Universal Display Corp. (OLED) Q1 2023 Earnings Call Transcript

Universal Display Corp. (NASDAQ: OLED) Q1 2023 Earnings Call dated May. 03, 2023.

Corporate Participants:

Darice Liu — Senior Director, Investor Relations and Corporate Communications

Steven V. Abramson — President and Chief Executive Officer

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Analysts:

Brian Lee — Goldman Sachs — Analyst

Steven Chin — Cowen and Company — Analyst

Sidney Ho — Deutsche Bank — Analyst

Mehdi Hosseini — Susquehanna International Group — Analyst

Nam-Hyung Kim — Arete Research — Analyst

Christopher Grenga — Needham & Company — Analyst

Martin Yang — Oppenheimer & Co. — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to Universal Display Corporation’s First Quarter 2023 Earnings Conference Call. My name is Paul and I will be your conference moderator for today’s call. At this time, all participants are in a listen-only mode. A brief 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 conference call over to Darice Liu, Senior Director of Investor Relations. Please proceed.

Darice Liu — Senior Director, Investor Relations and Corporate Communications

Thank you. And good afternoon, everyone. Welcome to Universal Display’s First Quarter Earnings Conference Call. Joining me on the call today are Steve Abramson, President and Chief Executive Officer, and Brian Millard, Vice President and Chief Financial Officer.

Before Steve begins, let me remind you, 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, May 3, 2023.

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 investment 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.

Steven V. Abramson — President and Chief Executive Officer

Thanks, Darice. And welcome to everyone on today’s call. For the first quarter of 2023, we reported revenue of $130 million, operating profit of $45 million and net income was $40 million or $0.83 per diluted share.

Macro uncertainties continue to linger and weigh on near-term demand. However, we remain confident in the long term growth path of OLED. In addition to the significant IP adoption cycle that is expected to commence next year, OLED activity is increasing in several segments of the consumer electronics landscape.

Last month, Samsung Display announced a $3.1 billion investment to retrofit its assigned plant to a Gen 8.6 OLED IT facility and it has been reported that other leading panel makers are planning to invest in new capacity as well.

Fueling this new capex is a nascent OLED IT market. According to Omdia market research, 470 million displays for IT products were shipped last year and only 9.1 million units or 2% were OLED. Omdia forecasts that, due to leading OEMs broadening their adoption of OLED in their product portfolio, IT OLED panels will reach 12.9 million units this year and will double to 25.4 million units next year and, by 2028, OLED tablet and notebook panel shipments will reach 74.3 million units.

Foldables is another area of growth and excitement. DSCC forecasts that foldable smartphone shipments will increase 45% year-over-year in 2023 to 18.6 million units. DSCC expects to see at least 37 different foldable models shipped this year from 10 different brands with Google, OnePlus and TECNO entering the foldable market for the first time. This is an increase from last year when there were 19 different foldable smartphone models from seven different brands. IDC, another market research firm, projects a five year CAGR of 27.6% for foldable phone shipments as units reach 48.1 million units in 2027.

Switching gears to automotive, according to Omdia, the automotive industry has emerged as a key market for displays, becoming the fifth largest display application market in terms of shipments as of 2022. Omdia forecasted shipments in the automotive OLED display market will surge to 6.9 million units in 2027 from 770,000 units in 2022, thanks to OLED displays’ rapid response rate, low power consumption, lightweight and slim design.

In just the past three months, Samsung Display signed an agreement with Ferrari to develop OLED displays for Ferrari’s next generation models. LG Display is reportedly planning to supply a 30-inch OLED panel for electric carmaker Lucid’s upcoming models. Buick showcased its first electric SUV, the 2025 Electric E5 in China with a 30 inch curved OLED dashboard display. And Hyundai Motors developed the world’s first 30-inch rollable OLED display for automotive applications.

And for large area OLED panels, LG Display announced that it will release a 77 inch transparent OLED product by the end of this year, and Samsung Display announced that its hybrid QD-OLED panel yield now exceeds 90%.

