Q3 2019 Earnings Call
Good day, ladies and gentlemen, welcome to Universal displays third quarter, 29th <unk> Earnings Conference call. My name is Jerry that'll be a conference moderator for today's call.
At this time all participants are in listen only mode. It question and answer session will follow the formal presentation. If any what's your acquire operator assistance during the conference. Please press Star Zero and your telephone Keypad. As reminder, this conference is being recorded for replay purposes, I would now like to turn the call over time Darice Lou.
Director of Investor Relations. Please proceed.
Thank you and good afternoon, everyone welcome to Universal displays third quarter earnings Conference call. Joining me on the call today are steep abramson, President Chief Executive Officer to sit Rosenblatt Executive Vice President Chief Financial Officer, before Steve <unk> Airlines, yet Chase calls a copy of universal just like any redistribution retransmission or.
<unk> any portion of this call and any form without the expressed written consent of universal display strictly prohibited further that's cosby, what castlight and will be made available for a period of time, a universal displays website. This call contains time sensitive information that is accurate only as of the G. Otherwise webcast of this call October Thirtyth.
2019. During this call you may make forward looking statements based on current expectations. These statements are subject to a number significant risks and uncertainties and our actual results may differ materially. These risks and uncertainties are discussed in the company's periodic reports filed with the FCC and should be referenced by anyway, considering making any.
The company Securities Universal display disclaims any obligation to update any of these statements no I like to turn the call over to Steve Abramson.
Thanks, Paris and welcome everyone on today's call.
We're pleased to report another quarter of solid results a third quarter 2019 revenues under assay. Six says six were $97.5 billion operating profit was $40.8 million and net income was $37 million were 78 cents per diluted share.
Under assay six a five the prior accounting standard our third quarter 2019 revenues were essentially the same as $97.7 million operating income of $41 million and net income of $37.1 million were 78 cents per diluted share.
During the quarter all that activity continued to gain straight on a global scale as a result, we're raising our 2019 revenue guidance, our new 2019 revenue guidance under assay six a six is in the range of $400 million to $410 million under assay six 520.
19 revenues are expected to be in the range of $435 million to $440 million Susan will provide further details shortly.
As panel makers continue to shift more of their focus to almost as a future displays we're seeing a corresponding increase an old investment momentum.
Earlier this month, Samsung announced 11 billion dollar investment and hybrid QD OLED TV.
As part of this Capex plan Samsung is slated to commence operations of a Gen 8.5 production line 2021 with initial monthly capacity 30000 panels on the mobile site earlier. This month Samsung showcased the trend of Fiveg displays at the image exhibition with all that.
Alex old displays allow users to enjoy high capacity high resolution multimedia content seamlessly, while supporting HDR high dynamic range and its rapid response rate work with many other advantages such as relatively low power consumption Slim like design always has garnered.
In praise worldwide as the most visited mobile display with the highest degree of portability.
The end of August I visited Guangjo, China to attend the Grand opening ceremony of LG display the second OLED TV fab. This impressive Gen 8.5 facility will mainly manufacture large size high resolution old products, including 55 age 65 inch and 70 said.
It's TV panels. The initial monthly capacity. This plant is 60000 sheets and by 2021, it will be expanded its a 90000 sheets per month.
Conjunction with the opening ceremony LG display announced it expects to produce over 10 million OLED panels, a year by 2022.
LG display also announced vizio and this newest OEM customer.
2020, Vizio, a leading global brand well known in the mid range TV market will be joining the old TV bandwagon, which already includes LG electronics, Sony Philips, Hi, sense, Skyworth, saying, Oh and conquer.
Yeah, we use investment although it has been translating into market share gains. According to our Hs market research and just one year deal we share in the old market has increased from negligible market share in the second quarter of 2018% to 10% in the second quarter of 2090.
Beauty is currently ramping capacity ads B seven Chengdu facility as well as its recently opened be 11 fab in men Yang. Additionally, as two other gen six or what Fabs in the works its betwo fab and so on chain, which is in the midst of construction and be 15 fab.
Uhhuh show, which was announced at the end of last year.
In our recently announced plans for a new Gen six flexible OLED fab in Sherman.
The 6.8 billion dollar plant is expected to be completed by early 2022 and will produce 48000 she's per month.
Vision loss announced is investing approximately $1.6 billion and OLED module factory and Guandjo China.
In lighting last month, 13th International Symposium on automotive lighting, how they presented its digital OLED technology, and new enabling technology that involves providing the old light sources into a much greater number of individually energize segments for a wide variety of.
