Universal Display Corp

NASDAQ:OLED

Earnings Call Transcript 2020-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to Universal Display's Fourth Quarter and Full-Year Earnings Conference Call. My name is Sherry, and I'll be your conference moderator for today's call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes.

I'd like to now turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

[Darice Liu]

Thank you, and good afternoon, everyone. Welcome to Universal Display's fourth 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 a 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, February 18, 2021. During this call, we may make forward-looking statements based on current expectations. These statements are subject to a number of 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 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.

[Steven Abramson, President and Chief Executive Officer]

Thanks, Darice, and welcome to everyone on today's call. We are pleased to report our fourth quarter and 2020 results. 2020 revenues were $429 million, operating income was $158 million and net income was $133 million or $2.80 per diluted share. Fourth quarter revenues were $142 million, operating income was $66 million and net income was $54 million or $1.13 per diluted share.

For 2021, we expect to see meaningful growth. Based upon current estimates and expectations of a global health crisis improving, we believe 2021 revenues will be in the range of $530 million to $560 million. Sid will provide further details shortly.

Moving back on 2020. It was a year filled with innovation and advancements, flexibility and perseverance, diligence and safety, as well as challenges in this ongoing pandemic. As a company, we move swiftly to safely adapt to rapidly changing conditions. We implemented measures to safeguard our employees while ensuring the safe and efficient operations of our facilities. We also quickly mobilized our business continuity plans to ensure our ability to continue our R&D program and the manufacture and shipments of our UniversalPHOLED materials to our customers.

As a result of the tremendous and commendable agility and execution focus of everyone at UDC and our manufacturing partner PPG, we continue to build upon our first-mover advantage in the OLED ecosystem and are positioned to emerge an even stronger company when this crisis ends.

During the year, we announced long-term agreements with China Star Optoelectronics, the second largest panel maker in China, celebrated the 20-year anniversary of our strategic partnership with PPG, established OVJP Corporation to advance the commercialization of our groundbreaking OLED TV manufacturing technology.

Expanding our community education initiatives with the establishment of the UDC, Inc. PHOLED Scholarship, which aims to support a graduating U.N. student pursuing a degree in the STEM field and our partnership with the Smith Family Foundation will assist with community programs in Trenton, New Jersey. And we were recognized by Fortune as one of the world's 100-fastest growing companies and by Newsweek as one of America’s most responsible companies.

From an R&D standpoint, we remain at the forefront of innovation. A team of scientists and engineers are continually discovering, developing and designing new emissive material system and technologies and advancing our R&D roadmap with new milestone achievements.

On the materials front, a portfolio of energy-efficient high-performing phosphorescent materials continues to expand with the next-generation reds, greens, yellows, and hosts to meet our customers’ ever-demanding and ever-evolving specification needs of color point, efficiency and lifetime.

With respect to blue, we continue to make excellent progress in our ongoing development work for a commercial blue phosphorescent system. Regarding OVJP, we are making advancements with our Organic Vapor Jet Printing manufacturing technology for maskless, solventless, dry direct printing of large-area OLED panels.

With the formation of OVJP Corporation this past summer, the OVJP team is focused on scaling our novel technology platform into a commercial equipment system. OVJP Corporation’s first milestone is to develop an alpha system, which is anticipated to be ready during 2022.

And as we had noted last quarter, Nature published our paper titled Plasmonic enhancement of stability and brightness in organic light emitting devices, describing UDC's fundamental groundbreaking device architecture that may extend the lifetime and enhance the efficiency of OLED panels applicable to both displays and lighting applications. This work is part of our long-term R&D roadmap for continuing to enable the OLED ecosystem with leading-edge technologies and best-in-class materials.

Looking to the OLED industry, the ecosystem continues to grow with new OLED capacity, new OLED products and new OLED customers. Samsung Displays portfolio of OLED products continues to grow. HTC expects OLED smartphone adoption to increase in 2021 with the expansion of 5G as well as further penetration into the mid-range market. Also in the small and medium OLED market, Samsung is ramping its efforts in IT. Early last month, Samsung announced its 2021 lineup of OLED laptop displays will include over 10 new models, the sizes ranging from 13.3 to 16-inches. Samsung is also forecasting a 500% increase in annual sales for its OLED IT panels this year.

