Yahoo Finance Universal Display (OLED) Q4 2018 Earnings Conference Call Transcript
Image source: The Motley Fool.
Universal Display (NASDAQ: OLED)
Q4 2018 Earnings Conference Call
Feb. 21, 2019 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to Universal Display's fourth-quarter and full-year 2018 earnings conference call. My name is Matt, and I will be your conference operator for today's call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darice Liu.
Thank you. You may begin.
Darice Liu -- Director of Investor Relations and Corporate Communications
Thank you, and good afternoon, everyone. Welcome to Universal Display's fourth-quarter full-year 2018 earnings conference call. Joining me on the call today are Steve Abramson, president and chief executive officer; and Sid Rosenblatt, executive vice president and chief financial officer. Before Steve begins, let me remind you that today's call is the property of Universal Display.
Any redistribution, retransmission or rebroadcast of any portion of this call in any form without the express written consent of Universal Display is strictly prohibited. Further, this call is being webcast live and will be made available for a period of time on Universal Display's website. This call contains time-sensitive information that is accurate only as of the date of the live webcast of this call, February 21, 2019. 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 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 market.
More From The Motley Fool
These include, but are not limited to, statements regarding Universal Display's beliefs, expectations, hopes or intentions regarding the future. It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected. These risks and uncertainties are discussed in the company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the company's securities. Universal Display disclaims any obligation to update any of these statements.
Now I would like to turn the call over to Steve Abramson.
Steve Abramson -- President and Chief Executive Officer
Thanks, Darice, and welcome to everyone on today's call. 2018 set the stage for the OLED industry's next growth phase with new OLED capacity announcements, an expanding list of panel manufacturers entering commercial OLED production and the broadening landscape of consumer end products. All of this fortifies the foundation for strong growth in the coming years for the industry and for us. Our 2018 revenues under ASC 606 were $247 million, operating income was $57 million and net income was $59 million, or $1.24 per diluted share.
Under ASC 605, the prior accounting standard, our 2018 revenues would have been $326 million, operating income of $136 million and net income of $130 million, or $2.77 per diluted share. These financial results show the magnitude of the impact that ASC 606 can have on the recognition of materials, royalty and licensing revenues. For 2019, we expect meaningful growth to resume as new capacity comes online, new OLED products are launched and progress continues with our customers' commercialization plans. Our 2019 revenue forecast under ASC 606 is in the range of $325 million to $350 million.
Under ASC 605, 2019 revenues are expected to be in the range of $395 million to $420 million. As we look back on 2018, we made significant progress with our internal growth roadmap, despite the soft premium smartphone market environment and excess inventory in the channel impacting our sales. This includes new customer agreements, advancement in our R&D programs, new infrastructure plans and expanding our critical mass, all of which further solidifies our leadership position in the OLED ecosystem and buttresses our long-term plans to enable this growing industry in conjunction with increasing our top and bottom line. On the customer front, we announced an expanded evaluation agreement with Sharp and new long-term agreements with Samsung Display and Visionox in 2018.
And last month, we announced a new agreement with Chinese micro OLED manufacturer, CF Technology. From a research and development standpoint, we are expanding our innovation pathways for our proprietary OLED materials and technologies, while also expanding our global IP matrix. We're innovating, inventing and introducing new OLED emissive materials and technologies, including new reds, greens, yellows and hosts. With respect to our blue emissive system, we continue to make excellent progress in our ongoing development work for our commercial phosphorescent blue emissive system.
With our deep and broad experience and know-how of more than two decades of pioneering research, we are continually discovering, designing and delivering the best OLED emissive layer materials to meet the ever growing and ever evolving specs for our expanding customer base. We work closely with each customer to custom-design proprietary phosphorescent materials and device architectures that can meet their different specifications for color, efficiency and lifetime. With numerous customers, who have numerous product roadmaps for numerous end-users, our material design and commercialization pipeline is busier than ever. With OVJP, our novel solventless, mask-less deposition technology, which allows pylon manufacturers to combine the benefits of using small molecule materials, the industry's trusted standard and the foundation for all of today's OLED products with a printing process that enables cost-effective, high-performance large-area side-by-side RGB patterning, we have installed the first two chambers of our prototype system and are expecting delivery of the last chamber in the coming months.
