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Universal Display Corp  (NASDAQ:OLED)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 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 Third Quarter 2018 Earnings Conference Call. My name is Dana and I'll be your conference moderator for today's call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Darice Liu, Director of Investor Relations. Please proceed.

Darice Liu -- Director of Investor Relations & Corporate Communications

Thank you and good afternoon everyone, welcome to Universal Display's third 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 express written consent of Universal Display is strictly prohibited.

Further, this call is 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 November 1, 2018. All statements in this conference call that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as those relating to Universal Display Corporation's technologies and potential applications of those technologies, the Company's expected results, as well as the growth of the OLED market and the Company's opportunities in that market.

These include but are not limited to statements regarding Universal Display's beliefs, expectations, hopes or intentions regarding the future. It is important to note that these statements are subject to risks and uncertainties that could cause Universal Display's actual results to differ from those projected. These risks and uncertainties are discussed in the Company's periodic reports filed with the SEC and should be referenced by anyone considering making any investments in the Company's securities. Universal Display disclaims any obligation to update any of these statements.

Now I'd like to turn the call over to Steve Abramson.

Steve Abramson -- President, Chief Executive Officer, Director

Thanks Darice and welcome to everyone on today's call. Our third quarter 2018 revenues were $77.6 million, operating profit was $26 million and net income was $22.8 million or $0.48 per diluted share. Under ASC 605, the prior accounting standard our third quarter results would have been $91.6 million in revenues, $40.1 million in operating profit and $34.2 million in net income or $0.72 per diluted share.

During the quarter we began to see a pickup in the smartphone market, as new OLED products were launched, including the Samsung Note 9, Huawei Mate 20X and 20 Pro, LGV 40, Google Pixel 3 and 3XL and others. Also notable was Apple moving from one model with an OLED display last year to two models with OLED screens this year.

We believe that these launches are indicative of the increasing demand and value of OLED is leading OEM product road maps and reinforces a strong secular OLED growth story. Near term however, the magnitude of the pickup through our material sale was not to the degree we had earlier anticipated. As a result, we are lowering our 2018 revenue guidance to approximately $240 million to $250 million. Under ASC 605, we estimate that our 2018 revenues to be approximately $315 million to $325 million.

And as we look to 2019, we continue to anticipate it to be a meaningful year of growth, driven by a number of factors. These include continued growth in the smartphone market, we believe that new innovative OLED product launches, implementation of 5G and other factors will help drive the continued pickup in the smartphone market.

We also believe that the proliferation of OLEDs across the consumer electronics market will continue to broaden. We have seen OLED adopted a myriad of applications in AR VR, wearables, tablets, laptop, automotive, TVs and smartphones, which is where the majority of OLED displays are used today. We believe that the adoption of OLEDs across the consumer electronics spectrum will continue to broaden as OEM and consumer interest for beautiful, innovative, energy efficient displays continues to grow.

For example in the TV market ,demand continues to outpace supply as OLED TVs are recognized as the best TVs in the market. The most recent accolades comes from Forbes and rthings.com who jointly named LG's OLED TV one of the best products of the year. The report noted that quote-unquote the LG B8 is the best TV reviewed in 2018 and had outstanding picture quality, thanks to the OLED panel that delivers excellent dark room performance. OLED contain each pixel individually, so it delivers perfect plaques and wide viewing angles.

No wonder why consumer demand for OLED TV continues to grow. As new OLED TV capacity increases, we expect our business to increase significantly. On the IT front, Samsung Electronics announced last month that it is working on developing new laptop form factors, including one with a foldable OLED display. LG Display is reportedly working with Lenovo on developing a foldable OLED tablet which may ship by the end of next year.

And in automotive, from Samsung announcing last month, that its OLED displays were selected for the Audi e-tron, Audi's first all-electric vehicle through place a side view mirrors, two reports LG Display is working with Visteon, the second largest automotive display supplier. We believe that interest for OLED displays and automotive applications continues to increase due to its many attributes, including high resolution, fast response time, high contrast and form factor.

