Corning’s Earnings Review: Display Technologies Grows On Holiday Sales; Specialty Materials Flattish Despite High Volume

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Corning (NYSE:GLW) announced its third quarter results on Tuesday, October 28, 2014. The maker of Gorilla Glass reported 23% year-on-year growth in GAAP revenues driven by growth in its Display Technologies, Optical Communications and Environmental Technologies segments. [1] The Specialty Materials segment, despite the higher sales volume of Gorilla Glass, and the Life Sciences segments were flattish year-on-year. Corning’s GAAP net profits increased 148% primarily due to an increase in income from foreign currency transaction and hedge gains. However, on a non-GAAP basis, which excludes impact of foreign currency, net profits grew 16.6%.

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Holiday season sales help boost Display Technologies sales

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In preparation for holiday season sales, manufacturers of LCD TVs usually increase their purchases of LCD panels during the third quarter.  But, this year’s third quarter was expected to be slower due to the high sales of televisions in the second quarter, driven by the FIFA World Cup held in June-July 2014. However, LCD panel shipments still remained high in the third quarter purely due to holiday season demand. In the third quarter, Corning’s Display Technologies’ sales benefited from this seasonal phenomenon. Corning also experienced lower sequential price declines during the quarter. The LCD supply chain continues to maintain healthy levels of inventory which will likely ensure further moderation in price declines.

Going forward, we expect to see some sequential moderation in sales in the fourth quarter, since it follows the peak season in the third quarter. However, year-on-year sales should remain up due to the consolidation of Corning Precision Materials’ (CPM) sales. Display Technologies third quarter sales grew 55.7% primarily due to inclusion of CPM’s sales. [1]

Our long term outlook for Corning’s Display Technologies remains positive primarily due to the growing adoption of LCD TVs and replacement of Plasma and CRT TVs. Sales of Plasma and CRT TVs have been declining due to cost competitive LCDs. By 2015, Plasma and CRT TVs are expected to disappear from the market, giving way to LCD TVs. [2] OLED TVs may offer some competition to LCD TVs, but they there are expected to account for just 1% of overall TV shipments through 2017 due to their higher price. Emerging markets such as India are expected to fuel the demand for LCD TVs as these regions continue shift from traditional CRT TVs to LCD TVs. In 2012, 47% of Total TV shipments to India were LCDs, but by 2015, this is likely to rise to 97%. [3]

Price decline offsets Specialty Materials volume growth

In line with Corning’s guidance, Specialty Materials sales grew 10% sequentially due to the launch of new mobile phones. However, on a year-on-year basis, sales were flattish. [1] This is because of the continued decline in price of Gorilla Glass, which offset the high volumes experienced in the third quarter. As you might recall, in the first quarter this year, Gorilla Glass faced sharp price declines due to contract re-negotiations at a time of high competition. In order to maintain its market position, Corning had to reduce its prices. The low price also impacted Specialty Materials’ profitability, which declined 20% year-on-year.

During the third quarter earnings call, Corning announced that it is planning to launch Gorilla Glass 4 on November 20, 2014. Gorilla Glass 4, which possesses “dramatically improved performance characteristics” compared to its predecessor, has already begun to be used by Corning’s customers. [4] Corning is betting on Gorilla Glass 4 to help moderate the price declines experienced during the third quarter. We believe that the early adoption of Gorilla Glass 4 bodes well for Corning’s Specialty Materials segment since it will help bolster fourth quarter volume, which is expected to be tempered by the absence of new product launches.

Separately, it is worth mentioning that Gorilla Glass’ has been gaining popularity in the automotive industry. BMW recently awarded Corning’s Gorilla Glass for Automotives with the BMW Supplier Innovation award. [5] Gorilla Glass is used in the BMW i8 as an acoustic glass partition to shield sound from the rear engine. The selling point for Gorilla Glass is that it is 50% lighter than the conventional soda lime glass used in windshields, sidelites, sunroofs, and backlites. This helps automakers achieve the objective of reducing vehicle weight in order to facilitate fuel efficiency. However, Corning may not see a significant impact on revenues from Gorilla Glass sales to the automotive industry in the short term due to its exposure to a limited number of customers. But the award from BMW does add to its credibility, which may lead to adoption by other automakers in the long term.

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Notes:
  1. Corning’s Q3 2014 Financial Statements, October 28, 2014, www.corning.com [] [] []
  2. LCD TV Growth Improving, As Plasma and CRT TV Disappear, According to NPD DisplaySearch , April 16, 2014, www.displaysearch.com []
  3. LCD Will Be the Sole TV Technology in India by 2016, According to NPD DisplaySearch, April 29, 2014, www.displaysearch.com []
  4. Corning’s (GLW) CEO Wendell Weeks on Q3 2014 Results – Earnings Call Transcript, October 28, 2014, www.corning.com []
  5. Corning® Gorilla® Glass for Automotive Receives BMW Supplier Innovation Award, October 7, 2014, www.corning.com []