Growth at Optical Communications and Display Technologies Segments Will Drive Corning’s Earnings

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Corning (NYSE:GLW) is set to announce its second quarter 2014 results on July 29. We expect to see growth in its Display Technologies and Optical Communications segment. The acquisition of Samsung Corning Precision Materials, now known as Corning Precision Materials, will add to Corning’s revenue. Growing internet traffic and measure taken by service providers to offer high speed internet to customers will continue to drive Optical Communications’ revenue.

In the first quarter 2014, Corning’s revenue grew 26% year-over-year to reach $2.29 billion, primarily driven by the acquisition of Corning Precision Materials. Corning’s net income and diluted earnings per share declined 39% on account of increased operating and tax expense associated with the 100% ownership of Corning Precision Materials.

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Growing internet traffic will drive Corning’s Optical Communications segment

The growing video content on websites and increased usage of cloud-based services has been driving internet traffic. Increase in internet friendly mobile devices such as smartphones and tablets have also added to the internet traffic by enabling easy access.  In order to cater to the increased traffic, services providers are forced to upgrade their networks and move from copper wire to optical fiber based network. In the U.S., carriers such as Verizon and AT&T have actively been involved in upgrading their networks in order to offer high speed internet to their subscribers. Consumers are also readily subscribing to optical fiber based internet services in order to experience high speed internet. In Europe, the number of subscribers for fiber-to-the-home (FTTH) services increased 29% in 2013, almost double the growth rate in 2012. [1] These trends have been driving growth at Corning’s Optical Communications segment which provides optical fiber and related equipment.

Cisco forecasts that the global network traffic will increase 23% every year through 2017. [2] Growing internet traffic will drive sales of optical fiber and related equipment, the market for which is expected to grow to $80.6 billion by 2018, an average growth rate of around 14% every year. [3] We expect the trend to have a positive impact on Corning’s Optical Communication revenue in the second quarter and years to come.

CPM will continue to drive inorganic growth in Corning’s Display segment

In the first quarter, Corning’s Display Technologies revenue grew 43%, to reach$929 million, driven by the acquisition of Corning Precision Materials (CPM). [4] We expect the second quarter revenue to witness similar inorganic growth due to the acquisition.

Volume declined mid-single digits in the first quarter due to technical issues at one of Corning’s customers in Korea. Corning had advised that the issue should be resolved soon and will not have an impact on second quarter volume. Therefore we expect to see growth in volume in the second quarter driven by seasonal demand as manufacturers restock their supplies in anticipation of third and fourth quarter sales and also the carryover of first quarter volume lost at the Korean customer.

LCD prices continued to decline in the first quarter due to oversupply in the industry negatively impacting Corning’s pricing. Competitive pricing mechanisms, in contracts that Corning had negotiated towards the end of 2012, also aggravated the price declines. [5] We expect to the price decline to continue into the second quarter, however, Corning has already negotiated new contract with customers which will ensure lower price declines.

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Notes:
  1. FTTH subscriber growth accelerates says FTTH Council Europe, Feb 24 2014, www.lightwaveonline.com []
  2. Cisco Visual Networking Index: Forecast and Methodology 2012–2017, www.cisco.com []
  3. Fiber Optic Components: A Global Strategic Business Report, December 2013, www.prweb.com []
  4. Corning’s First Quarter 2014 10-Q SEC Filing, April 28 2014, www.corning.com []
  5. Corning Management Discusses Q4 2013 Results – Earnings Call Transcript, January 28 2014, www.seekingalpha.com []