We also believe that new form factors only made possible because of OLEDs will be introduced. Since the OLED stack essentially consists of film layers, they are inherently conformable, bendable and rollable. Back in 2013, with the move from glass on glass to glass on plastic, we saw the first conformable smartphones with the Samsung Edge and LG, G Flex. We believe that the next milestone in the OLED form factor roadmap is foldable. With Royole's announcement on Wednesday and Samsung and Huawei both aggressively working toward a commercial product, we expect the emergence of foldable OLED products to excite the consumer industry.

Additionally, new production capacity is expected to significantly expand the panel maker landscape. As a pioneer of AMOLED manufacturing, we expect Samsung to continue to lead the OLED market. At the same time other panel makers, including LG Display, BOE, Tianma and Visionox are investing in building new OLED production capacity.

Additionally panel makers, including Sharp, Japan Display, Royole and EDO are advancing their commercialization initiatives. We believe that all these panel makers will help to significantly expand the production capacity landscape in the coming years. In short, with billions of dollars committed to fueling the commercialization of OLEDs around the world and the landscape of OLED panel manufacturers expanding, and OLEDs playing an increasingly larger role in leading OEM product roadmaps. We believe the stage is being set for OLEDs to become the dominant display technology across the consumer electronic spectrum.

Now, let me briefly touch on some of the recent news in the panel maker ecosystem. In mid-October, Samsung held an OLED forum in China to discuss some of its R&D initiatives and its product roadmaps. Last week Samsung reportedly confirmed that the IMID exhibition show in Korea is developing technology for QD OLED or quantum-dot organic light emitting diodes for TV's. And just this week, Samsung reported during its earnings call that demand for flexible OLED panels was recovery.

Samsung discussed it's focus on diversifying its OLED customer base, differentiating its OLED product portfolio and expanding into new OLEd applications, including foldable, automotive and IT. Heading into next year, Samsung expects its OLED revenues, profits and fab utilization rates to be up year-over-year.

During LG Display's earnings conference call, the company reiterates its strong capital commitment to OLEDs for both TV and mobile. Additionally LGD hit the key operating milestone in the quarter with its OLED TV panel business achieving positive operating profit for the first time. With continued strong demand for OLED TVs, LGD's capacity plans are on track. It's second OLED TV fab in Guangzhou, China is expected to open in mid 2019. LGD is also evaluating plans to convert additional Gen-8.5 LCD capacity to OLED capacity in Guangzhou.

This is in addition to its ongoing Gen-10.5 OLED TV fab plans. LGD plans to sell 2.4 million to 2.8 million units this year 4 million OLED TVs next year and 10 million units by 2021. In Japan, Sharp announced early last month it's long way to move into the oven market, according to reports Sharp will offer OLED panels in its new smartphones later this year and plan to sell OLED displays to other manufacturers.

And in China, BOE technology was upbeat on its OLED mobile shipment outlook during their earnings call this week. BOE continues to ramp its Gen-6 flexible plant in Chengdu with new capacity phase is expected to be added in the coming months. Its second Gen-6 OLED plant in Mianyang is reportedly on schedule to commence operations in the first half of next year. And BOE reaffirmed plans to build its third OLED fab in Chongqing iwhich is expected to come online in the second half of 2020.

Visionox announced last month, a second phase to it's Gen-6 OLED production fab. The $6.3 billion, 30,000 plates per month flexible OLED line is expected to begin mass production in late 2020 or early 2021. With respect to EDC's internal R&D activities, our focus remains on being at the forefront of leading-edge OLED's technologies phosphorescent materials. Our team of scientists and engineers are continuously investing, developing and delivering next generation of material systems and technologies, including new reds, greens and yellows and hosts to meet the ever-changing and ever evolving customer specifications for an array of consumer applications.

With respect to blue, we continue to make excellent progress in our ongoing development work for our commercial phosphorescent blue emissive system. In addition to our phosphorescent core competencies, one of our major R&D initiatives is OVJP organic vapor jet printing for large area TV's.