As we ramp our prototype system to advance OVJP's commercialization path, we are also evaluating potential revenue and partnership opportunities. OVJP is part of our long-term growth strategy, and we believe that its commercial launch is about three to five years away. We're in the midst of expanding our global presence. In Asia, as our customer base continues to increase, we are broadening our on-site technical resources to further accelerate our customers' time to market.
In the U.S., our subsidiary Adesis opened its new state-of-the-art chemistry laboratories in the fourth quarter of 2018. And here in Ewing, New Jersey, we will be expanding our corporate and R&D facilities. This is all to meet the future needs of the OLED industry, our customers, our R&D programs and our employees. I remember back just a few decades ago, there was just a handful of us and the UDC office was above the liquor store across the street from Princeton University.
And now, we are a global company enabling a $25 billion-plus industry that is in the early stages of growth. As we saw at CES in Las Vegas last month, and what we expect to see at Mobile World Congress next week in Barcelona, OLED technology is paving extraordinary paths for cutting-edge consumer display products. In the smartphone market, foldables are becoming a major theme, as consumer electronic OEMs reconcile the increasing customer appetite for larger displays and portabilities. OEMs, including LG, Huawei, Vivo, Royale, Xiaomi and others have made public statements on their foldable future.
And following up to its sneak peak at its November developers forum, Samsung showcased its foldable smartphone product yesterday at its unpacking event. On the IT front, activity has increased significantly. At CES, Alienware, Dell, Lenovo, Razor and Samsung were all showcasing OLED IT products. And just a few weeks ago, Samsung announced that it would begin production of the world's first 4K 15.6-inch OLED displays for the notebook market.
These Samsung notebook display panels will have a brightness level ranging from 0.0005 to 600 nits and a dynamic contrast ratio of 120,000 to 1. When compared to LCDs, the blacks will appear 200 times darker and whites twice as bright. In the OLED TV market, LG Display increased its 2018 OLED TV shipments by 70% year over year to 2.9 million units, up from approximately $1.7 million in 2017. For 2019, LGD expects shipments to grow to approximately 3.8 million OLED TVs.
Additionally, LG announced at CES that its awe-inspiring rollable OLED TV will go into production sometime this year. Furthermore, as the majority of new OLED capacity being built is flexible, we expect the ramp of plastic OLED production to usher in new design possibilities for the display and lighting industries. From conformable to foldable to rollable, OLED's are the only display technology that can commercially enable these exciting and groundbreaking form factors. In the coming years, new ideas, new concepts and new products are expected to showcase the endless wonders and possibilities that OLEDs can engender.
As we have noted in the past, we believe that we are in a multiyear OLED CAPEX growth cycle. We continue to expect year-end 2019 installed base of OLED's square meter capacity to increase by approximately 50% over year-end 2017. This growth cycle is fueled by the proliferation of OLEDs across the consumer electronic landscapes, including ARVR, smartwatches, smartphones, IT, automotive and TVs. With Samsung Display, OLEDs are becoming an increasingly significant contributor to its revenues.
During its recent earnings call, Samsung announced that over 70% of its display sales stem from OLED. In addition to IT and automotive OLED design activity, Samsung launched the Galaxy S10 yesterday in San Francisco, marking the 10-year anniversary of the Galaxy S smartphone series. In 2010, when Samsung entered the nation's smartphone market and launched the Galaxy S., they made the bold move to differentiate their product with an OLED display, enabling great picture quality in a thin form factor. Fast forward to today, and Samsung is a top leading smartphone manufacturer and OLEDs are considered the best-in-class for premium smartphones.
During its earnings call, LG Display reaffirmed its OLED TV production plans to add 60,000 sheets per month of capacity in its new Guangzhou OLED fab this year, bringing their total Gen-8.5 OLED TV capacity to 130,000 sheets per month by the end of 2019. Additionally, LG Display has allocated CAPEX to add 30,000 sheets per month of Gen-6 flexible OLED mobile capacity next year. In Japan, Sharp launched the Aquos Zero smartphone in the fourth quarter of 2018, which features a 6.2-inch OLED screen, Sharp's first mobile OLED screen. And in China, there is new OLED capacity activity throughout the region.
