Note: More details to come; changes are highlighted. Except where highlighted no other sections of this report have been updated.
Reason for Report: 1Q18 Flash Update
Prev. Ed.: Mar 13, 2018; 4Q17 Earnings Update
FLASH UPDATE [Earnings update in progress; to follow]
Corning delivered 1Q18 adjusted EPS of 31 cents, which decreased 13.9% y/y and 36.7% sequentially.
Core revenues increased 3.8% y/y to $2.513 billion but declined 6.1% on a sequential basis.
The results reflect strength in the company’s Optical Communications, Environmental Technologies and Life Sciences business lines.
Segmental Performance
The Display Technologies segment generated around 29.8% of total revenues. Revenues decreased 5% from the year-ago quarter as well as sequentially to $745 million. Per management, sequential decline in LCD glass prices “were the best first quarter since 2010.”
Optical Communications garnered 35.4% of total revenues. Reported segment revenues increased 8% year over year on the back of strong demand for both enterprise and carrier products. However, it declined 5% on a sequential basis to $886 million.
The Environmental Technologies segment generated around 12.9% of revenues. Reported segment revenues were up 17% y/y and 11% q/q to $322 million. Strong demand for Corning’s solutions in the automotive market and additional contract wins drove year-over-year growth. Improvement in heavy-duty diesel truck demand and new gasoline particulate filter business led to an increase in diesel sales.
Specialty Materials generated 11.1% of revenues. Reported segment revenues declined 7% y/y and 29% q/q to $278 million backed by penetration into developing regions and product portfolio expansion.
The Life Sciences business accounted for around 9.3% of revenues. Reported revenues were up 10% from the year-ago quarter and 3% sequentially to $232 million.
Operating Details
Adjusted gross margin reduced 100 basis points (“bps”) from the year-ago quarter to 40% while remained flat from the previous quarter.
Adjusted selling, general & administrative expenses (“SG&A”), as a percentage of revenues, increased 100 bps, from the year-ago quarter to 15%. However, it remained flat on a sequential basis.
Moreover, research & development expenses (R&D), as a percentage of revenues, increased 200 bps on a y/y basis and 100 bps from the previous quarter to 10%.
Guidance
Corning reiterated the FY18 outlook. For FY18, management continues to project core sales to surge 7% to $11 billion.
The company expects LCD glass market growth to be in the mid-single digit. Management anticipates Corning’s volume to grow faster than the market, primarily attributed to ramping production of world’s first Gen 10.5 fab in Hefei. It expects LCD glass prices to decline sequentially.
Optical Communications sales are anticipated to grow around 10% on a y/y basis. Notably, this growth excludes contribution from 3M’s Communications Markets Division.
For FY18, Environmental Technologies sales are expected to increase by 10%, while Specialty Materials sales are anticipated to grow depending “on timing and extent of new model launches and adoption of our innovations.” The Life Sciences business will increase in the mid-single digits range.
For 2Q18, Corning projects LCD glass market volume to grow sequentially in the low-single digit range. Growth is expected to pick up as company ramps production. Decline in LCD glass price is projected to be lesser than the first quarter, marking it as the “best second quarter” considering a time-span of a decade.
Optical Communications and Environmental Technologies are envisioned to grow by low-teens and high-teens, respectively on a y/y basis in 2Q18.
While Specialty Materials segment performance is expected to decline mid to high-single digits from the year-ago quarter, Life Sciences segment is projected to up high-single digits.
Bottom Line
Corning is a provider of connectivity solutions worldwide. In the 2H18, the company intends to unveil “next generation of Corning Gorilla Glass.”
The company has been supplementing its portfolio with various acquisitions. The buyout of 3M’s Communications Markets Division is expected to conclude in FY18. Corning anticipates the deal to add 7-9 cents to FY19 earnings.
These along with strategic acquisitions like SpiderCloud, Gerresheimer’s Pharmaceutical Glass Tubing Business, Alliance Fiber Optic Products and STRAN Technologies will aid the stock to gain momentum in the rest of FY18.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON GLW.