In the third quarter we installed the first chambers of our pilot prototype system. We are planning for additional chambers to be delivered by the end of the first quarter of 2019. We believe that this prototype system will enable us to scale our novel and proprietary mask-less dry printing technology to Gen-8 and higher commercial platforms, paving an alternative path for high throughput, scalable and cost-effective manufacturing of RGB side by side OLED TVs.

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

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thank you, Steve. And again, thank you everyone for joining our call today. Before I discuss our third quarter financial results, I want to remind you that revenues before 2018 are under the prior accounting standard, ASC 605. Beginning in January 2018, we adopted a new accounting standard, ASC 606.

Revenues for the third quarter of 2018 were $77.6 million, under ASC 605, our third quarter revenues would have been $91.6 million. This compares to Q2, 2018 revenues of $56.1 million in Q3 2017's $61.7 million.

Our total material sales were $51.2 million in the third quarter, compared to material sales of $36.8 million in the second quarter of 2018 and $47 million in the third quarter of 2017. Green emitter sales in the third quarter of 2018, which include our yellow-green emitters were $35.9 million. This compares to $25.7 million in the second quarter of 2018 and $32.8 million in the third quarter of 2017.

Red emitter sales in the third quarter of 2018 were $14.6 million, this compares to $10.9 million in the second quarter of 2018 and $13.7 million in the third 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, product mix, material ordering patterns, customer inventory levels and customer production efficiency gains.

Since the number of these factors are moving variables for our customers, they are also moving variables for us. Before we discuss Q3 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 on a quarterly basis in proportion to corresponding OLED material shipments.

Third quarter 2018 royalty and license fees were $23.3 million, this compares to $15.5 million in the second quarter of 2018 and $12 million in the third quarter of 2017. Cost of sales which includes Adesis cost of sales for the third quarter 2018 were $16.1 million. This compares to $11.6 million in the second quarter of 2018 and $13.5 million in the third quarter of 2017.

Cost of material sales which only relates to OLED materials and does not include Adesis cost of sales were $13.8 million translating into material gross margins of 73.1%. This compares to 74.8% in the second quarter of 2018 and a comparable year-over-year's quarter material gross margins of 75%. Third quarter operating expense, excluding cost of sales was $35.4 million, up from last quarter's $33.6 million and up year-over-year from the comparable quarter's $32.4 million.

Operating income was $26 million for the third quarter of 2018, under ASC 605, Q3 operating income would have been $40.1 million. This compares to last quarter's $10.9 million and the year-over-year comparable's quarter of $15.8 million. Third quarter 2018, income tax expense was $5.3 million or a tax rate of approximately 19%.

Net income for the third quarter of 2018 was $22.8 million or $0.48 per diluted share. Under ASC 605, our third quarter net income would have been $34.2 million or $0.72 per diluted share. This is sequentially up from last quarter's $10.8 million or $0.23 per diluted share and up from the comparable year-over-year's quarter of $13.5 million or $0.28 per diluted share. For the nine-months of 2018, revenues were $177.3 million, operating income was $41.5 million and net income was $39.6 million or $0.83 per diluted share.

Under ASC 605, our nine month 2018 revenues would have been $233.4 million, operating income would have been $97.6 million and net income would have been $85.2 million or $1.80 per diluted share. This compares to nine months of 2017 results of $219.8 million of revenues, $88.4 million in operating income and $71.1 million in net income or $1.49 per diluted share.

Now looking to 2018 based upon our current forecast, we are revising our 2018 guidance. As Steve mentioned, we did see a pickup in the smartphone market driven by a number of new OLED mobile launches, but the magnitude of a pickup to our material sales was not to the degree that we had earlier anticipated.

As a result, we now expect 2018 revenues under ASC 606 to be approximately $240 million to $250 million. Under ASC 605, we expect 2018 revenues to be approximately $315 million to $325 million. This compares to 2017 revenues of $335.6 million. We would note, as we have in the past, a shift in the industry's momentum in either direction can impact our financial results.