We work closely with our customers as they map out their new product introductions for the coming years, and we are developing new OLED technologies and materials to support their product roadmaps. We have crafted a comprehensive approach for the invention of energy efficient, high performing phosphorescent materials. This includes our machine learning, synthetic, mechanistic, analytical and process chemistry expertise, all created and driven by our global team of scientists, engineers and technicians. We are continuously discovering, developing and delivering next generation reds, greens, yellows and hosts to meet the ever-changing and ever-evolving specifications for energy efficiency, operational lifetime and color gamut.

As a pioneer in the OLED ecosystem with approximately three decades of experience and know-how, we are leveraging our first mover advantage and continue to be at the forefront of the OLED materials industry.

With respect to blue, we continue to make excellent progress in our ongoing development work for our commercial phosphorus blue emissive system. We continue to believe that we are on track to introduce our all phosphorescent RGB stack into the commercial market in 2024.

We believe that the introduction of our full suite of red, green and blue phosphorescent emissive materials will unlock a vast array of opportunities for higher energy efficiency and higher performance across a broad range of OLED applications.

On the OVJP front, we are making advancements with our groundbreaking dry printing manufacturing process platform. Two critical milestones that we are currently driving towards are the printing of all layers in the PHOLED device and achieving scale print uniformity. We believe that achieving these milestones will be significant in our path to commercialize the OVJP.

To learn more about UDC, including our phosphorescent OLED and OVJP programs, please visit Booth 828 at SID Display Week in Los Angeles later this month.

Additionally, this afternoon, we announced the acquisition of Merck KGaA’s phosphorescent emitter portfolio and a new multi-year collaboration agreement. The portfolio encompasses over 550 patents in 172 patent families and will complement and boost our strong global IP framework of more than 5,500 issued and pending patents. The new collaboration pertains to certain UDC green and yellow phosphorus emitters for use with Merck KGaA’s transport and host materials to create advanced PHOLED stacks.

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

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Thank you. Thank you, everyone, for joining our call today. Looking at the first quarter, our revenue was $130 million compared to $150 million in the first quarter of 2022. Results were in line with our expectations of a softer first half of the year compared to the second half.

Our total material sales were $70 million in the first quarter compared to material sales of $87 million in the first quarter of 2022. Green emitter sales, which include our yellow green emitters, were $54 million. This compares to $66 million in the first quarter of 2022. Red emitter sales were $16 million. This compares to $20 million in the prior year’s quarter. As it has been discussed in the past, material buying patterns can vary quarter to quarter.

First quarter royalty and license fees were $55 million compared to the prior-year period of $60 million.

Adesis’ first quarter revenue was $5 million, an increase of $1 million from the comparable period in 2022. First quarter cost of sales in 2023 and 2022 were both $33 million. This translates into total gross margins of 75% in the first quarter of 2023 compared to 78% in the first quarter of 2022.

Cost of OLED material sales in the first quarter of 2023 were $29 million, translating into material gross margins of 58%. This compares to $30 million and material gross margins of 65% in the first quarter of 2022.

Impacting first quarter gross margins was a $3.3 million increase in our inventory provision and $4.7 million related to the underutilization of our new Shannon facility. The combined impact of these items is approximately 6% to total gross margins.

First quarter operating expenses, excluding cost of sales, were $52 million. In the first quarter of 2022, it was $55 million. The year-over-year decrease is primarily due to lower stock-based compensation expense and the Fujifilm patents becoming fully amortized in July of last year.

We continue to expect 2023 opex to increase 5% to 10% year-over-year as we continue to invest in our people, in our global infrastructure and in our innovation engine.

Operating income was $45 million in the first quarter, translating into operating margin of 35%. This compares to the prior-year period of $62 million and operating margin of 41%.

The income tax rate was 23% in the first quarter of 2023. We expect our tax rate for the year to be approximately 22%.

First quarter 2023 net income was $40 million or $0.83 per diluted share. This compares to $50 million or $1.05 per diluted share in the comparable period in 2022.