With the increased focus on the IT market, which has an estimated TAM of approximately 450 million units spread across laptops, tablets and monitors and only about 1% of the IT market being OLED, there are reports that Samsung is planning to build a new OLED production line for notebook as A4 fab in Asan. This line is expected to have a production capacity of 30,000 substrates per month.

For large-area panels, Samsung Display is reportedly making progress with its QD-OLED program as expected to begin production of this QD-OLED panels for TVs and possibly monitors in the second half of this year. LG Display continues to ramp up its OLED TV production. For 2021, LGD Plus increases OLED TV shipments to 7 million to 8 million units up from around 4.5 million units in 2020.

OEM, such as LG Electronics, Sony, Vizio, Skyworth and more than a dozen others are fueling this tremendous growth. Bolstering LGD shipment target growth is the expansion of its OLED TV portfolio. During CES, LG unveiled its new 42-inch and 83-inch OLED TV panels, augmenting its existing lineup of 48-inch, 55-inch, 65-inch, 77-inch and 88-inch model.

On the small and medium front, LGD’s flexible OLED fab ran at full utilization in the second half of 2020, which has been widely attributed to demand for their OLED smartphone panel. Additionally, LGD is focusing on the automotive market, with plastic OLED panels for applications, including infotainment system, dashboards, heads-up displays, side mirror displays, and rear seat entertainment displays. LG Display also noted their plans to rollout 20-inch and 30-inch OLED displays in the future, targeting the premium mid-sized panel market related to gaming, mobility and IT.

According to reports, BOE will use some of its capital raise for its third OLED fab in Chongqing, which has a designed monthly output of 48,000 flexible Gen-6 panels. The first phase of Chongqing is expected to commence by the end of this year. BOE is also planning to invest in OLED micro-display plant in the Southwestern Yunnan province for augmented and virtual reality displays.

The construction of Tianma’s $6.8 billion Gen-6 flexible fab in Xiamen is reportedly progressing ahead of schedule. When this fab is completed, we will have the capability of 48,000 substrate starts per month. In addition, Tianma is a mix of ramping its Wuhan capacity with an additional 15,000 substrate starts per month.

China Star is expanding its Gen-6 flexible OLED capacity at its Wuhan plant, its first OLED fab that opened at the end of 2019. By the end of this year, China Star fab is expected to have a monthly installed capacity of 48,000 substrate starts. And Visionox recently commemorated its new OLED module line in Guangzhou with production expected to commence this month. Additionally, Visionox is working on ramping its new Gen-6 flexible OLED fab in Hefei, which will have the ability to manufacture 30,000 plates per month.

The benefits of OLED continued to drive adoption across the consumer electronics landscape from the wide color gamut and deep color saturation to the 180-degree viewing angle and true contrast ratio to response rates that are more than 10x faster than LCDs as well as form factor. Essentially comprised of film layers, OLEDs are inherently conformable, bendable and rollable.

To-date, Samsung, Huawei, WIA and Motorola have launched foldable smartphones. That list is expected to expand with reports to OEMs, including Xiaomi, Oppo, Vivo, and Google will jump on the foldable phone bandwagon this year. And in CES, LG Electronics unveiled world's first rollable smartphone, and now it's not the product we will launch later this year. Also at CES, TCL showcased a rollable smartphone prototype screen that can stretch from 6.7-inches to 7.8-inches.

And during Adesis earnings call, Samsung Display noted that it will develop rollable and slidable OLED displays. Another benefit is eye health, as some of you are aware, blue light from electronics has been linked to problems like blurry vision, eyestrain, dry eye, and even sleep disorders when people are excessively exposed to it.