Moving along to gross margins, while quarterly material gross margins can vary quarter to quarter, we expect our overall 2018 material gross margins to be in the 70% to 75% range, which is consistent with the past few years. Operating expenses of SG&A, R&D and patent costs are expected to increase in the aggregate, in the range of 10% to 15% year-over-year, driven primarily by R&D. We expect the effective tax rate to be approximately 20% give or take a few basis points.

For 2019, we anticipate significant industry growth to resume. We expect year-end 2019 installed base of OLED square meter capacity to increase by approximately 50% over year-end 2017, with the majority of the capacity ramping in 2019. While the timing of capacity installs and ramps during the year are fluid, we believe that this new capacity translates into additional revenue opportunities for us.

And lastly, the Board of Directors approved a $0.06 quarterly cash dividend, which will be paid on December 28, 2018 to stockholders of record on December 14, 2018. The dividend reflects our 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, Chief Executive Officer, Director

Thanks Sid. Since Universal Display was founded, we been steadfast in enabling the OLED industry's tremendous potential. And while that potential has been affirmed through these past two plus decades, commercial growth of the industry only began a few years ago. We are still very much in the early stages of the incredible long-term growth path of OLEDs in displays and lighting.

UDC is in the unique position as we continue to play a critical role in the OLED markets' future. As a leading player in the ecosystem, we have the largest, deepest strongest team in the world, focus on phosphorescent OLED emissive layer technology.

We are expanding our team to fuel our long-term growth and increase our competitive edge. Building on the depth of our experience and know how, we are continuously innovating and investing the best OLED emissive layer materials, while also strengthening our global IP portfolio. As we head into this next wave of high volume capacity growth, we are well positioned to leverage the vast opportunities in this thriving market, drive profitable growth and deliver the most energy efficient, high performance and cost effective emissive layer solutions to our customers and partners.

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.

On that note, operator, let's start the Q&A.

Questions and Answers:

Operator

Thank you, Mr. Abramson. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Brian Lee from Goldman Sachs. Please proceed with your question.

Brian Lee -- Goldman Sachs -- Analyst

Hey guys, thanks for taking the questions. I guess, just wanted to start off with the guidance given a pretty unexpected shift here, so late into the year. The $50 million cut to the 606 guidance and then the $12.5 million revenue cut to the 605 guidance. I guess I'm still trying to reconcile how this all works? So, your expectation of material shipments over the course of the licensing contract dictates how you pro-rata recognized licensing revenue so. How often are you, I guess, remarking the baseline of expecting material shipments? And the reason I ask is, when do you kind of see the catch up on some of these licensing revenues that are being received, but not recognized? That'd be the first question.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thanks, Brian. One of the primary reasons for the wide range between ASC 606 and 605, is really a product mix. Under 606, we use an average selling price for all materials sold over the life of a contract. Under ASC 605, its actual billings and each material has its own pricing and therefore depending on products mix, it will impact the revenue profile differently, under 605 and 606.

For this year, lower material sales cause a larger discrepancy between 606 and 605. Under 606, the decline in sales is magnified across the board. As ASC 606 revenue guidance is approximately $240 million to $250 million; under 605, we expect 2018 revenues to be approximately $315 million to $325 million. This compares with 2017's revenues of $335 million.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Yeah, no, that's helpful. I understand and I appreciate you guys continuing to provide the delta and bridge between the two different accounting methodologies. But when I look at the material revenue for 3Q and then what you're inferring for 4Q, it actually looks like you're in line to maybe slightly up versus the second half of 2017 when we adjust out for the $15 million or $20 million of pre-buys you had. So, if that's kind of the baseline, I guess I'm still trying to figure out how much higher does materials revenue have to be for some of these step downs in the ability to recognize royalty and licensing revenue to sort of flip that the other way?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

It's -- the higher the -- based upon 606 and the way that we have to interpret 606 is, as we've gone through a number of times, as you estimate the number, the number of grams you saw over the life of the agreement. And when you are below the amount that you estimated, it has an impact not only on our material sales, but on our license fees also, since they are tied together and it magnifies the problem. So when your material sales are lower than you anticipated, you end up with a much bigger decline in just on the material side.