The OE technology broke ground on its third Gen-6 flexible mobile OLED fab in Xinsheng in December. And the day after Christmas, BOE announced plans to build its fourth Gen-6 OLED fab in [ Fujo ] with an investment of approximately $6.8 billion. During 2019, we expect BOE to continue to ramp its capacity in Chengdu and production is slated to commence at its second facility in Mianyang later this year. Tianma is currently ramping production in its Gen-6 flexible fab in Wuhan.
With approval secured for the construction of its second phase, Tianma's combined capacity of the two phases is expected to total 37,500 sheets per month by the end of 2020. Visionox, with whom we signed long-term license and material supply agreements in June last year, is in the midst of ramping its first Gen-6 flexible OLED plant. A second phase to this fab was approved and is expected to begin mass production in late 2020-early 2021. While still at an early stage, the potential of OLED lighting is tremendous due to its numerous benefits.
These benefits include energy efficiency because of our proprietary, phosphorescent materials, novel innovative form factors, which pave the way for boundless design opportunities, beautiful natural colors that create a spectral distribution that is the closest to natural sunlight, cool operating temperatures allowing users to handle them safely at low cost potential. With the development and commercialization of OLEDs accelerating in the consumer electronics market and OLED lighting starting to enter niche commercial markets, namely automotive, we are further strengthening our competitive might. We're developing new OLED technologies and next-generation materials and continue to leverage and expand our first mover leadership position. And on that note, let me turn the call over to Sid.
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
Thank you, Steve. And again, thank you, everyone, for joining our call today. Let me review our 2018 results before commenting on our 2019 guidance. Just as a reminder, revenue before 2018 are under the prior accounting standard ASC 605.
Beginning in January 2018, we adopted a new accounting standard ASC 606. Under ASC 606, 2018 revenues were $247 million, material sales were $153 million and royalty and license revenues were $81 million. Under ASC 605, 2018 revenues would have been $326 million. On an apples-to-apples basis, under ASC 605, our 2018 revenues look similar to our 2017 revenues.
2018 operating expenses, excluding cost of materials was $137 million, up from $135 million in 2017. Under ASC 606, operating income was $57 million. Net income was $59 million or $1.24 per diluted share. Under ASC 605, operating income was $136 million, compared to operating income of $146 million in 2017.
Net income would have been $130 million or $2.77 per diluted share, compared to net income of $104 million or $2.18 per diluted share in 2017. We generated $122 million of cash from operations and ended the year with $550 million in cash and equivalents or approximately $11 of cash per diluted share. Now moving on to our fourth-quarter results. Under ASC 606, revenues for the fourth quarter of 2018 were $70.1 million, sequentially down from third quarter 2018 to $77.6 million.
Under ASC 605, our fourth-quarter revenues would have been $92.9 million. This compares to Q3 2018 revenues of $91.6 million and Q4 2017's $115.9 million. Our total material sales were $39.9 million in the fourth quarter, compared to material sales of $51.2 million in the third quarter of 2018 and $59.8 million in the fourth quarter of 2017. Green emitter sales in the fourth quarter of 2018, which include our yellow green emitters, were $27.5 million, this compares to $35.9 million in the third quarter of 2018 and $40.9 million in the fourth quarter of 2017.
Red emitter sales in the fourth quarter of 2018 were $11.8 million, this compares to $14.6 million in the third quarter of 2018 and $18.3 million in the fourth quarter of 2017. 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 of these factors are moving variables for our customers, they are also moving variables for us.
Before we discuss Q4 royalty and license revenues, we want to remind you that under ASC 606, irrespective of when billings occur, we will recognize royalty and license revenues in proportion to corresponding OLED material shipments. Fourth-quarter 2018 royalty and license fees were $25.9 million, this compares to $23.3 million in the third quarter of 2018 and $53.8 million in the fourth quarter of 2017. Fourth-quarter 2018 Adesis revenues were $4.4 million, this compares to $3 million in the third quarter of 2018 and $2.3 million in the fourth quarter of 2017. Cost of sales, which include Adesis cost of sales for the fourth quarter of 2018 were $18.3 million, this compares to $16.1 million in the third quarter of 2018 and $16.9 million in the fourth quarter of 2017.