Last month, LG Display announced its OLED display became the industry's first TV panel to win accreditation from IC, a US-based eye protection certification agency. LGD's 65-inch OLED TV panel portion of harmful blue-light is only 34%, the lowest among TV titles, and about half of that LCD TV panel.

And last year, Samsung Display unveiled an optimized OLED display for 5G smartphones that emits only 6.5% of harmful blue-light and earned certification of Eye Care Display from SGS, Société Générale de Surveillance, the European eye protection certification agency. Samsung Display noted that its OLED products also have about 70% less harmful blue-light emissions in those current LCD smartphone displays.

On the lighting front, while we were still in the early commercialization stage, we believe that the benefits of OLED lighting, which include high-power efficiency, novel and innovative form factors, beautiful natural colors and cool operating temperatures are all quite compelling. We look forward to enjoying those benefits in our new conference rooms, which will have OLED lighting fixtures.

On that note, let me turn the call over to Sid.

[Sidney Rosenblatt]

Thank you, Steve, and again, thank you, everyone for joining our call today. Let me review our 2020 results before commenting on our 2021 guidance. 2020 revenues were $429 million, up 6% year-over-year. Material sales were $230 million, down 6% year-over-year, and royalty and license revenues were $185 million, up 23% year-over-year. 2020 operating expense excluding costs of materials was $186 million, up 8% from $171 million in 2019. Operating income was $158 million in both 2020 and 2019.

2020 net income was $133 million or $2.80 per diluted share compared to 2019 net income of $138 million or $2.92 per diluted share. We ended the year with $730 million in cash, cash equivalents and short-term investments or $15.45 of cash per diluted share.

Now moving on to our fourth quarter results. Revenue for the fourth quarter of 2020 was a record $141.5 million, up 21% from last quarter’s $117.1 million and up 39% from fourth quarter 2019 revenue of $101.7 million. Our total material sales were $62.5 million in the fourth quarter, down 9% sequentially from last quarter’s $68.7 million, and up 3% from the comparable year-over-year’s quarter $60.8 million.

Green emitter sales, which include our yellow, green emitters were $48.2 million, down 9% sequentially from the third quarter’s $52.9 million, and up 1% from the comparable year-over-year’s quarter $47.5 million. Red emitter sales were $14.3 million in the fourth quarter, down 6% from the third quarter’s $15.2 million and up 10% from the comparable year-over-year’s quarter $13 million.

As we have discussed in the past, material buying patterns can vary quarter-to-quarter. Some of the contributing factors include COVID-19 issues as well as consumer product demand cycles, capacity ramps schedules, production loading rates, device recipes, product mix, material ordering patterns, customer inventory levels and customer production efficiency gains. Since a number of these factors are moving variables for our customers, they are also moving variables for us.

Fourth quarter 2020 royalty and license fees were $75 million, up 68% from the third quarter of 2020s $44.6 million and up 99% from the comparable year-over-year’s quarter of $37.8 million. The increase was due to the strength of our customer sales of royalty-bearing OLED licensed products in the latter half of 2020. In addition, there was an ASC 606 cumulative catch-up that was recognized in the fourth quarter due to the impact of the pandemic.

Fourth quarter 2020 Adesis revenues were $4 million. This compares to $3.8 million in the third quarter of 2020 and $3.2 million in the fourth quarter of 2019. Cost of sales for the fourth quarter 2020 were $27 million. This compares to $23.4 million in the third quarter of 2020 and $18.2 million in the fourth quarter of 2019. Cost of OLED material sales were $24.6 million, translating into material gross margins of 61%. This compares to 70% in the third quarter of 2020 and comparable year-over-year’s quarter’s material gross margins of 73%. For the year, our material gross margins were 67%. A primary driver of our material gross margins is product mix.

As OLED demand continues to grow, our developmental materials pipeline is also growing and that has impacted our total material gross margins. As we invent and develop next-generation phosphorescent emitters, they are increasingly more complex and as a result of higher initial costs. With the expected continued growth and complexity of our phosphorescent materials portfolio and increase in raw material costs, we estimate that our average annual material gross margins will be in the range of 65% to 70% going forward.