Customizable lighting, the size and communication using exterior lighting.
Oh, the highlights that the benefits of all its include perfect contrast, hi, homogeneity at minimal spacing between segments. All that's also maintain high system efficiency as a flat right inside of lighting element that can be as thin as just one millimeter.
The proliferation of all those across the consumer electronic spectrum is fueling the multiyear capex cycle, we are in.
We had previously forecasted that year end 2019 installed base of always square meter capacity will increase by approximately 50% over a year end 2017, and we believe the industry is well on track to meet that target.
As we look out we see a long runway of growth for the OLED market and for US and 2020, we expect to see continued revenue and earnings growth and we'll provide more color during our February <unk> earnings call.
2021, we estimate that you read installed solar capacity base as measured in square meters will increase by approximately 50% again over year end 2019.
On the R&D fraud innovation remains at the core of you do see DNA, we're continuing to advance our robust Oleg materials and technology leadership on the materials front, we're investing innovating in commercializing new I, Miss a materials and technologies, including the Red Green yellow is it has.
With respect to Blue we continue to make excellent progress that are ongoing development work for our commercial phosphorescent blow a missile system.
We also continued to advance our work in organic vapor jet printing our novel manufacturing process for mass was solvent list dry direct printing of large area OLED panels.
Additionally, we are expanding our customer programs to support our growing base boosting our research investments and broadening our local presence in service offerings with new corporate and laboratory facilities in Korea at Hong Kong, These new sites, which serve as a central point of view D.C., South Korean and Chinese technical.
Operations include a state of the portfolio application Sen with laboratory space for device fabrication in testing.
Dan This footprint will enable a wider range of process development testing and evaluation activities to support our customers gross usually see Hong Kong's new site is complete and operational and we expect the new UGC Korea site to be completed in the coming months.
With respect to the old materials ecosystem as we noted during last quarters earnings call as a leader in the industry, we want to help enable our customers OLED product pipelines. This includes helping to accelerate the design pace of myriad of recipes for a multitude of OLED product specs.
We have been establishing a network of old material partnerships. These partnerships will center on our proprietary phosphorescent emitters to ensure high performing highly efficient and cost effective although it solutions.
Since our second quarter call. We now it's a technical collaboration with Merck Kgaa, where we will be leveraging the expertise of our phosphorescent OLED emitters and their transport materials to develop higher performing alleged tax.
Also announced host partnership agreements with MTN, China, and LG Chem in Korea, we expected. These local partners will be volume manufacturers have hopes that are complimentary to our phosphorescent emitters for direct sale to specific customers translating into a win win outcome for all our partners our customers.
And for Us.
On that note, let me turn the call over to set.
[noise]. Thank you, Steve and again, thank you everyone for joining our call today.
Revenues for the third quarter of 29 team under assay six six were $97.5 million compared to second quarter 2000, $19 million to $118.2 million, which included an estimate of $15 million to $20 million of sales the Chinese panel manufacturers, which we believe were pulled in from the SEC.
In half of 2019 due to trade related concerns and Q3 2018 $77.6 million.
Under assay six so five.
Third quarter revenues would have been $97.7 million. This compares to second quarter 2019 revenues of $119.8 million in Q3, 20 eighteens $91.6 million.
Our total material sales were $51.8 million into third quarter compared to material sales of $76.3 million in the second quarter of 2019 and $51.2 million in the third quarter of 2018.
Green emitter sales in the third quarter of 29 team, which include our yellow Green emitters were $40.2 million. This compares to $60.2 million in the second quarter of 2019 and $36.4 million in the third quarter of 2018.
Red emitter sales in the third quarter of 2019 were $11.4 million. This compares to $16 million in the second quarter of 2019 and $14.6 million into third 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. These factors are moving variables for our customers.
They're also moving variables for us.
Before we discuss Q3 royalty and license revenue, we want to remind you that under assay six so six irrespective of when billings occur we will recognize royalty and license revenues in proportion to corresponding OLED material shipments.
Third quarter 2019 royalty and license fees were $43 million. This compares to $38.9 million in the second quarter of 2019 and $23.3 million in the third quarter of 2018.
Third quarter 2019, adhesives revenues were $2.7 million. This compares to $2.9 million in the second quarter of 2019 and $3 million in the third quarter of 2018.
Cost of sales, which included thesis cost of sales for the third quarter of 2019.
Were $17.3 million.
This compares to $24.1 million in the second quarter of 2019 and $16.1 million in the third quarter of 2018.
Cost of material sales, which only relate to all of materials.