Cost of material sales, which only relates to OLED materials and does not include Adesis cost of sales, were $14.8 million, translating into material gross margins of 63%. This compares to 73% in the third quarter of 2018 and the comparable year-over-year's quarter material gross margins of 74%. Impacting our gross margin was an inventory reserve at $2.6 million. For the year, our material gross margins were approximately 72%, in line with our guidance range of 70% to 75%.
Fourth-quarter operating expense, excluding cost of sales was $36.5 million, up from last quarter's $35.4 million, but down year over year, from the comparable quarter's $41.1 million. Operating income under ASC 606 was $15.3 million for the fourth quarter of 2018. Under ASC 605, fourth-quarter operating income would have been $38 million. This compares to last quarter's $40.1 million and the year over year comparables quarter's $57.9 million.
Fourth-quarter 2018 income tax was a benefit of $1.5 million. Under ASC 606, net income for the fourth quarter of 2018 was $19.2 million or $0.40 per diluted share. Under ASC 605, our fourth-quarter net income would have been $45.2 million or $0.95 per diluted share, this compares to last quarter's $34.2 million or $0.72 per diluted share and the comparable year-over-year quarter of $32.8 million or $0.69 per diluted share. Now looking to 2019.
Based on our current forecast, we expect 2019 revenues under ASC 606 to be in the range of $325 million to $350 million. Under ASC 605, 2019 revenues are expected to be in a range of $395 million to $420 million. As Steve mentioned earlier, with our growing list of customers and customer needs, our material design and commercialization pipeline is busier than ever. As we continue to innovate and invent new materials, some of the new product performance specifications entail materials that are increasingly more complicated.
As a result of all these developmental activities, we expect our 2019 material gross margins to average approximately 70% for the year. As we have noted in the past, material gross margins can vary quarter-to-quarter. With respect to operating expenses, we expect R&D expense to increase by approximately 25% to 30% year over year, driven by customer programs and our internal R&D programs, including blue and OVJP. SG&A and patent costs are expected to increase by approximately 7% to 10% year over year.
We expect the effective tax rate to be approximately 18%, give or take a few basis points. With respect to the year, we plan to continue to provide ASC 605 quarterly results. 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 $0.10 per share will be paid on March 29, 2019 to stockholders of record at the close of business on March 15, 2019.
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.
Steve Abramson -- President and Chief Executive Officer
Thanks, Sid. 2019 marks the 25th anniversary of Universal Display Corporation. In 1994, we were founded on the mission to develop and commercialize key OLED technologies. And today, we are a leading player enabling the OLED industry, an emerging market that is forecasted to grow to $30 billion this year.
The extraordinary value of our proprietary OLED technologies of phosphorescent materials has solidified UDC as an integral partner in the commercialization of OLEDs into the marketplace. Looking to the year, we are energized by the great opportunities to expand the market and fuel our growth as we work with OLED manufacturers to broaden the commercial landscape and build on the OLED industry's momentum. With the ongoing proliferation of OLED products, we see a market environment poised for stunningly colorful, thin innovative products, including novel plastic-based form factors that we believe could forge new commercial product roadmaps in the display and lighting industries. As a fast moving forward-thinking company, we continue to target new opportunities for growth, as we leverage our intellectual property, materials and technology and growing product portfolio to further enable the industry's growth.
Our ability to leverage the breadth and depth of our know-how and experience into new materials and new technologies, coupled with our expanding infrastructure that is designed to drive competitive speed and cost effectiveness, we believe that we are well-positioned to enable the growth of the OLED industry for the near-term, mid-term and long-term. I would like to take this opportunity to thank each of our employees for their drive, desire, dedication and heart in elevating and shaping Universal Display's accomplishments and advancements. We are committed to being a leader in the OLED ecosystem, achieving superior long-term growth and delivering cutting-edge technologies and materials for the industry, for our customers and for our shareholders. And with that, operator, let's start the Q&A.
Questions and Answers:
Operator
Great. Thank you. [Operator instructions] Our first question is from Brian Lee from Goldman Sachs. Please go ahead.
Brian Lee -- Goldman Sachs -- Analyst
Hey, guys. Thanks for the questions. Maybe first one just looking at the mix of revenue this quarter. Royalty and licensing picked up to be a bigger percentage than the recent run rate that we've seen over the past few quarters.