Fourth quarter operating expense, excluding costs of sales was $48.8 million, up from last quarter’s $45.3 million and essentially flat from the comparable year-over-year’s quarter of $49 million. Operating income was $65.8 million in the fourth quarter of 2020. This compares to last quarter’s $48.4 million and the year-over-year comparable year’s quarter $34.5 million.

Net income for the fourth quarter of 2020 was $53.9 million or $1.13 per diluted share. This compares to last quarter’s $40.5 million or $0.85 per diluted share and the comparable year-over-year’s quarter of $26.4 million or $0.56 per diluted share.

Now to our outlook. We expect 2021 revenues to be in the range of $530 million to $560 million. We believe the 2021 ratio of material to royalty license revenues will be in the ballpark of 1.5 to 1.

Moving along to margins, we expect our 2021 material gross margins to be in the 65% to 70% range. Our annual overall gross margins for the year are expected to be approximately 80%, 2021 operating margins are expected to be approximately 40% to 45%.

Operating expenses of SG&A, R&D and patent costs in the aggregate are expected to increase in the range of 20% to 25% year-over-year, with R&D up about 25% and SG&A up about 15%. Increased spending in 2021 includes a significant investment in OVJP development. We expect the effective tax rate to be approximately 19% give or take a few basis points.

As Steve mentioned earlier, we expect meaningful growth this year. This is being driven by new OLED capacity, which translates into new OLED revenue opportunities for us. As we reiterated last quarter, we expect the installed base of OLED capacity to increase by approximately 50% at the end of this year over the installed capacity base at the end of 2019 as measured in square meters.

And lastly, we are pleased to announce that the Board of Directors has approved an increase in Universal Display's cash dividend, a dividend payment of $0.20 per share will be paid on March 31, 2021 to stockholders of record as of the close of business on March 16, 2021. The dividend increase reflects the confidence in our robust future growth opportunities, expected continued positive cash flow generation and commitment to return capital to our shareholders.

With that, I will turn the call back to Steve.

[Steven Abramson, President and Chief Executive Officer]

Thanks, Sid. Our outlook for 2021 reflects another year of strong growth and performance, while also continuing to invest in near-term and long-term opportunities to fortify our leadership position well into the future. It's a long and vast runway of forecasted growth in the OLED industry, and therefore, for us, we are investing in our people, our infrastructure, and our innovation to advance our first-mover advantage and to further enable our customers in the OLED ecosystem. We have and continue to strategically increase our headcount around the world to meet the growing long-term needs of the company and our customers.

In Asia, our recently expanded footprint and increased local technical support, including new corporate and laboratory facilities in Korea and Hong Kong with state-of-the-art PHOLED application centers for device fabrication and testing have played a critical role during the pandemic for on the ground customer support.

In the U.S., we are renovating two buildings across the street from our current site to accommodate our growth and are expected to move into the new expanded site this year, and we plan to retrofit our existing site into a dedicated R&D innovation center. Regarding innovation, in addition to expanding our core competencies in OLED technologies and materials, we are seeing strong interest from customers and potential partners for our OVJP technology. We are ramping our OVJP efforts in Silicon Valley to scale our novel manufacturing platform with the first milestone being alpha system in 2022.

In closing, 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 while 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.

[Operator]

Thank you, Mr. Abramson. [Operator Instructions] Our first question is from Brian Lee with Goldman Sachs. Thank you. You may proceed.

[Brian Lee, Goldman Sachs Group, Inc.]

Hey, guys. Thanks for taking the questions. Kudos on the nice end to the year here. Maybe just – I know you're going to get a bunch of questions on this, so I'll get it out of the way here. On the – Sid on the ASC 606 catch-up you saw on the quarter, can you quantify that to any degree? And then maybe importantly also, what actually triggered it, if you could elaborate a little bit so we understand what happened there? And then related to that, is it one customer? Is it several customers and question as to why that got triggered? And then is there the potential it comes up again in 4Q of 2021 or 2022 ahead of the contracts with some of your big Korean customers coming to a close on their terms?

