbedded in your green numbers, meaning the yellow emitter that you sell to LG for their TV business, that's imbedded in the green numbers?.

That is correct..

Okay. And lastly, on the host -- I'm sorry to beat a dead horse on this, but is there any inventory remaining at NFCC that you haven't written down or is that all included in what you wrote down..

It's all-inclusive, no matter where it's located..

Got it, okay.

And just lastly, is there any way for you to guide us on the difference in host material price that you were selling and that [indiscernible] is selling? I know it's almost non-- you know, not apples to apples anymore, because of the age of some of the older host material, but is there an amount you have to reduce by to become really competitive to their material?.

We don't disclose our prices, and there's -- and we don't exactly know what [indiscernible] is selling it for. We've looked at it and we get guidance on what we think it needs to be from working with our customer, and we think that we can meet those numbers..

And in that same vein, are you looking outside of Samsung in terms of host material, for instance, LG in their flexible line or some of the other smaller guys? Is that a potential or are you just concentrating on meeting the goals that you need for Samsung?.

All of our customers. So we look at it and we sampled it to other customers. So it is not just Samsung..

Okay. Thank you..

Thank you..

And we do have a follow-up question from Hendi Susanto with Gabelli & Company..

Thank you again. Hi, Sid. In the press you shared that the wearables [indiscernible] flexible displays they only use one emitter color.

I'm wondering if you can share this information like first whether you know how many emitter colors are in Samsung Galaxy S6 Edge? And secondly, whether you can share some insight into when we can see two emitter colors on the smart watch flexible display, I'm wondering whether you are in the sampling stage with them or whether this is still like beyond that..

Well, as we stated with Samsung, we sell red and green emitters that are in all of their OLED displays. So our red and green phosphorescent are in all their displays, all their OLED displays. With regard to LG, we have stated in the past that they're only using red.

We have a sample of our green and other materials to them, and we believe that it makes sense for them to replace their green florescent materials because they would end up with a much more efficient product. So we have sampled it to them. When they decide to do that is out of our control..

Got it..

Thank you..

And ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the program back to Mr. Rosenblatt for any additional closing remarks..

Thank you for your time today. We appreciate your interest and support and look forward to speaking with you again on the next quarter. So with that, thank you very much and good night..

And this concludes today's conference. You may now disconnect..