Why Optical Communications Business Is Most Critical For Corning’s Growth?

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Corning’s (NYSE: GLW) optical communication segment grew at a CAGR of 11.75% in the last 5 years due to growth in global IP data and higher demand for cloud computing. The demand for fiber optics is growing as companies are shifting from traditional IT system to cloud computing and data consumption is growing due to increased Internet connectivity and smartphone usage. Corning’s optical communication segment grew nearly 12.4% in 2015 and, we believe that this segment is likely to continue its growth at a CAGR of about 5.5% over the next five years. Corning’s optical communication segment has grown significantly in the last 5 years despite Corning’s other segments not performing well. Optical communication segment contributed about 33% to Corning’s overall revenues in 2015 and we believe that this segment will be the biggest contributor in Corning’s sales growth among all the segments of Corning in the coming years.

Corning’s optical communications segment, as noted accounting for about 33% of the company’s revenues, is a high margin business. It has two sub-divisions  First, carrier network, which supplies optical fiber and hardware equipment for voice, data and video communications for public networks and second, enterprise networks, which supplies optical fiber and hardware equipment for voice, data and video communications for private networks.

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Growth in internet users and increases in cloud computing to push demand 

The number of internet users has increased at a CAGR of about 9.5% over the last 5 years and stands at about 3.4 billion as of July 2016. This has fueled the demand for high resolution content and thus, fiber optic products. Corning’s optical communication revenues have grown close to 11.75% CAGR in the past 5 years, but we believe that with increasing prices and internet users, there is huge potential for further growth. We note that Corning’s optical communication segment has grown at a better pace than the overall company’s revenues for majority of the last 5 years. However, Corning’s revenue growth surpassed its Optical communication segment in 2014 due to Corning’s integration of Samsung Corning Precision. Additionally, Corning’s revenue increased in 2014 because of an increase in demand for heavy duty diesel products propelled by new governmental regulations in Europe and China and increased demand for Class 8 vehicles in North America.

The shift from legacy IT services to cloud based services due to increased trend of organizations pursuing digital business strategy which includes going mobile, adding analytics and extending the online experience, has resulted in increased demand for cloud computing devices. The worldwide public cloud services market is projected to grow 16.5 percent in 2016 to $204 billion, up from $175 billion in 2015, according to Gartner, Inc.

 

Low energy costs to keep margins high in short term 

Corning’s production requires large amount of energy and uninterrupted power sources. Cost of energy has declined significantly in the last couple of years as a result of a sharp drop in oil and natural gas prices. We believe that energy prices remain subdued in the near term as Gulf countries are still overproducing oil. Thus margins for Corning’s optical communications segments is also expected to remain at its current levels.

 

Investing in disruptive technologies to give competitive advantage to Corning

 Although, Corning is a leading player in the optical fiber, cable, hardware and equipment production, competition within the optical communications equipment industry is intense and is likely to put pressure on prices. To maintain its competitive advantage, we expect Corning to continue investing in both incremental and disruptive technologies.

 

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Corning

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