[Sidney Rosenblatt]

Thank you, Brian. And obviously, there is a lot of questions in that one question. But I do know that the focus is on ASC 606. Our fourth quarter revenues came in higher than expected due to increased strength in the latter half of the quarter from our Korean customers. And obviously, in addition, $17 million of cumulative catch-up from ASC 606 adjustments through the pandemic contribute to our fourth quarter revenues.

As part of our ASC 606 review at the end of 2020, we look into COVID-19 impact to our business and the OLED market forecast. With the reduction in 2020 and 2021 market forecast, we are now estimating lower material shipments in our ASC 606 estimates. This then results in higher license and royalty fees per material shipment. This is what was reflected in the cumulative catch-up adjustment of $17 million in 2020. Most of it was recognized in the fourth quarter.

And realistically it was the COVID-19 issues that caused this catch-up in the fourth quarter. And if things continue at a longer than expected path, then we should not see these large catch-ups again, unless there is something that causes a major hiccup in either the market estimates or our sales compared to our estimated sales. So that was a long-winded answer, but I hope it helped.

[Brian Lee, Goldman Sachs Group, Inc.]

No, that clarifies a bit. I think you've been clear about that in the past that barring a shift in kind of the outlook. You wouldn't necessarily see these big catch-ups, so that's good to understand. Maybe on mix of revenue, I know that, you said $17 million of ASC 606 catch-up in Q4, that's helpful in terms of the additional detail. But when I look at Samsung revenue, it was up a lot in Q4 versus Q3. I know they did well with some of the product cycle stuff in the back half, and I assume they're part of the catch-up. But can you give us a sense if that revenue for them on the material side was higher in Q4 versus Q3 about the same or lower? Just trying to understand how much of that big bump in Samsung was the catch-up versus just organic materials revenue growth?

[Sidney Rosenblatt]

Yes. To be honest, Brian, the 606 – it’s multiple customers and it's all – it's every material and it is between the materials and license fees. And we really don't break it out between one versus the other, but it was stronger for them in that quarter.

[Brian Lee, Goldman Sachs Group, Inc.]

Okay. Helpful. Maybe last one, I'll pass it on here. With respect to the gross margins, I think you had said 80% gross margin inclusive of Adesis in 2021. That's the guidance here. So if I look at the 65% to 70%, and then I assume some contribution for Adesis, it seems like Adesis has been running at a pretty high gross margin, call it, 35% to 40%, the past three quarters or so. Is that the right range to get you to the 80% blended for 2021? Just trying to understand the moving pieces in the margins just given the blend there?

[Sidney Rosenblatt]

Yes. The overall 80% margin, obviously, that applies to our license fees and royalties and that includes Adesis. And Adesis’ margins have been consistently getting better. So it's all built into that to get to the 80% that we expect moving forward.

[Brian Lee, Goldman Sachs Group, Inc.]

Okay. Fair enough. I'll pass it on. Thanks guys.

[Sidney Rosenblatt]

Thank you, Brian.

[Operator]

Our next question is from Krish Sankar with Cowen and Company. Please proceed.

[Robert Mertens, Cowen and Company, LLC]

Hi. This is Robert Mertens on behalf of Krish. First, congrats on the quarter and thanks for taking my questions. One of your large TV customers has spoken out about ramping the number of units this year relative to last year. How should we think about the demand quarterly and how that might impact your revenues for the year? And then I have one follow-up.

[Sidney Rosenblatt]

Sure. We're happy to take your question. The second half we believe will be better than the first half, if we’re particularly talking about TV applications and that you have holiday buildup. But as LG has talked about going from 4.5 million to 7 million to 8 million units in 2021, so we're very excited about that because we think OLED TVs are great. They've been rated the best TV ever, continue to be. So we're very pleased with that and we'll do everything we can to support our customer.

