What Is Driving Corning’s Optical Communication Revenue?
Nearly 30% of Corning’s (NYSE: GLW) overall revenues come from its Optical Communication division, which has grown at a CAGR of about 9% in the last four years. This growth was primarily driven by the increase in data usage and demand for cloud computing. However, the business has relatively lower margins, which reduce its valuation contribution to just 22%. The margins are lower because of pricing pressure, as well as complex procedures in the manufacturing of optical fiber. Corning’s Optical Communication division’s profitability has fluctuated in the last few years due to higher sales of low-margin products and fluctuation in optical fiber prices. Still, the outlook is fairly healthy, as we expect the sales to grow at 5% annually in the next 5 years, accompanied by a small improvement in margins. This is expected to be driven by higher use of video content, increasing smartphone penetration and growth in cloud computing.
What Does Corning’s Optical Communication Division Sell?
Corning’s Optical Communication division supplies optical fiber and hardware equipment for voice, data and video communications for networks. Its offerings include a range of optical fiber technology products such as fiber-to-the-home access, metropolitan, long-haul and submarine networks. Apart from these, it also supplies hardware and equipment products such as fiber optic connectors and other accessories for optical connectivity. A significant portion of Corning’s optical fiber is sold to fiber cable and broadband subsidiaries such as Corning Cable Systems LLC and Beijing CCS Optical Fiber Cable. Corning’s remaining fiber production is sold directly to end users or third party cable companies. In addition, Corning offers its hardware products for the cable television industry, including coaxial connectors and associated tools.
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What Will Drive Revenue Growth?
Corning’s Optical Communication revenues have grown at a CAGR of 9% in the last 4 years, primarily driven by growth in global data usage and higher demand for cloud computing.
The use of video content has ballooned in the last few years driven by the likes of Facebook, Twitter, and WhatsApp. This data-heavy content has increased demand for high-speed networks across the globe, and Corning is well positioned to capitalize on this growth opportunity since it has sufficient capacity to cater to the demand.
Volatility in EBITDA Margins
The EBITDA margin for Corning’s Optical Communication business is much lower than that of its Display Technology business. The low margin for this segments can be explained by the relatively high manufacturing costs of optical fiber, as well as competition in the sector which has led to pricing pressure.
Optical Communication margins have also fluctuated in the last few years due to higher sales of low-margin products, pricing pressures and growth in operating expenses due to acquisitions. However, after 2014, optical fiber prices remained stable and higher growth in demand led margins to bounce back to around 25% in 2016. Corning also implemented new production software for the segment in 2016, which is likely to improve its margins going forward.
For precise figures, please refer to our complete analysis of Corning
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