Brian Lee -- Goldman Sachs -- Analyst

Okay, fair enough. I'll take the accounting questions offline. And just two more and I'll hop back in the queue. When I look at the customer split, it looks like LG revenues fell almost $10 million sequentially. Any color you can provide as to why that customer might have slowed to that degree, just looking back at their second half revenues historically, they're stronger not weaker, which would make sense given the seasonality of TVs their main product?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

It's difficult for us, I mean customer ordering patterns are really difficult for us to anticipate, quarter to quarter forecasting is always an issue for us.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Last one. Steve, in your prepared remarks, you alluded to a few developments at Samsung. One specifically being the QD plus OLED approach to making TVs. I think they also mentioned that, that process is in R&D stage on their third quarter call earlier this week. So, there is also the expectation that as part of that material stack the OLED component would be Blue. Can you comment on your involvement there, if any? And then just maybe even at a high level what the implications would be for your own Blue development, because what we hear from industry chatters that the, the blue fluorescent, that's in the white OLEDs might not be the best long-term solution given the lifetime and burning issues that we've been hearing about on that product set. So would be curious to just kind of hear you guys' take since you brought it up?

Steve Abramson -- President, Chief Executive Officer, Director

Sure, Brian. What we think it's really good movement in OLEd that Samsung is moving toward QD OLEDs for TVs. We think it's an exciting development. As you know, we worked with our customers on a number of different projects, but we don't talk about any of the specific projects, but I will say our customers are obviously very interested in our progress in phosphorescent blue.

Brian Lee -- Goldman Sachs -- Analyst

All right, thanks guys.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thanks, Brian .

Operator

Our next question comes from the line of CJ Muse from Evercore ISI. Please proceed with your question.

CJ Muse -- Evercore ISI -- Analyst

Yeah, good afternoon. Thank you for taking my question. I guess first question trying to isolate the material that you reported versus what we were modeling and to get your thoughts on that. So, it looks to me like you're roughly 10 million to 15 million lower Korea, 8 million upside China. So, just curious as we isolate kind of your material sales to the September quarter, how much of that and I presume Korea, how much of that was lower unit demand versus perhaps better customer efficiencies that you didn't anticipate?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

There's a number of factors that impact our revenues. Obviously, whether it is customer, demand, inventory, efficiency. So, all of them really have an impact on our material sales. But I mean, to look at the quarter and look at what has occurred, I mean, we saw a pickup in the beginning of the second quarter and of material sales and further we saw even bigger pickup during the summer, but orders then began to slow down in September and then continue through October, and as a result of that, our material, we believe that, our expectations for material sales are going to be lower for the rest of the year. What compounds this reduction is ASC 606. The impact of 606 magnifies the effect of lower than anticipated material sales. However, as we head into 2019 with utilization rates increasing and new capacity ramps, we believe the 2019 will be a strong year.

CJ Muse -- Evercore ISI -- Analyst

Okay, that's helpful. And I guess, thinking about the prior question regarding $12 million shortfall on a non-ASC 606, translating to $50 million. And I get the impact of royalties before you had talked about roughly 2/3, 1/3 relationship between materials and royalties. Is that relationship changing and/or has your refined guide on an ASC 606 basis reflected perhaps a change in accounting that you've come to in terms of how you think best to adopt 606?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

We think that a ratio of 2:1 under 606 is still appropriate for our materials to royalties. But as we said, because everything is tied to materials when your material sales are lower, the royalties and license fees are going to be lower because they literally are tied together now.

CJ Muse -- Evercore ISI -- Analyst

But how does 12 turn to 50 I guess is the question that were all trying to figure out-?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Well, it's a product mix and that we've -- our products that are sold to customers are priced differently whereas under each material has its own pricing. And then the -- on the mix, there are different under 606 versus 605. Under 605, you use the actual price that you sell the materials; under 606, just an average price over the life of the agreement. So they can be different. And so when you do that, you do see a difference and as I said, product mix really does make a big difference in this case.