We ended the quarter with approximately $845 million in cash, cash equivalents, and investments.

Regarding guidance, we are reaffirming our expectation that 2023 revenues will be in the range of $550 million to $600 million.

And lastly, our Board of Directors approved a $0.35 quarterly dividend, which will be paid on June 30, 2023 to stockholders of record as of the close of business on June 16, 2023. The dividend reflects our expected continued positive cash flow generation and commitment to return capital to our shareholders.

With that, I’ll turn the call back to Steve.

Steven V. Abramson — President and Chief Executive Officer

Thanks, Brian. Energy efficiency and sustainability are key foundational elements in UDC’s core competencies. Our patented and award winning phosphorescent OLED technology and UniversalPHOLED Materials can enhance the performance of displays and lighting products, providing real power saving advantages for longer battery operation in portable electronics and less energy consumption in larger displays and lighting products.

In our recently published 2022 Corporate Social Responsibility report, which can be found on our website, we estimate that our phosphorescent technology materials in OLED smartphones saves more than 860,000 metric tons of carbon dioxide equivalent per year. Using an EPA calculator, this is comparable to carbon sequestered by more than 14 million tree seedlings grown for 10 years.

In addition to the continuous generation to generation improvements in our red and green phosphorus and materials, the introduction of our phosphorescent blue into the commercial market is expected to further increase energy efficiency and translate into added power savings, longer battery life, greater displays and lower panel temperature. We believe that our broadening phosphorescent portfolio will enable new product designs and applications and support our customers’ sustainability initiatives, driving growth for UDC and the OLED industry.

And lastly, I would like 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

Thank you, Mr. Abramson. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brian Lee with Goldman Sachs. Please proceed with your question.

Brian Lee — Goldman Sachs — Analyst

Hey, everyone. Thanks for taking the questions. Sorry, I jumped on late, so apologies if you already covered this. But did you sell any blue development bill of materials in the quarter? How much if you did? And then how many customers, account wise, were there purchasing blue this quarter for sampling purposes?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. Hey, Brian. Thanks for the question. So we did have sales of blue materials, both host and emitter development sales, in the period. A few hundred thousand dollars’ worth across a number of customers.

Brian Lee — Goldman Sachs — Analyst

Okay. Great. And then second question just on the TV market. I know there’s been a lot of back and forth in the press about LG and Samsung doing a deal on OLED panels for TVs. Maybe high level, can you speak to some of the implications as you see it for the market? And then also for UDC, any potential upside maybe to your internal views around the TV market this year given this sort of go forward? Thanks.

Steven V. Abramson — President and Chief Executive Officer

Brian, as you know, we can’t speak for our customers. We think the OLED TV market is great. OLED TVs are great. And the more Samsung and LG sell, the better it is for us.

Brian Lee — Goldman Sachs — Analyst

All right. Great. I’ll take the rest offline. Thanks, Steve.

Operator

Thank you. Our next question is from Krish Sankar with TD Cowen. Please proceed with your question.

Steven Chin — Cowen and Company — Analyst

Hi. Good afternoon. This is Steven calling on behalf of Krish. Thanks for taking my questions. First one, if I could, Steve or for Brian, in terms of linearity in the first quarter, can you talk about how customer orders trended relative to your original expectations? At one point — coming into this current quarter, how have your conversations with customers been and their sentiment, especially relative to any delays or push-outs or pauses in orders?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. Hey, Steven. Nice — great question. So, yeah, in terms of the quarter, as we said in the release, it really did play out in line with our expectations. So there really wasn’t anything out of the ordinary that we saw in Q1. And the reaffirmation of guidance for the year is evidence that I think what we’re seeing and hearing from customers for the rest of the year is also in line with those expectations and what we had originally planned.

I think it’s certainly expected to be a second half weighted story. We do expect the first half to be lighter. And I think you’re seeing that in the Q1 result. But everything we’re hearing from the customers is really consistent with where we were back in February as well.