[Robert Mertens, Cowen and Company, LLC]

Great. Thank you. And then as you look at the ramp-up from your Chinese customers, have you seen more localization efforts? Is there any sort of developing competition within China for OLED materials or new developments with local customers there to work with different materials, just sort of how the landscape there has been developing?

[Sidney Rosenblatt]

No. We are working, obviously, with a number of Chinese manufacturers and the Chinese manufacturers that – we're very happy that we continue to do that. And China is the second largest revenue region, and it's a huge opportunity for us. So we work with all the major Chinese panel manufacturers and we're very excited, no matter what category it's growing in.

[Robert Mertens, Cowen and Company, LLC]

Okay. Thank you. That's all for me. I'll pass it to the next person.

[Sidney Rosenblatt]

Thank you.

[Operator]

Our next question is from Jim Ricchiuti with Needham & Company. Please proceed.

[James Ricchiuti, Needham & Company, LLC]

Hi, good afternoon. Is the customer breakdown that I have is correct, and it may not be. It looks like there was a fairly large increase in revenues from your second customer on the TV side in Korea LG. And I'm just wondering, is there any color you could provide on that, whether it's potentially their scale up that has been going on in China? Or just any kind of timing issues around some of the either materials sales? Or is it relates to when you recognize the license revenue?

[Steven Abramson, President and Chief Executive Officer]

Well, it's clearly LG noted on their conference call that their second fab is up and running, and that will – I think, we've seen a big increase, obviously, in Q4 with customer B. So OLED sales were very strong in the quarter, but I think it was across the board.

[James Ricchiuti, Needham & Company, LLC]

Okay. And Sid is there any way to – I think, you may have mentioned it just in response to the last question just with respect to how we should think about seasonality of the TV-related revenue. Is that changing more – becoming more heavily concentrated in the back half than it has been in the past?

[Sidney Rosenblatt]

Well, this year it was. And I think that, obviously, TV sales are weighted towards the holiday season. And I think it could be that this year that it was also impacted by a lot of people being home around the world and buying new TVs. I don't have a specific answer for you, but it does appear that there is – our second half of the year was the best. For last year and this year it has been historically better.

[James Ricchiuti, Needham & Company, LLC]

And the final question now and I’ll jump back in the queue. I think you gave some information as to the increased investment and as it relates to OVJP. Is besides getting that alpha unit going and I think you talked about 2022 and I'm not sure if you gave any further color on as to when. Are there any milestones we should be paying attention to as it relates to the OVJP in 2021? Or is it going to be fairly quiet until we start getting more concrete information with respect to this alpha system?

[Steven Abramson, President and Chief Executive Officer]

Jim, I think the next big milestone is the alpha system. I mean, we're hiring the teams right now. In California, we're improving our technology, but the big milestone, I think you guys should be looking for would be the alpha system sometimes in 2022.

[James Ricchiuti, Needham & Company, LLC]

Okay. And just if I could slip one more in. Just with respect to the increase in R&D. That being one of the big factors, is there any way you could talk to some of the other R&D initiatives as it relates to blue. Is that being stepped up in your plans for 2021 as well more so than, say, in 2020?

[Sidney Rosenblatt]

Well, we are doing a number of things which obviously would include work on blue, which is one of our major efforts. OVJP is another one. But we're continuing to work on new and next-generation materials because as we had stated, we're having more and more customers, each one of our customers has more and more specific needs, and we're continuing to do everything we can to meet our customer's needs across the board. And they are different. So the more customers we have, the more materials we're going to develop, and the more time we're going to spend on R&D to ensure that we support them.

[James Ricchiuti, Needham & Company, LLC]

Okay. Thanks a lot.

[Sidney Rosenblatt]

Thank you.

[Operator]

Our next question is from Matthew Prisco with Evercore ISI. Please proceed.

[Matthew Prisco, Evercore ISI]

Hey guys. Just want to kick-off. Maybe you could talk about some of the assumptions around the new calendar 2021 topline guide, specifically, how are you thinking about growth in mobile relative to TVs, and how should we be thinking about revenues from the IT market as the OLED penetration kind of pushes across all verticals now?