CJ Muse -- Evercore ISI -- Analyst

Got you. Thank you.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thank you, CJ.

Operator

Our next question comes from the line of Jim Ricchiuti from Needham & Company. Please proceed with your question.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi, thank you. Yeah, I'm just wondering as you started seeing the orders slowing in September or October. Can you help us understand which areas you started to see that and was it -- it is seemed to be coming more from smartphone applications or the larger area screens?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Yeah. Pretty much we believe it's on the smartphone side. I mean, it's -- even though our sales to customer A went up from Q2 to Q3 significantly over 100%, it was not that what we expected and that really would be the smartphone side.

Jim Ricchiuti -- Needham & Company -- Analyst

Okay. And Sid, as you saw that happening, did it -- did the slowing accelerate, as you saw or is it -- has it stabilized. I'm trying to get a sense as to whether there is the potential that this is going to start to reverse in the next couple of months. And I'm wondering, what's going to drive that?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

As just in time supplied or provider of material and we have very short lead times. We do talk to our customers and based upon customer discussions that we've had recently, pretty much what we see over the next couple of months as what we've recorded, the range is not that large. And as I said, there's always multiple variables that could impact ordering patterns from customers, which would include timing of introduction of new products and inventory levels. But pretty much when we saw the slowing down in September and October, we see that carrying through through November and December.

Jim Ricchiuti -- Needham & Company -- Analyst

And there is any contributing factors either more broadly price breaks or volume price breaks or just -- able to tell if -- I had a question has been asked, just increased the efficiency of the materials?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

We don't have anything specific that we can point at to, really is what our customers have said it's not our customers have said, that we need to do this or do that, it really is the customer -- it's their demand side that's driving what they buy from us.

Jim Ricchiuti -- Needham & Company -- Analyst

Are you seeing the same thing in China or is it just because so many of those producers, are at very early stages of ramping?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

China is really early, and is going forward, things should get easier to predict, but as you are aware, particularly when guys are ramping up early, their volumes of material that they buy is always very volatile. They start lines, they do some production testing and then they look at it and see what the results are. So you know, once they get up to a consistent run rate. It's a little bit easier.

Jim Ricchiuti -- Needham & Company -- Analyst

Okay, thank you.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thanks, Jim.

Operator

Our next question comes from the line of Sidney Ho from Deutsche Bank. Please proceed with your question.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks for taking my questions. I have a few. Just following on the Q4 guidance, are you expecting the decline quarter-over-quarter to come primarily, from one large customer or is it more widespread. The reason I asked is, its kind of strange that the larger OEM have -- the smartphone OEM have two SKUs this year and the fact that you started seeing a slowdown so early after the launch, it seems like it should be -- I don't know if it is a just one customer is being the driver for Q4.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

It's -- based upon our initial estimates, it's across the board, but we, as that we just said, it is smartphone related that seems to be the larger parner , say has historically been our largest customer.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. Maybe a follow-up to a question earlier. On the ASC -- I guess it is ASC 606, I understand that the lower expected unit shipments from Q4 is driving a change for the full year guidance, but are there any major changes in your ASC 606 assumptions where there is ASC assumptions over the life of the contract as a result of what you've seen this quarter, or do you assume the revenues was now being pushed out to future years?

Steve Abramson -- President, Chief Executive Officer, Director

Pretty much -- that is correct, it's being pushed out to future years. We have not made any change in assumptions. I mean, after three quarters of ASC 606, we're finding things and getting better in terms of estimating what will occur. But there's been no significant changes in how we do this.

Sidney Ho -- Deutsche Bank -- Analyst

Okay. And my last question is on the customer C and customer D. For customer C specifically, 10% customer this quarter, is that the same customer as last quarter's customer C and if they are the same, I'm curious if this is volume starting to ramp or is it just part of the seeding process that kind of started in Q2?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Yeah, if customer C is the same as customer C in the last quarter, they did open a new line in the last quarter.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, thank you very much.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thanks, Sidney.

Operator

Our next question comes from the line of Atif Malik from Citi. Please proceed with your question.