Steven Chin — Cowen and Company — Analyst

Got it. And just as my follow-up, Brian, just wondering about inventory days. So, I know things — like the dollar levels and also inventory days came down a little bit this quarter. But just in terms of big picture, conceptually, the inventory days have been well above 12 months for a number of quarters now. And I guess, just kind of looking back historically, the last time there was a big step up from, I think, the roughly nine-month type of range to about 12 months, it was back in 2017 when premium smartphones started to adopt OLED panels. And so, I guess my question is, the higher inventory days that you guys are running at, should we expect that to go back down towards the 12-month mark over time as demand recovers or is there a structural change in your demand profile from customers because of TVs and IT panels going forward where we should expect inventory days to maybe stay in this 12 to 16 month type of range. Thanks.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. So, on inventory, there’s really kind of two main drivers there for the increase you’ve seen in recent periods. The first being in our raw materials inventory, which is where the bulk of the increase has been.

We have iridium, which is a key raw material for us and is included in a number of our materials. And so, we have been building a strategic stockpile of that. We feel comfortable with the quantities of iridium that we have on hand, but that’s been some of what you’ve seen in the increased dollar value in the last few years.

Also, on the finished goods side, we’re a sole source supplier for our customers. So, we need to make sure that we have the quantities on hand to meet their demands, but the increases that you’ve seen on that side have not been necessarily because of anything specific we’re hearing from the customers, but more just our own planning. But we’re always making sure that we’re being disciplined and not getting too far ahead of the demand curve there and how we build up our supply.

Steven Chin — Cowen and Company — Analyst

Okay. Thank you.

Operator

Thank you. Our next question is from Sidney Ho with Deutsche Bank. Please proceed with your question.

Sidney Ho — Deutsche Bank — Analyst

Thank you. I’ve got a couple of questions. First one is on the acquisition of Merck — Merck’s patent portfolio. Can you walk us through what you get that is not already covered by your IP portfolio? Does that accelerate your product development, let’s say, the blue emitters? Or does that mean going forward you will be more active in selling host materials or just kind of strengthen your royalty and licensing business?

Steven V. Abramson — President and Chief Executive Officer

This is really to expand and buttress our patent portfolio, our emitter patent portfolio. So, we clearly have the leading position in phosphorescent emitters. And when Merck’s patent portfolio became available, we thought it was a very good addition to our portfolio, and it will broaden the tools at our team’s disposal as we develop new and next generation phosphorescent materials and continue to build upon our industry-leading position.

Sidney Ho — Deutsche Bank — Analyst

Okay. That’s fair. Second question is, I noticed that, for Q1, the revenues outside your two top customers are now 44% of total revenue, which seems like the highest that I can remember. Can you talk about the breadth of that revenue stream? And do you have any concerns that there is a lot of excess inventory at those customers, especially given the persisting weakness we’ve been hearing from Chinese handset OEMs? Thanks.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. So, we continue — we have a number of customers, as you know, beyond the top two and we’ve seen those entities continue to increase their share with us over recent periods. So, nothing really specific. I think there’s also variability in our customers’ buying patterns quarter to quarter that also contributes to some periods — the top two may be a little less than in others, but it’s not a structural change in our view. It’s just kind of a little bit of a one off, I think, that you’re seeing in Q1.

Sidney Ho — Deutsche Bank — Analyst

Okay. Thank you.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

Thank you. Our next question is from Mehdi Hosseini with SIG. Please proceed with your question.

Mehdi Hosseini — Susquehanna International Group — Analyst

Yes. Thanks for taking my question. A follow-up to the Merck topic. Should I take this patent acquisition as a sign that you are renewing efforts to drive revenue from the host? And if not, then what’s the main objective here?

Steven V. Abramson — President and Chief Executive Officer

No, it’s not — we’re not renewing efforts on the host. This is an emitter portfolio acquisition and it was basically to provide our team with additional pathways, so that we can develop future materials, broader materials for our customers, for the industry and accelerate the ecosystem.