[Sidney Rosenblatt]

Well, thanks for the question. In terms of guidance, I mean, we do think that we're going to see some recovery in 2021 over 2020. And as I think we noted on our prepared remarks, talking about [indiscernible] having 10 new IT products and that market is really small. But smartphones and TVs will still be the driver for us. IT is 450 million units, but it's really very small. So when you talk about the growth, it is something that we're in the very early stages of, but it is a huge opportunity for us when you're talking about a TAM 450 million units.

[Matthew Prisco, Evercore ISI]

And then how should we think about growth in smartphones relative to TV next year [indiscernible] revenues?

[Sidney Rosenblatt]

Yes. All of them are built into where we think we're going to grow. Obviously, we talked about LG growing and I think the smartphone market is going to grow.

[Matthew Prisco, Evercore ISI]

Got it. Okay. And then just as a quick follow-up. It seems like domestic China sales, so once you back out LG [indiscernible] were down pretty meaningfully quarter-over-quarter. Is that some type of inventory burn that's continuing or Huawei dynamic or something else we should be thinking about?

[Sidney Rosenblatt]

So as you can see that customer C is down significantly and they have – that customer historically has been lumpy. I don't think it's anything specific from one quarter to the other, it's difficult. But they historically have been one of our lumpiest customers.

[Matthew Prisco, Evercore ISI]

Great. Thanks.

[Sidney Rosenblatt]

Thank you.

[Operator]

[Operator Instructions] Our next question is from Shannon Cross with Cross Research. You may proceed.

[Patrick Jackson, Cross Research]

Hi. This is Patrick Jackson on for Shannon. I first wanted to ask what dynamics you're seeing in terms of OLED penetration in the low and mid range smartphone market as retail demand grows? And you mentioned LG Display showed its ability to increase some capacity in China, but I was wondering if there's any other near-term catalyst that you see contributing to improve share specifically in that market? Thank you.

[Sidney Rosenblatt]

I think that a number of our – well, thank you for the question. I think, Samsung mentioned on their call that they are penetrating the mid range and have talked about this for a while, and there are a number of mid range phones that are in the marketplace. I think it's expected to increase this year because when you need to make the market grow and the premium end of the smartphone market is pretty much all OLED. So you're going to see more and more penetration into the mid range and there's even some low-end ones.

[Patrick Jackson, Cross Research]

Thank you. I also wanted to ask about your outlook in material sales through 2021. And are there any changes in the key drivers you see in the medium-term?

[Sidney Rosenblatt]

No. I think that in terms of – obviously, we don't breakout between the license fees and material sales. But we do expect growth across the board, whether it's in smartphones and IT and on TVs, we do think that the ratio will go back to about 1.5 to 1 of license fees to royalties.

[Patrick Jackson, Cross Research]

Thank you.

[Sidney Rosenblatt]

Thank you.

[Operator]

Okay. And our next question is from Martin Yang with Oppenheimer & Company.

[Zhihua Yang, Oppenheimer & Co. Inc.]

Hi. Thank you for taking the question. My first question is on, can you maybe provide us with an update on your long-term capacity outlook in the next couple of years?

[Steven Abramson, President and Chief Executive Officer]

Well, as we have done in the past, we talk about the install base and we've talked about the installed base from the end of – we've actually done it since 2015 to 2017, 2017 to 2019, and now we're talking about 2019, the end of 2019 to the end of 2021 and the installed base capacity based upon square meters growing by 50%. And we do believe that. So we really only go that far. So right now we think that it is intact in terms of in-store capacity. However, as we've discussed in the past, we don't start seeing any revenue until whatever installed base is actually turned on.

[Zhihua Yang, Oppenheimer & Co. Inc.]

Got it. Okay. And the next question is on your host material development. I know it's not a meaningful source of revenue, but our host material are a more meaningful revenue contributor in 2021. Is that more tied to – whether or not that's tied to your Chinese customer currently?