Atif Malik -- Citi -- Analyst

Hi, thank you for taking my questions. At the start of this year, you had a little bit of inventory problem with your top customers. To your best understanding, do you think that inventory has been worked down with the utilization going up in Q3 or there is still some inventory there?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

It's our understanding that inventory levels for each specific material at our customers vary and is depending upon changes in OEM customer orders and corresponding impact to fab utilization rates. So there maybe still some excess inventory in the channel.

Atif Malik -- Citi -- Analyst

Got it. And then Steve, in your prepared remarks you talked up about a bunch of drivers that are incremental to next year foldable phones, QD, OLED at Samsung, the premiums of mobile OLED panels have come down versus rigid. So what does this all mean qualitatively, in terms of the seasonality for first half next year?

Steve Abramson -- President, Chief Executive Officer, Director

Yeah, I'm not sure given our history, there's really less seasonality in the marketplace, is truly depend a lot on the new fabs opening up, the increased utilization rates of our customers, which then either are driven by or can drive new product introductions. So it's really when the fabs are going to open and how they're able to increase the utilization with the product developments.

Atif Malik -- Citi -- Analyst

Okay. And one last one for Sid, did you see an impact from China tariffs to your supply chain or did you hear it from your customers in terms of impacting their end demand?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

We work really closely with our customers in China, on a wide variety of opportunities and continuing to grow our partnership with them. This includes discussions on how current trade issues may apply to our materials. We have not seen some pre-tariff purchases during the quarter, but -- I'm sorry we may -- I'm sorry, I mean, I said we may have seen some, not we may not, but we have not seen any indication that in the current trade situation, that it will impact our business long-term.

Atif Malik -- Citi -- Analyst

Thank you.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thank you Atif.

Operator

Our next question comes from the line of Hendi Susanto from Gabelli & Company. Please proceed with your question.

Hendi Susanto -- Gabelli & Company -- Analyst

Good evening. I would like to understand more about ASC 606, Sid. So how does higher or lower material sales affect your gross margin?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

On our gross margin because of ASC 606 using average selling price, so it would not affect our gross margins very much, it's always product mix that affects our gross margins, but it is not 606 that's going to specifically impact our gross margins.

Hendi Susanto -- Gabelli & Company -- Analyst

Okay, got it. And then secondly, under ASC 606, how -- what if you change your assumption on how much material yourselves is across multi-year contract, like if you make adjustment whether your sales of material is higher or lower during the said multi-year period.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

We do change our assumptions as over the life of a part, but we haven't -- we have not seen a significant change in our -- what we believe our business will be over the foreseeable future. And over the life of all of these long-term agreements. Quarter-to-quarter, things change. But overall, we don't see any real difference today that we did 2 months ago or 6 months ago.

Hendi Susanto -- Gabelli & Company -- Analyst

And then let's say, if hypothetically you change your assumption on the amount of materials and then it's lower. Will it drive like a higher license revenue, because the license revenue will be spread across like a smaller volume?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

That is correct. If you sell less material than you estimated, then because it is a direct correspondent, if you sell less and you have, you know what your license fee is, then you will have an increase in the license fee per gram or per kilogram that you sell. That is correct.

Hendi Susanto -- Gabelli & Company -- Analyst

That's helpful. And then Steve, is there a way to tell how different materials for QD OLED versus current OLED display materials?

Steve Abramson -- President, Chief Executive Officer, Director

Sorry, could you repeat that question again?

Hendi Susanto -- Gabelli & Company -- Analyst

The materials for QD OLED that Samsung mentioned in the call, like how different the emitter materials will be in QD OLED versus current materials in regular OLED?

Steve Abramson -- President, Chief Executive Officer, Director

Well, the way the QD OLED works as I understand, is you have a blue emitter and then or a set of blue emitters and then use the quantum-dots to convert them into red and green as well. So, Samsung will be designating the specific types of materials that they will be looking for both the OLED portion and the quantum-dot portion.

Hendi Susanto -- Gabelli & Company -- Analyst

So like they need the blue emitter materials, but they don't need the red OLED and green emitter material?