Mehdi Hosseini — Susquehanna International Group — Analyst

Okay. Got it. And I’m assuming that you won’t — the acquisition of patents won’t have any near-term impact on your financials. Fair?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

No, it was a $66 million purchase price. So, we’ve — that cash outflow has occurred and we’ll be amortizing that over a 10-year period. So there’ll be roughly $6 million of annual expense going forward.

Mehdi Hosseini — Susquehanna International Group — Analyst

Okay. All right. And then, just very encouraging to hear that you actually are recognizing emitter revenue — I’m sorry, blue emitter revenue. Should I assume that couple of hundred thousand dollars a quarter of revenue is enough for your customers to — and your customers’ customers to develop the required semiconductor components to qualify the panels or would you have to sell them more as they retool and prepare for high volume manufacturing next year?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. So in terms of the quantities of blue, it is an increasing quantity. I think what we sold in Q1 dollar wise is pretty similar to what we sold for all of last year. So it has increased in Q1. I think those quantities certainly will increase somewhat as we get closer to a commercialization, but we feel comfortable with the 2024, us having commercial material available next year and the timelines and feel comfortable with the pace that we’re making with that as well as what we’re hearing from our customers.

Mehdi Hosseini — Susquehanna International Group — Analyst

I guess what I’m trying to better understand is if there is a lagging effect between the volume shipment from you to your customer and the time it would take for your customers to work with their customers to qualify for end product.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

I think there certainly would be — there’s — just kind of playing up and sequencing, our customers would need to do build panels, feel comfortable with the performance of those and then have conversations with theirs. So I think there’ll be increasing activity as we approach commercialization or commercial launch of a panel with our blue phosphorescent material in it.

Mehdi Hosseini — Susquehanna International Group — Analyst

Okay. Thank you. Thanks.

Operator

Thank you. Our next question is from Nam Kim with Arete Research. Please proceed with your question.

Nam-Hyung Kim — Arete Research — Analyst

Hi. Thank you for taking my question. Sorry, a quick clarification on Merck, your IP acquisition again. You just said you enhanced emitter patent portfolio. You also said in prepared remarks, and I also remember Merck used to supply HTL layer to — for one of your customer. So I just wonder you are interested in entering into any other OLED material regimes [Phonetic] like HTL other than current EML layer [indecipherable]?

Steven V. Abramson — President and Chief Executive Officer

No, Nam. This is just an emitter acquisition.

Nam-Hyung Kim — Arete Research — Analyst

Okay, got it.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah, the collaboration — Nam — yeah, Nam, the collaboration agreement that we announced today as well in the release that we put out, that’s focused on collaborating with Merck and providing our emitters, so they can use those in their development of host and transport layers.

Nam-Hyung Kim — Arete Research — Analyst

Okay. Another question. I think none of your customers signed the contract on blue yet. Obviously, it’s not available commercially today. Should we expect additional royalty and licensing income on top of additional material revenue when you have a commercial ramp on blue next year? I just wonder if there will be any financial implication on additional licensing control on blue video customer? Thank you.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. So, our contracts — our license agreements with our customers, certain of them are portfolio license agreements that do include blue and certain customers specifically — our contract with Samsung, our license agreement with Samsung excludes blue. So it just kind of depends on a customer to customer basis, whether there’s an incremental opportunity there.

Nam-Hyung Kim — Arete Research — Analyst

Okay. Makes sense. Thank you.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

[Operator Instructions] Our next question is from Jim Ricchiuti with Needham & Company. Please proceed with your question.

Christopher Grenga — Needham & Company — Analyst

Hi, good afternoon. This is actually Chris Grenga on for Jim. With respect to the cost of materials, could you just elaborate on the puts and takes there, particularly the inventory charge? And how should we be thinking about the cadence of the impact — that impact of the Shannon facility as you go through the year? Thank you.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Thanks, Chris. So on the inventory charge, we did record a $3.3 million inventory provision in Q1. And that was really — each quarter, we had to take a look at our sales plan and the quantities we have on hand. And as we did that this period, there were certain materials that we had excess quantities of and just needed to provide for. So that’s really a composition of that. It’s something we have to do every quarter. Sometimes it’s a really small number or no number. This quarter, it happened to be $3 million.