Were $15.2 million translating into material gross margins of 70.6%.
This compares to 71.2% in second quarter of 2019, and the comparable year over year first quarter material gross margins of 73.1%.
For the year, we continue to expect our overall material gross margins to be into 70% to 75% range.
Consistent with the last few years.
As we have noted in the past material gross margins can vary quarter to quarter third quarter 2019 operating expense excluding cost of sales were $39.4 million down from last quarter's $45.4 million, but up year over year from the comparable quarters 35.4 million.
In dollars.
Operating income under assay six so six was $40.8 million third quarter of 2019 compared to last quarter's $48.7 million and the year over year comparable quarter $26 million.
Under assay six so five third quarter operating income would have been $41 million. This compares to last quarter's $50.3 million and the year over year comparable quarter $40.1 million.
Third quarter 2019 income tax rate was 15.3%.
Without a issue 2016 dash nine or third quarter 2019 tax rate would have been 16.9%.
For the year absent the effective Ashu 2016 dash nine we continue to expect our tax rate to be approximately 18% plus or minus a few percentage points.
Under assay six so six net income for the third quarter 2019 was $37 million or 78 cents per diluted share. This compares to last quarter's $43.4 million or 92 cents per diluted share and the comparable year over year quarter of 22.8.
In dollars were 48 cents per diluted share.
Under a assay six so five our third quarter net income would have been $37.1 million or 78 cents per diluted share.
This compares to last quarter's $44.8 million or 95 cents per diluted share and they're comparable year over year quarter of $34.2 million were 72 cents per diluted share.
We ended the quarter with approximately $597 million in cash cash equivalents and short term investments or $12.70 of cash per diluted share.
Moving along to guidance based on customer discussions current operating levels product mix as well as other major variables our expectations for 2019 have increased and we are raising our full year EPS guidance.
We now expect our 2019 revenues on their assay six so six to be in a range of $400 million to $410 million.
Under assay six so 520 19 revenues are expected to be in the range of $435 million to $440 million.
And lastly, the board of directors approved a 10 cents quarterly dividend, which will be paid on December 30, Onest 2019 to stockholders of record as of the close of business on December 13th 2090.
The dividend reflects our expected to continue positive cash flow generation and commitment to return capital to our shareholders.
With that I will turn the call back to Steve.
Thanks.
Since our inception, the evolution of consumer electronic products has been driven impart by form factor and we believe that form factor is playing an increasing role in the consumer landscape and with that so will it all as a form factor go hand in hand Oleds are then.
Lightweight agnostic to the substrate owlets can be built on glass metal foil or plastic and because all as our film layers. They are inherently conformable bendable enrolling.
The recent introduction of the Galaxy fold L'oreal flex pay and the pending introduction of the Walkaway made X is an incredible milestone in the form factor roadmap.
On a side note both sit and I have the galaxy fold and we think it's awesome.
All adds are undoubtedly amplifying the realms of imagination innovation and widening the world's perception of what our product can be all those are broadening the consumer market and ushering in an era of new concepts, new designs and new applications as we fast forward into the future. We believe that oleds will be the youve.
Liquid is display technology with conformable foldable enroll more products expected to be prevalent in everyday life.
And we are excited to continue to be integral part of this market evolution.
Looking to this year, we're on track to deliver record revenues and earnings have foresee. This trend to continue into 2020 are growing success is due to the hard working a brilliant team at UGC I would like to take this opportunity to thank each of our employees for their drive desire dedication and hard.
Elevating and shaping universal displays accomplishments and investments we're committed to being a leader in the old ecosystem, achieving superior long term growth and delivering cutting edge technologies in materials for the industry for our customers for our shareholders.
With that operator, let's start the today.
Thank you Mr. Haven.
I would like to ask a question. Please press star one and your telephone keypad.
Information until indicate your line is in the question.
You May press star to at the wed like to remove your question from the Q.
Participants using speaker equipment and baby necessary to pick up your handset before pressing the star.
Our first question is from Sidney Ho with Deutsche Bank. Please proceed with your question.
Hi, This is Jeff ran on for Sidney just wanted to ask about the pull in from Twoq. You have you seen any pulling in Threeq you or do you expect any in Fourq you from 2020 as kind of the U.S. China trade conflict continues.
Thank you for your question and now we have not seen anything as it appears that.
The Poland that occurred last quarter.
It was really the only one that we have seen.
And we have not seen anything at this quarter and we.
Really hard to tell what can happen into fourth quarter.
Great and just as a follow up I think recent data point checkpoint inch to Fiveg phones in 2020, being a little stronger than people expected.