How should we be thinking about that split? And if you can kind of give us some guidance around what's embedded in the 2019 revenue outlook? Just what was driving the more heavily weighted royalty and licensing number this quarter away from that kind of two-thirds, materials one-third split you've talked about in the past?
Steve Abramson -- President and Chief Executive Officer
That's a great question. Thank you, Brian. The customer ratios are different, but we believe that the average ratio for next year is likely to be between 1.5 to one and two to one. And it really is based upon customer mix.
Brian Lee -- Goldman Sachs -- Analyst
OK. So just to be clear, 1.5 to one to -- between 1.5 to one and two to one on material. So skewing a bit more toward royalty and licensing than what you saw through 2018, that's fair?
Steve Abramson -- President and Chief Executive Officer
That is correct, and it really is due to customer mix.
Brian Lee -- Goldman Sachs -- Analyst
OK. Fair enough. And then maybe speaking about customers here for a minute. I know inventory was an issue that plagued you through different parts of 2018 at Samsung, and I think toward the latter part of the year in LG as well.
Can you give us kind of your latest thoughts around what the inventory status on materials as you are aware of it? Is that Samsung and LG? And how those factored into the thought process for setting 2019 guidance? And then just related to that, the $2 million-plus inventory write-off, what that might have been related to? Was that hosts? Or was that a different material that you can give us some clarity around?
Steve Abramson -- President and Chief Executive Officer
Sure. Based upon our most recent information, Brian, we believe that the inventory purchased in 2017 has essentially been flushed out of the channel, and -- so that we think is not an issue going forward. And in terms of the reserve, it is -- we're sole-source phosphorus and emitter company and these relate to our phosphorescent emitters. We build inventory to meet customer needs and sometimes these patterns shift.
And based on our current forecast, anything that's not estimated to be shipped in the next 12 months is subject to our reserves. But due to their long shelf life and if the demand environment changed, we can adopt -- adapt as we move forward. And we review our inventory on a quarterly basis and estimate what will be sold over the next 12 months. And depending on material, we do make some adjustments to the reserve levels.
Brian Lee -- Goldman Sachs -- Analyst
OK. Fair enough. Last one from me and I'll get back in the queue. Just the 70% gross margin guide for materials on that -- in 2019 and also the big jump in R&D spending year on year, that's your forecasting.
Those are your deep dynamics we haven't seen in prior years. So I'm wondering what is it about the next 12 months that's driving that dynamic? And then you mentioned some programs, both internally and customer-driven, can you speak to how much of that is blue-oriented versus other? And then also if there is any concentration by product application, whether it be mobile or TV or smartphone or other granularity around product applications you can give us? Thank you.
Steve Abramson -- President and Chief Executive Officer
Thank you. Regarding the first part of your question on gross margins, for the past number of years, our average annual material gross margins have been in the range of 70% to 75%. Last year it was approximately 72% and we estimate it to be 70% average this year. Our material gross margins are impacted by product and customer mix.
And frankly, some of the new materials have higher costs. As we noted earlier with the growing number of customers and customer needs, our material design pipeline is really busier than it's ever been. As we continue to innovate and invent new materials, some of the new products are increasingly -- have become more complicated and therefore translate into additional costs. And in addition to that, ASC 606 has about a 1% to 2% impact on our gross margins, because we use average sale price.
And in terms of R&D spending, R&D spending is two areas that we are focusing on this year is blue and OVJP. And so if you look at the average over the past two years though, if you take '18 and what we're projecting for '19, they actually is in the 10% to 15% range. And it really depends -- some things get pushed from year to year at different times.
Brian Lee -- Goldman Sachs -- Analyst
OK. Thanks a lot.
Operator
Our next question is from CJ Muse from Evercore. Please go ahead.
CJ Muse -- Evercore ISI -- Analyst
Yes. Good afternoon. Thank you for taking my question. I guess, first question, it sounds like a tone change here on blue where you cited excellent progress.
So would love to hear in more detail, what you could share on that front with us?
Steve Abramson -- President and Chief Executive Officer
That's a great question, because we have been more positive. Our confidence in developing commercial phosphorescent blue in this system continues to grow, due to significant R&D progress that we're making. We believe that we're getting closer to initial commercial specs, but we're not yet able to provide a time frame. Blue is a work in progress, and we are making progress, but there is nothing that we can announce at this moment.