[Steven Abramson, President and Chief Executive Officer]

We've talked about having some partnerships on developing our hosts and we are continuing to work with a number of our partners. However, as of now, we have not had any wins. And so there's really nothing to talk about. And I mean, host would not be a big part of our business for 2021.

[Zhihua Yang, Oppenheimer & Co. Inc.]

Got it. Thanks. I'll jump back to the queue.

[Sidney Rosenblatt]

Thank you.

[Steven Abramson, President and Chief Executive Officer]

Thanks, Martin.

[Operator]

Our next question is from Andrew DeGasperi with Berenberg Capital Markets. Please proceed.

[Andrew DeGasperi, Joh. Berenberg, Gossler & Co. KG]

Hi. Thanks for taking my question. Just had one in terms of what we've been hearing with some of the OEMs out there that the chip shortage out there, could that impact some of the production across the board? Are you hearing the same thing on display industry? Or is this still relatively untouched?

[Steven Abramson, President and Chief Executive Officer]

Yes. We've obviously heard about the same, the chip shortages. And right now, we have not heard anything from our customers or even from market data that talked about the chip shortage impacting smartphones at this point for TVs.

[Andrew DeGasperi, Joh. Berenberg, Gossler & Co. KG]

That's helpful. And then secondly, on the gross margin for materials, I think you mentioned that there's going to be higher costs tied with OLED development. Are these just the recipes for your red and green at this stage? Or would if in fact, you do ship some blue along the way would that signal a hit to gross margin as well?

[Sidney Rosenblatt]

The gross margin hit is based upon developmental materials. And as we have stated, developmental materials before they come commercial are more expensive. But this includes all of our colors. This is not just one specific color. This is red, green, yellows and blues. So developmental materials are ones that we’re just either scaling up or working on to see whether eventually we will scale them up and they are more expensive to make.

[Andrew DeGasperi, Joh. Berenberg, Gossler & Co. KG]

Got it. Thank you.

[Sidney Rosenblatt]

Thank you.

[Operator]

[Operator Instructions] We do have a follow-up question from Krish Sankar with Cowen and Company. Please proceed.

[Krish Sankar, Cowen and Company, LLC]

Yes. Hi, thanks for taking the question. Sid, I just wanted to follow-up, AIXTRON spoke about OVPD Phase II qualification a couple of months ago, and then your OVJP seems like it’s still like in a year or two away. I'm just wondering, like, some of your main customers look at OVPD and even arguably Mini and MicroLED, is the window for industrialization of OVJP technology closing?

[Sidney Rosenblatt]

OVPD and OVJP technology are very different technologies. Our OVJP technology is a maskless dry printing process. So it is very different than the technology that we’d licensed to AIXTRON 20 years ago. So they are very different.

[Krish Sankar, Cowen and Company, LLC]

Got it. So you don't think that has any impact on OVJP opportunity down the road?

[Sidney Rosenblatt]

We do not.

[Krish Sankar, Cowen and Company, LLC]

Got it. And maybe just ask one quick follow-up. I don't know if this question came up earlier. What is your view on OLED Mini and MicroLED technologies people are talking about? Do you think those technologies can peacefully coexist with OLED, or do you think they could potentially replace OLED down the road?

[Steven Abramson, President and Chief Executive Officer]

Well, I think MicroLED technology is really still – it's very early stage. And with any new technologies, there's still a number of unanswered questions when you deal with, particularly in MicroLEDs. We've heard it for a long time. We do know that Samsung did launch a 110-inch MicroLED TV, which reportedly has a price tag of $156,000. So it is very early and I don't think the jury knows what the answer is going to be.

[Krish Sankar, Cowen and Company, LLC]

Got it. Thank you very much.

[Steven Abramson, President and Chief Executive Officer]

Thank you.

[Operator]

This does conclude our question-and-answer session. I would like to turn the conference back over to Sid Rosenblatt for closing comments.

[Sidney Rosenblatt]

Thank you all very much for joining our call tonight. And we wish you all a good evening and please stay safe and sane. Thank you.

[Operator]

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.