Hi, how does that change your outlook going into 2020 is actually kind of.
Make a pretty good upgrade cycle for smartphones.
No I think that it's a little.
Premature right now, but the premium smartphone market I think is.
Something that we'll continue to grow I mean, a lot of folks are talking about fiveg being a push to for people to switch and it might be something that will keep smartphone market. Moving ahead. I mean, we are very positive on 2020.
Great. Thank you.
Thank you.
Next question is front Atif Malik with Citi. Please proceed.
Hi, Thanks for taking my questions and congratulations on that strong results.
Two questions first if I look at the implied revenue number for Q4 hundred 2 million up sequentially versus last year Q4, maybe seasonally down how should we look into Q4 being up sequentially this year versus last year.
And are you seeing China.
Coming back.
In the fourth quarter after new China sales the almost half in the September quarter.
Thanks for your question I mean, the strength we saw.
In the quarter, we expect to see it in the fourth quarter really due to customer pipeline activity.
Can't really talk specifically about any customers, but we do see the pipeline.
Obviously this year better than last year.
Okay, and then Steve maybe one for you know there's quite a bit of press that that Korean display makers I want to work more closely with low crude supply admitted pocketable at post that Japan trade attention.
Does this pose any kind of competitive threat to your position at those display makers.
Oh, we have very strong relationships with.
Our.
Our customers both in Korea.
And and in China, and we are putting more assets over to both Korea.
And Hong Kong. So we believe that we will continue to have very strong relationships with our customers moving forward.
Great. Thanks.
Thank you.
Our next question is from C.J. Muse with Evercore ISI. Please proceed.
Hi, guys. This is Matt Chris gone for C.J., Thanks for taking my questions.
First material royalty split in the quarter was much more heavily weighted towards royalties that we would have expected seemingly boosting gross margins and tighten the gap between 60 <unk> five so can you kind of just walk us through the dynamics driving this and how should we think about that split moving forward.
Well I at this what has occurred is it really is our customer mix and.
Each customer's materials or royalty and license ratio is different because essentially each agreement is very different. So therefore and in addition to that is customer buying patterns. So.
When things sort of switch from one to the other really has to do with with our customer mix, which then causes these sometimes results it looked a little odd.
Okay. That's helpful. And then just to follow up on a pull in question. So if I look at China sales, excluding customer be seating and the 15 or 20 million Poland last quarter, they appear to be down about 5 million quarter over quarter. So how much of this decline was driven by inventory digestion and have your thoughts changed at all around.
The magnitude and drawdown timing of the corn.
No I mean.
We still believe that the $15 million to $20 million is our best estimate of what was pulled in.
And they are currently use in material and we believe that the inventory will be used up by the ended the year.
Great. Thank you.
Thank you.
Our next question is from a Hendi Susanto Gabelli and company. Please proceed.
Good evening, Steve and see it that congrats on raising the guidance again.
Thank you thanks.
My first question is can you give us some.
Can you give us some insight on there are no round off defies recipes and inventory management practices in China, considering that there is still lots of development and pre production activities.
I mean, there is it in the early stages in China, obviously, we've talked about that deal, we just ramping up and they're going through learning curves and so we do see them.
You know, they're ordering patterns have been somewhat.
Lumpy, but.
It'll just take some time and I.
I think they will I think that as new lines open things will flatten out a little bit as they get a little more experience, but we believe that they will do very well.
And how about that there are no around of device recipes.
We really can't talk for our customers about recipes.
It's it's their proprietary.
Information and it's really what goes into their pipeline is different to have multiple products. So some of the different products have different recipes, but we really don't go into each customers.
Proprietary information.
Got it and I would like to understand more about your.
Strategic all that pulls partnership with LG Chem my understanding is that threat posed materials can be viewed as mature market and wrap in green can be viewed as commodity businesses with assemblies players can you go over opportunities across red Green and yellow OLED hosts materials and help us to digest wed opportunity.
Slice.
Well we partner.
We work with a number of their host partners to commercialize.
Materials that work that are complimentary to our proprietary phosphorescent emitters.
And we think that these guys, we're working with them. So that each of these volume manufacturers of host materials can work with specific customers of ours and really be able to give each customer what it needs. So.
Without going through.
Red green or yellow or any of the hosts.
And we work with a number of different hosts companies and we are working trying to get a number of different host materials into our customers hands. It gives them the best stack.
And then in other words.
I guess universal display and they're.
Mike Montreal, sending green host materials again in the future.