CJ Muse -- Evercore ISI -- Analyst
OK. That's helpful. And I guess as a follow-up, and I guess a bit further out. Can you talk about, I guess, where we are in terms of the roadmap for RGB OLED TV? So I guess, within this, would love to hear how you're thinking about OVJP as well as perhaps other deposition technologies, including inkjet printing that could get us over the hump and drive commercialization?
Steve Abramson -- President and Chief Executive Officer
Well, CJ, we've been focusing on OVJP for quite some time, because we believe it combines the benefits of evaporative small molecule materials with the printing process. So we've recently designed a new prototype system and we have two chambers in already, the third chamber should be here shortly. We're continuing to grow our development team on that. We think it's probably about three to five years before we see commercial production with OVJP.
CJ Muse -- Evercore ISI -- Analyst
OK, great. Thank you.
Steve Abramson -- President and Chief Executive Officer
Thanks, CJ.
Operator
Our next question is from Mehdi Hosseini from SIG. Please go ahead.
Mehdi Hosseini -- SIG -- Analyst
Yes. Thanks for taking my question. A couple of follow-ups, given how you described the difference in 606, or is it 605, 1.5 to 1.0, it seems to me that the TV revenue or revenue attributed to TV end market of customer B is going to grow at a faster rate compared to revenue contribution from customer A. Is that the right way of reconciling these multiple data points that was discussed earlier?
Steve Abramson -- President and Chief Executive Officer
I mean, Mehdi, we really can't talk about customer specifics, because each of our customers have different terms in terms of pricing of materials, based upon their cumulative volume discounts and how much is paid, either a fixed royalty that's allocated over the entire life of the agreement or whether they're royalty-based, and we have customers that are both. So what you see when you see the result is a blend of all of them, which is an average, which is why things do swing from one weight to the other depending on it. But we really can't talk specifically one customer or the other.
Mehdi Hosseini -- SIG -- Analyst
Let me rephrase the question. Is it fair to assume that the customer A drives a bigger difference between 605 and 606 than customer B?
Steve Abramson -- President and Chief Executive Officer
Again, I can't really go through specifics. We do, we have seen a large increase in deferred revenues and in our cash that we received. And as you're well aware over the years, we've had a customer array that has paid us fixed license fees that is paid each quarter now over the life of the agreement. That is not the only amount that goes -- that is in the increase in deferred revenue, but they are a large customer.
Mehdi Hosseini -- SIG -- Analyst
Got it. OK. Thanks for the color. And then given your incremental confidence in the growth that is coming back from multiple customers, what are your plans for increasing capacity or asking PPG to add -- to increase capacity?
Steve Abramson -- President and Chief Executive Officer
Mehdi, as you are well aware, we're always on top of how much capacity we have, and we'd added capacity a couple of years ago and we are looking at this based upon what we see the forecast for the next couple of years to be. We believe today we have capacity to meet the needs for the foreseeable future, but we are always looking at when we need to start the process of adding new capacity, because we always want to be ahead of the game and we never want to be in a situation where we are not able to manufacture the phosphorescent materials that our customers need. Since we are a sole source, we will always build excess capacity and excess inventory.
Mehdi Hosseini -- SIG -- Analyst
I know, and I think we're all trying to figure out when -- the timing of when these conversations with PPG will they start?
Steve Abramson -- President and Chief Executive Officer
I'll be honest with you, we will always have these conversations, and it isn't that it's up to PPG, it's up to us. So we are constantly looking at what our forecasts are for the next, what we believe, 12 months and 24 months, and it is an evaluation process that is ongoing, and I can tell you we're talking about it right now.
Mehdi Hosseini -- SIG -- Analyst
Got it. Thank you. Thanks for the color.
Steve Abramson -- President and Chief Executive Officer
Thank you.
Operator
Our next question is from Sidney Ho from Deutsche Bank. Please go ahead.
Sidney Ho -- Deutsche Bank -- Analyst
Thanks for taking my question. I got a few. So the first one I have is first off is on the revenue -- deferred revenue side, and thanks for providing that ASC 605 guidance, it's super helpful. But looking at the cumulative revenue deferred between 2018 and 2019, you will be probably be around $115 million by the end of this year.