And then as it relates to Shannon, we had $4.7 million in Q1 of underutilization. That’s slightly higher than the run rate that we had last year. And I think as we’ve worked with the team, I think there’s going to be a slight uptick, maybe slightly more than $1 million of underutilization cost this year. But still more or less in that ballpark of what we previously disclosed. And it should be pretty linear in terms of cadence over the year, certainly more than a million per month.

Christopher Grenga — Needham & Company — Analyst

Thank you very much. And you spoke about the investments that you’re seeing and the secular tailwinds, particularly in IT. I guess what else are you seeing that gives you confidence that you’re going to see an acceleration in the back half of the year to achieve the guidance?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. I think it’s — a lot of it is what you hear from our customers in terms of the expectation that the second half of the year is going to be better than the first half. So, I think a lot of what we’re saying is an echo of others in the ecosystem, which is also informed by our forecast information that we get from our field teams and our customers in terms of what they are seeing and expecting and planning for. And also, some of that has to do with product launch cycles that are planned for the second half of the year, which also demand additional quantities of material to meet those launches. So there’s a number of factors that we’re monitoring, but all that kind of informs the reaffirmation of our guidance range.

Christopher Grenga — Needham & Company — Analyst

Great. And one more — just one more, if I may, on Merck. Are the emitters broadly relevant to consumer electronics generally, or is there any particular topology or size that those emitters, that newly acquired portfolio of IP would be more or less relevant to?

Steven V. Abramson — President and Chief Executive Officer

Well, Merck has been working in this field for a long time, and there are a lot of really smart people working on it. So I would say it’s broadly applicable across the board.

Christopher Grenga — Needham & Company — Analyst

Got it. Thanks very much.

Steven V. Abramson — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Martin Yang with Oppenheimer. Please proceed with your question.

Martin Yang — Oppenheimer & Co. — Analyst

Hi. Thank you for taking the question. I dropped off for the last couple of minutes, so sorry if this has been asked before. Can you remind us your expected ratio between material and royalty sales for the year?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. Hey, Martin. So we’re expecting 1.5 to 1, so 1.5 materials to 1 royalty license.

Martin Yang — Oppenheimer & Co. — Analyst

Got it. Thank you. A second question is on your license agreement with Samsung. It seems that you have eliminated language around minimum purchase agreement on the new material supply agreement that you entered since late last year. Can you confirm? And also, maybe comment on how that impacts your revenue recognition and the cash flow going forward?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. So there’s no change in terms of the structure of the contract with respect to minimum requirements from the old agreement to the new one. So, that’s completely unchanged. So, if there’s a wording change, it’s just a nuance on our side as opposed to anything structural in the contracts.

Martin Yang — Oppenheimer & Co. — Analyst

Got it. So, can you maybe clarify how, going forward, the revenue recognition can [indecipherable] track a bit more closely with cash flows?

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Yeah. So. So the revenue model is exactly the same, in that we have to look at our — recognize on a per unit basis as we ship material, both the material revenues as well as the royalty and license revenues. And that’s based on estimates of contract purchases over the full term.

The payment structure is slightly different in the new contract as opposed to the former. The prior contract had quarterly payments and this contract has both quarterly and annual payments. Obviously, we can’t go into the depths of the details on how those are calculated, but there is just a different payment structure that makes us feel like revenue recognition and cash collection should be much more closely correlated in this next — this current contract.

Martin Yang — Oppenheimer & Co. — Analyst

Got it. Thank you.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

Thank you. This concludes the question-and-answer session. I would like to turn the program back to Brian Millard for any closing comments.

Brian Millard — Vice President, Chief Financial Officer and Treasurer

Thank you for your time today. We appreciate your interest and support.

Operator

[Operator Closing Remarks]