Corning Earnings: Optical Communications Segment To Drive Sales, Positive Outlook For Specialty Materials Segment

Corning (NYSE:GLW) released its third quarter earnings on October 27, reporting an 11% year-on-year decline in net sales driven by economic uncertainty (especially in China) and foreign currency headwinds. ^[1] The company’s core sales were down by 5% with sales across all segments (with the exception of optical communications) declining. The display technologies segment was the worst hit, with sales declining by 25%, driven by the depreciation of the Japanese yen against the dollar and declining retail prices. ^[2] The optical communications segment posted strong growth, driven by increasing demand for fiber optics, which is expected to continue with growing data traffic over communication networks.

Furthermore, the company introduced its new strategy and capital allocation framework, aiming to deploy $20 billion of capital through 2019. The strategy has two primary focus points – firstly, it aims to distribute more than $10 billion to shareholders through accelerated share repurchases. Secondly, it aims to increase dividends per share by at least 10% annually through 2019 and invest approximately $10 billion in the company’s portfolio through R&D, capital spending and strategic M&A.

See our complete analysis of Corning here

Weak Short Term Outlook For Display Technologies Segment

Corning’s display technologies net sales were down 25% year over year, largely attributable to weaker demand from China. We expect weak volumes in the fourth quarter, and likely into the first quarter of 2016 as well, reflecting the soft underlying retail market. Given the slowed retail growth and supply chain inventory, the company expects panel makers to further reduce utilization rates which depend directly on panel price declines. However, the longer term outlook for the segment remains moderate, driven by replacement demand and technology innovations such as 4K TV.

Optical Communications Sales To Grow 

The company generates about 30% of its revenue from the optical communications segment. The segment’s sales were up 7% year over year, driven by the completion of several acquisitions in 2015 and an increase in North American volumes for both carrier network and enterprise network products. The growth in carrier network products, driven by growth in fiber-to-the-home products in North America, was less than expected in Canada and Asia due to timing delays of fiber-to-the-home projects. We expect the segment to continue to see solid performance due to growth in data traffic over communication networks. Global network traffic is expected to grow by around 23% annually through 2017. ^[3] With growth in data traffic, sales of optical fiber cables, components and equipment will increase, driving the segment’s revenue.

The company generates about 12% of its revenues from the specialty materials segment, which was down 12% year over year. Core earnings improved in the specialty materials segment with an improvement in margins driven by an increase in Gorilla glass volume. Sales of Gorilla Glass 4 witnessed an impressive adoption rate, favorably impacting the company’s average selling prices. Even with segment sales expected to decline, there remains strong industry demand for Gorilla Glass 4, driven by solid demand for handheld electronic devices. With a projected 10% growth in the market for cover glass, we expect segment sales to pick up.

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More Trefis Research

1. Corning Third Quarter Earnings Release, Corning, October 27, 2015 [↩]
2. Corning 10Q Filing, Corning, October 27, 2015 [↩]
3. Cisco Visual Networking Index: Forecast And Methodology, Cisco, May 27, 2015 [↩]