Understand maybe smartphone premiums a little weaker, but just trying to understand how this balance will reverse itself? And in the case that you believe that over the life of the contract your largest customer may not buy as much, how is that impacting your revenue? How does that flow through into ASC 606 revenue?
Steve Abramson -- President and Chief Executive Officer
Thank you, Sidney. And your question is really the deferred revenue, it's difficult for us to predict, because as you are well aware, as we ship more to the customer, we will take more of that deferred revenue. And in -- under 606, you have to constantly be looking at the future. You have to take all of the revenue that is in the contract over the life of the agreement.
So with the assumption that the OLED industry will continue to grow through the terms of our long-term agreements and our material shipments will grow, you'll likely see deferred revenues begin to be recognized in the latter part of the agreement term. And all of the deferred revenue will be recognized by the end of the term of the respective customer agreements. So it is something that you are constantly adjusting.
Sidney Ho -- Deutsche Bank -- Analyst
OK. That's helpful. Maybe on -- my follow-up is a question related to your second largest customer. The number of OLED TV has increased, what, 50% last year -- in 2018 and but then your revenue from that customer is roughly flat.
Can you give us some color on why that is the case? Is that a learning curve? Is that some pre-buys going on? And if you look at what they guided for this year, I think Steve mentioned another 30% increase, how should we think about the revenue growth there?
Steve Abramson -- President and Chief Executive Officer
Yes. We believe that LG made significant efforts in its manufacturing efficiencies, which means for them better material utilization. It's been about three years since LGD really started producing OLED TVs in volume. It was 900,000 in 2016, 1.7 million in '17 and 2.9 million in '18.
And just like we saw with Samsung, the first few years they're really focused on improving manufacturing efficiencies. And then once you get to a steady run rate, the stepdown in efficiencies are not expected to be as significant. And for us any -- additionally any yield improvements mean more product end products, not necessarily more material sales, but it will be more royalties for us when they sell them. And so that's what happens and also there is some impact on that based upon ASC 606 using an average selling price versus the actual selling price that 605 uses.
I hope that helped.
Sidney Ho -- Deutsche Bank -- Analyst
Yes, that's helpful. Maybe one last question from me. Following up to earlier questions on RGB OLED, the I guess, non-OLED TV makers have been quite aggressive talking about the price of 65-inch TVs going down below $1,000. If I think about OVJP, is there a way that I can think of how much it can help reduce the cost of the TV panel? Do you have any kind of estimate at this point?
Steve Abramson -- President and Chief Executive Officer
It's difficult for us to estimate, however what we believe is that this process is one that we think we can -- that can be used for large-area displays and Gen-10 and above, and it is for TVs and it is a very scalable process. And to be honest, when you go from Gen-8.5 to Gen-10.5 or Gen-10, you can increase the number of 65, you can double the number of 65-inch TVs from a Gen-8 to a Gen-10, which really should help the cost per unit. So when you go to Gen-10.5, you literally go from -- for a substrate you go from 365s to 665s, which we think is very good in terms of how it will help grow the industry, because I personally believe that LG has talked about making 10 million OLED TVs in 2021, and this is the technology that I believe that -- and you're still talking about 5% of the TV market. OVJP technology, assuming that it does what we believe it will, will now allow you to start taking significant market share for TVs because I believe that the cost structure will -- the cost will come down significantly.
Sidney Ho -- Deutsche Bank -- Analyst
Great. Thank you very much.
Steve Abramson -- President and Chief Executive Officer
Thanks, Sidney
Operator
[Operator instructions] Our next question is from Jim Ricchiuti from Needham & Company. Please go ahead.
Jim Ricchiuti -- Needham and Company -- Analyst
Thank you. Goof afternoon. Steve, I think it was in your commentary, your text, you talked about new red and yellow emitters, new host materials. And is this something we should be thinking about impacting revenues this year? And I don't recall you talking about host materials, at least in recent conference calls, and I'm wondering if that's tied to the work on blue?
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
So we are continuing. We will talk a lot about blue but we're continuing to invent red, new reds and greens and yellows, and we're continuing to improve the efficiencies and lifetimes, and we have a significant research program on that. We've also continued to work on host materials, we do not yet have any host wins to announce, but we're continuing to move forward because we do believe we have a competitive edge in the host business. So our hosts actually relate to the full color spectrum.
