CPM Acquisition, Optical Communications To Drive Corning’s Revenue

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Corning (NYSE:GLW) is set to announce its fourth quarter 2014 results on January 27. We expect to see growth in the company’s revenue, driven primarily by its Display Technologies segment. The Optical Communications segment will also contribute to growth. Corning’s Specialty Materials segment could see a slowdown due to slow tablet sales, lack of new smartphone launches and a decline in prices.

In the third quarter, Corning 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%.

See our complete analysis of Corning here

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CPM Will Continue To Drive Display Segment

Corning’s Display Technologies sales volume grew in the third quarter as LCD TV manufacturers increased their panel purchases on account of preparation for holiday season sales. This will have left fewer purchases during the fourth quarter, which should result in a sequential decline. However, Display Technologies will likely post double digit growth on a year-on-year basis due to the consolidation of Corning Precision Materials’ (CPM) revenues.

Corning acquired CPM, earlier known as Samsung Corning Precision Materials, in January 2014, after having purchased Samsung’s share in the joint venture. As a result of the consolidation, Corning’s Display Technologies revenue grew 56% in the second and third quarter of 2014. [1] We expect the fourth quarter revenue to witness similar inorganic growth due to the acquisition.

LCD prices continued to decline in the third quarter due to oversupply in the industry, negatively impacting Corning’s pricing. However, price declines have moderated significantly over the past few quarters. Additionally, Corning has already negotiated new contracts with customers which will have ensured further moderation in price declines in the fourth quarter.

Growing Internet Traffic To Drive Optical Communications

Cisco forecasts that global network traffic will increase 23% annually through 2017 [2] driven by higher online video content, an increase in the number of Internet-friendly mobile devices and growth in demand for cloud computing services. 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%. [3] We expect the trend to have a positive impact on Corning’s Optical Communication revenue in the fourth quarter and 2015.

Gorilla Glass Sales Could Slow Down

With a large number of low-cost tablets available in the market and large-screen smartphones offering an alternative, sales of premium tablets have been declining for quite some time. Since Gorilla Glass is more commonly used on premium tablets, the decline in sales of such tablets tempered growth in Gorilla Glass sales in the second and third quarters of 2014. In the second quarter, Specialty Materials revenue declined 1% on account of the slow sales of Gorilla Glass. However, the third quarter sales benefited from new smartphone launches, which helped offset the negative impact of price declines and slowdown in tablet sales.

Since there were no significant product launches in the fourth quarter, it is likely that the slow tablet sales will hamper revenue growth. Additionally, price declines, though somewhat moderate, may continue to present headwinds for the segment. Since the segment is heavily reliant on high volumes to generate cost synergies and profits, weak sales could hurt Specialty Materials net income as seen in the second quarter of 2014.

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Notes:
  1. Corning’s Q3 2014 Financial Statements, October 28, 2014, www.corning.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 []