Corning Earnings: Optical Communications Offsets Declines Across Other Segments

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Corning (NYSE:GLW) announced its second quarter results on July 28, reporting a 5.6% decline in sales as a result of foreign currency headwinds. [1] However, its core sales – which exclude the impact of foreign exchange fluctuations and other charges – were flat, as sales across all segments but Optical Communications declined. The Optical Communications segment has been growing at a rapid pace due to the growth in demand for fiber optics by data centers and fiber-to-the-home (FTTH) networks. We expect to see the same trends continue into the next quarter as well.

Corning reported core sales of $2.52 billion, missing market estimates by $20 million. [2] However, the company managed to exceed earnings per share estimates by $0.01, reaching $0.38, thanks to its share buyback. In the third quarter, Corning bought back $616 million of common stock. The company has now announced a new $2 billion share repurchase program.

See our complete analysis of Corning here

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Data Centers And FTTH Demand Drive Fiber Optics Sales

The growing video content on websites and increased usage of cloud-based services has been driving internet traffic. The proliferation of smartphones and tablets has also added to the internet traffic by enabling easy access.  In order to cater to the increased traffic, service providers have been forced to upgrade their networks from copper wire to optical fiber-based networks. Consumers are also moving to fiber networks due to the higher speeds. This helped drive Optical Communications’ second quarter core sales, which grew 16.6% to reach $800 million. [2]

Demand from hyperscale data centers also helped drive growth at the segment. Hyperscale data centers have been growing rapidly due to their ability to serve high computing demands without having to increase resources. Since fiber optics are an essential part of their infrastructure, growth in hyperscale data centers is also driving Corning’s Optical Communications sales.

Sales of fiber optic cable will likely see strong demand in the future as internet traffic continues to rise. Cisco forecasts that the global network traffic will grow at an average rate of 23% every year through 2018. [3] We also expect to see growth in Corning’s Optical Communications segment in the second half of the year, driven by the consolidation of TR Manufacturing and Samsung Electronics’ fiber optics business. Corning acquired TR Manufacturing in January. [4] TR Manufacturing is a provider of fiber-optic and copper cable interconnects and electro-mechanical assemblies to original equipment manufacturers. Corning acquired Samsung Electronics’ fiber optics business on March 31. [5] The acquisition led to the integration of Samsung’s fiber optic manufacturing facilities in South Korea and China into Corning’s Optical Communications division.

Weak Display Technologies Outlook

In the second quarter, Corning’s Display Technologies core sales declined 5%, as moderate price declines offset the growth in volumes. The weakness in the segment will likely continue due to poor sales Western Europe and Latin America. Uncertainty in the European economy has resulted in a decline in demand for TVs, while sales in Latin America were particularly high last year due to the World Cup, which will result in tough comparables in the next quarter. However, growing TV screen sizes will likely offset some of this weakness. Additionally, Corning has negotiated contracts for the third quarter, which it expects will lead to more moderate price declines.

In the longer term, the shift to larger sizes will likely lead to strong demand for 4K LCD TVs, which are expected to grow more than 50%, reaching more than 32 million units in 2015. [6] Additionally, replacement demand of Plasma and CRT TVs should also drive growth in glass volumes. On the pricing front, Corning’s competitors are already pushing their limits on price reductions, any further declines would hurt their margins. Since it is unlikely that they will push down prices in order to gain market share, we believe that price declines will remain moderate.

Phire Gets Acceptance On Wearables

In February, Corning  unveiled its “design-in” version of Gorilla Glass, named Project Phire, its answer to competition from sapphire-based cover glasses. At the time of unveiling the Phire, Corning announced that it will be available commercially in the second half of 2015. [7] At the earnings conference, Corning announced that it had received its first order for Phire, which will come on wearable products. However, it expects sales to ramp up slowly. [8]

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Notes:
  1. Corning Announces Second-Quarter Core Sales of $2.5 Billion, July 28, 2015, Corning’s New Releases []
  2. Corning’s Second Quarter 2015 Financial Statements, July 28, 2015, Corning’s Quarterly Results [] []
  3. Cisco VNI Forecast Highlights, www.cisco.com []
  4. Corning Incorporated Completes TR Manufacturing, Inc. Acquisition, January 9, 2015, Corning’s News Release []
  5. Corning Completes Acquisition of Samsung Electronics’ Fiber Optics Business, March 31, 2015, www.corning.com []
  6. LCD TV Shipment Forecast Revised Upward on Strong Consumer Demand for Larger Sizes, December 31, 2014, www.displaysearch.com []
  7. Corning Gorilla Glass Exhibit Slides, February 6, 2015, www.corning.com []
  8. Corning (GLW) Wendell P. Weeks on Q2 2015 Results – Earnings Call Transcript, July 28, 2015, Seeking Alpha []