Jim Ricchiuti -- Needham and Company -- Analyst
So you're not specifically calling that out as it relates to blue?
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
No. I was just calling that out as it relates to a different material category.
Jim Ricchiuti -- Needham and Company -- Analyst
OK. And just on this modest downtick in material gross margins, Sid, you talked about the fact that with the larger number of customers, and there's just more complexity to that part of the business. I'm wondering to what extent is pricing impacting this at all, impacting your margins in this area of the business?
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
It is really the cost side. It is not pricing, I mean, we do have cumulative volume discounts, but as you are well aware, if we have new materials we introduced, we go back to a different price. And in addition, ASC 606 uses an average selling price, which is, depending on where you are in the contract is usually lower than what you are actually selling. But it is not the pricing side that is causing the margins to go down.
It's the cost side.
Jim Ricchiuti -- Needham and Company -- Analyst
OK. Thank you.
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
Thanks, Jim.
Operator
Our next question is from Hendi Susanto from Gabelli & Company. Please go ahead.
Hendi Susanto -- Gabelli and Company -- Analyst
Sid, you mentioned that 2019 gross margin is anticipated to be lower, because new materials are more complicated and have higher costs. On the one hand, one may think that new OLED display entrance in China may start from basic or less complex materials. On the other hand, there is also a lot of talks about flexible OLED display. This is a multipart question.
Like first, can you shed some light whether flexible OLED display will require more complex materials? Or can the same materials be used for flexible OLED display? Second, would you elaborate characteristics of new materials in 2019? And third, do complex materials warrant higher ASP when it comes to commercialization down the line?
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
Yes. Obviously, because we were really agnostic to the substrate, which is one of the major benefits of OLEDs and our phosphorescent emitters for rigid and plastic can be the same or they can be different. But it isn't that you need to develop a whole new set of phosphorescent emitters just to work on the flexible side. Our materials are more complicated, and as you get new customers, but to some extent the new materials that get adopted are built into, if you have a long-term contract with that customer, they are built into our assumptions for the average sales price over the life of the agreement.
So that we no longer see the benefit of a new material being introduced and seeing a spike in the price, which is while we do this assumptions over the life of the agreement, we make an assumption as how many new materials we're going to introduce during the life of the agreement, what they may be and then we build that into the average selling price. So it is built in, but you no longer see the benefit of the spikes.
Hendi Susanto -- Gabelli and Company -- Analyst
And then in terms of characteristics of new materials, would you be able to elaborate?
Steve Abramson -- President and Chief Executive Officer
Well, basically the new materials, they can be at different color points depending on the specific application. Customers always want higher efficiency and longer lifetime.
Hendi Susanto -- Gabelli and Company -- Analyst
OK. Yes. And then a question for Steve. So Steve, what caused the strategic shift to invest in OVJP in 2019? Are there some recent or potential catalyst the company to put OVJP as your major investment in 2019?
Steve Abramson -- President and Chief Executive Officer
Well, it was actually a few years ago that we had some really significant scientific and engineering breakthroughs, and that's when we decided to move forward more aggressively on OVJP. So one of the things we had to do was design a new tool, because this had never existed before. So this design and development of the new tool has been going on for a few years and now it's come online or it's about to come online and so we're getting even more excited about its potential.
Hendi Susanto -- Gabelli and Company -- Analyst
Got it. Let me get back to the queue.
Operator
Great. Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to Mr.
Rosenblatt for any closing comments.
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
Thank you, all, for your time today. We appreciate your interest and your support. Good night. Thank you.
Operator
[Operator signoff]
Duration: 51 minutes
Call Participants:
Darice Liu -- Director of Investor Relations and Corporate Communications
Steve Abramson -- President and Chief Executive Officer
Sid Rosenblatt -- Executive Vice President and Chief Financial Officer
Brian Lee -- Goldman Sachs -- Analyst
CJ Muse -- Evercore ISI -- Analyst
Mehdi Hosseini -- SIG -- Analyst
Sidney Ho -- Deutsche Bank -- Analyst
Jim Ricchiuti -- Needham and Company -- Analyst
Hendi Susanto -- Gabelli and Company -- Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
More From The Motley Fool
Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Universal Display. The Motley Fool has a disclosure policy.