Steve Abramson -- President, Chief Executive Officer, Director

That is correct. The way it's currently configured, that is correct.

Hendi Susanto -- Gabelli & Company -- Analyst

I see. And then one last question is there a way to tell whether the shortage in sales and sales projection is due to let's say like lower display unit production or whether customers may experience higher manufacturing efficiencies?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

As we stated earlier, we do think, obviously the smartphone market has been much softer than we anticipated. There's always a number of variables that impact our material sales, whether it's utilization rates, whether it's inventory. So there is always a number of things. It is difficult for us to predict or to -- which one of those are the reasons that material sales are down.

Hendi Susanto -- Gabelli & Company -- Analyst

Okay, thank you Sid. Thank you, Steve.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thank you, Hendi.

Operator

(Operator Instructions) Our next question comes from the line of Andrew Abrams from SCMR. Please proceed with your question.

Andrew Abrams -- Supply Chain Market Research -- Analyst

Hi guys, just one quick question, do you have any backplane changes or had you had any backplane changes in your assumptions for 2018 and do you see that in 2019 as you start to look forward?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Your question is whether there is new materials are going to be adopted or whether the same materials are being adopted, and you know, we are constantly giving our customers new materials to evaluate and they're constantly asking us for materials that have different performance characteristics, but we really don't talk about which customers by which materials.

Andrew Abrams -- Supply Chain Market Research -- Analyst

And just to clarify is -- would you expect to any major change in a backplane. I know there was a point I think it was last year, where one of those backplane changes got delayed. Is it the same kind of process going forward or are these more incremental changes that are made in terms of materials?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

I'm not trying to avoid your question. We can't really speak for our customers and when they adopt new materials. As you're aware, it does have some impact on pricing, but under ASC 606, there really is not, because when you build your long-term model with your customer, you actually have to build in. When you think, or when -- will they adopt new materials because that affects your average price. So, even if they adopted new materials under ASC 606 you would not see a spike in price of the materials because it is an average.

Andrew Abrams -- Supply Chain Market Research -- Analyst

Got it. Thank you.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thank you.

Operator

Our last question comes from the line of Brian Lee from Goldman Sachs. Please proceed with your question.

Brian Lee -- Goldman Sachs -- Analyst

Yeah, hey guys, just one quick follow-up, I don't know if you called it out, but the $1 million inventory writedown, I think it was materials related, can you speak to what material type that was related to and just maybe provide any color there?

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Sure. As you're aware, you -- from an accounting standpoint, you look at your materials and you do estimates of your material utilization over a 12-month period. And so we do that and our materials actually have a very long shelf life. So we did reserve about $885,000 this quarter. We review our inventory on a quarterly basis and estimate, and estimate what it's going to sell and depending on the materials, sometimes we will adjust our reserve levels as we move forward, but these materials have a long shelf life. And then based upon forecasts, things change and we may end up selling these materials. So, we're always looking at that. There's -- we have a lot of new -- we have a lot of materials, we have new customers. So there are materials that we will have to continue to keep an eye on.

Brian Lee -- Goldman Sachs -- Analyst

Okay, thanks for the clarity.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thanks, Brian.

Operator

Thank you, this concludes the question-and-answer session. I would like to turn the program back to Sid Rosenblatt, for any additional or closing remarks.

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Thank you for your time today. We appreciate your interest and support and we hope you all have a good nighlgt. Thank you.

Steve Abramson -- President, Chief Executive Officer, Director

Thank you.

Operator

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

Duration: 50 minutes

Call participants:

Darice Liu -- Director of Investor Relations & Corporate Communications

Steve Abramson -- President, Chief Executive Officer, Director

Sidney Rosenblatt -- Executive Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Brian Lee -- Goldman Sachs -- Analyst

CJ Muse -- Evercore ISI -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Atif Malik -- Citi -- Analyst

Hendi Susanto -- Gabelli & Company -- Analyst

Andrew Abrams -- Supply Chain Market Research -- Analyst

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