No we were talking about working with these with our partners, we're not talking about us getting into the posts manufacturing business on the commercial scale. What we're saying is that we will work with these hosts companies with our proprietary phosphorescent emitters and their hosts.
And get them into our customers, but they will be the volume manufacturers not because I see okay. That's helpful. Thank you.
Thank you.
Our next question is from me does is Seaney from S&P. Please proceed.
Hi, this is laurie.
We just have one follow up questions.
You guys have any updates on that.
We continue to make excellent progress on Blue and it's a work in progress, but we have nothing new to announce at this time.
Yeah, and you guys R&D spend is.
Lower than last quarter.
Your forecast going forward next year.
Well I can't talk about next year, we will talk about that on our earnings call in February , but we do expect R&D for the year over year over year to be up 25% to 30%. The reason that it was down. This this quarter is that the accrual it's a timing of accruals at each quarter.
Sure.
So that's why it was up in Q2, and then down in Q3.
Got it.
Thank you.
Thank you.
Our next question is from Jim.
She D with Needham and company. Please proceed.
Hi, Thanks, good afternoon.
Question I had I joined the call a little bit late so I apologize if you addressed this but in your in raising the guidance for the year I'm wondering how do you provided any additional color as to what drove that other than just conversations you've had with customers was it yeah can you point to anything specific either in our case.
Last of product or country or anything along those lines that would give us some indication as to what was driving that.
Well you know the strength that we saw in this quarter and expect to see in the fourth quarter is really due to customer pipeline activity.
We don't talk about specific customers, but we are seeing strength in many areas, so which is what caused us to raise it.
Okay. So it's it's fairly broad base is what you're saying.
Yes.
And then.
With you gave some color.
On R&D.
Any any other.
Color you can give.
In terms of the rest of Opex, how we should think about that.
Looking out over the balance of the year for Q4.
I think the all of it is in line with what we gave as guidance I think the SGN a.
Pat and cost should be up somewhere between seven patent costs were up 7% year over year investing in a is probably 10% 7% to 10% for both squares R&D is up year over year, 25% to 30%.
Okay. Thanks very much.
Thank you.
As a reminder to star one and your telephone keypad, if he would like to ask a question. Our next question is from Brian Lee with Goldman Sachs. Please proceed.
Hey, guys. Thanks for taking the questions.
I had a couple here I guess, maybe just some blue materials.
Now now that Samsung QD OLED TV spending plans have become more efficient Steve you alluded to that.
Prepared remarks wondering if you.
Seeing any pickup in activity and yes, there with respect to driving a better blue into the materials recipe for that process and maybe just bigger picture. How you think about the mobile and TV opportunity separately when thinking about it in the context of.
Potential blue materials commercialization for you.
Well, we think we think about blue we're obviously.
Maybe not so obviously looking at a broad based on blue both long on portable as well as TV, because we both the energy efficiency and the other advantages of of phosphorus and low.
On the first party question, we can't speak for our specific customers as you know, but we so in general we just worked closely with all of our customers and their R&D teams.
Okay Fair enough I tried.
Okay.
[laughter] said and more serious question the.
The $15 million to $20 million it sounds like you're comfortable with that estimate.
For the pre buys that you saw for China.
Can you give us you know now that you're done with the quarter and you have a good view into Fourq. You can you give us any sense of how much of that you think came out of Threeq versus Fourq. You is it was it more weighted in threeq.
Versus fourq in terms of the magnitude of the 15 to $29.
I had to be honest, Brian that.
We do talk to our customers than we do have a very good relationship with them, but I really can't answer how much they used in one quarter one month.
We talked about what their needs are we sit down and do planning for the next month in a next quarter just based upon that history, and where we think they're going to be that we believe they will use it all up by the end of the here.
Okay.
Fair enough last question for me I'll pass it on.
I jumped on late so maybe you did cover this but this was the.
The third straight quarter of materials gross margin being about 70% are you updating the guidance for the year here or is there. Some reason to expect that Q4 would be down from the year to date gross margin levels.
No I think we're still comfortable that it's going to be 70% to 75% for the year.
Okay.
Fair enough thanks, guys.
Great. Thanks, Brian .
Thank you. This concludes the question answer session I would like to turn the program back to Sid Rosenblatt for any additional for closing remarks.
Thank you for your time today, we appreciate your interest and your support enjoy Halloween and everybody have a good night.
This concludes today's conference you may disconnect your lines at this time.
Thank you guys have a great Nate.
Thanks, Jerry Thank you very happy Halloween.
Yeah, Hey, Bob.