Portfolio Manager Executive Summary[NOTE: Only highlighted material has been changed]
Corning Inc. (GLW)is a premier provider of optical fiber, cable and photonic products for the telecommunications industry, high performance glass for information display applications, ceramic substrates for the automotive industry, specialized polymer product for biotechnology applications and other advanced materials and technologies.Total GAAP revenue was $10.1 billion in FY17.
Key factors for determining an investment strategy inCorning are as follows:
- Strong growth prospect in the Optical communications market
- Improving adoption of gas particulate filters (GPFs) by automotive OEMs
- Improved competitive position in the Life sciences segment backed by acquisitions
- Declining revenues in the Display segment remains a concern
Of the sevenfirms in the Digest group covering Corning,sixprovided neutral ratings, one assigned a positiverating and nonehad a negative stance. Target prices provided by the firms range from a low of $30 to a high of $37, with the average being $33.08.
Cautious(Neutral or equivalent outlook) – 6 firms or 85.71%– The firms are optimistic about increasing adoption of Gorilla Glass, which will drive top-line growth. New opportunities in the automotive and life sciences sectors are worth mentioning. Moreover, strong demand in the Optical Communications segment is likely to fuel growth for the long term. These firms believe that Corning’s strong cash flow generation ability is helping it to invest in asset-heavy that will boost potential returns over the long term. The firms are optimistic about display segment despite the reported revenue decline. However, weak outlook for the display segment is a concern. Most of these firms believe that Corning’s current valuation reflects balanced risk/reward. Higher investments will hurt the bottom line. Hence, the possibility of an upside is limited at least in the near term.
Bullish (Buy or equivalent outlook) – 1 firm or 14.29%
Bearish (Negative or equivalent outlook) – 0firms or 0%
Mar 13, 2018
Overview[NOTE: Only highlighted material has been changed]
Based in Riverfront Plaza, NY, Corning Inc. (GLW) is a global technology-based company, which operates in five segments, namely Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials and Life Sciences. The products of the company include carrier and enterprise network components pertaining to the telecommunications industry, glass substrates for LCD television, ceramic substrates and filters for automotive and diesel emission control applications, products that provide material formulations for glass, glass ceramics and fluoride crystals for various requirements of clients, glass and plastic labware, equipment, media and reagents that facilitate workflow solutions for scientific applications.
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative Arguments- Technological leadership in LCD market
- The multi-year capital deployment plan is expected to rejuvenate growth in the LCD glass business
- Strong demand in the Optical Communications segment is likely to fuel growth in the long term
- Improving adoption of gas particulate filters (GPFs) by automotive OEMs is a positive for Corning
- Macro-economic concerns in China
- Cautious outlook for TV, PC and smartphone market is a concern
- Prolonged oversupply by Chinese panel manufacturers and pricing pressure remain headwinds.
Further information on the company is available at its website: company’s fiscal year coincides with the calendar year.
Mar13, 2018
Long-Term Growth[NOTE: Only highlighted material has been changed]
Long-term EPS growth for Corning is expected to be 4.0%. The company is the world's leading supplier of substrates for the LCD market. The company has benefited from the migration from CRT- to LCD-based displays in monitors and TVs and has secured a foothold in developed markets such as the United States, Japan and Western Europe.
The firms are optimistic about LCD glass prospects over the long term. Moreover, the demand for larger televisions will continue to enhance the company's growth.
Some firms also believe that management’s expectation of moderating price decline in the Display segment over the long term presents significant growth opportunity in terms of revenues and gross margin, given the company’s dominant position in the market.
Some firms believe that Corning will benefit from strong demand for fiber and fiber-connectivity products as networks transition from copper to fiber and traffic loads will increase in the long haul.
It is expected that GG will primarily drive earnings in the long term, even as more competitors threaten to take its share. Moreover, it is anticipated that new opportunities and potential of the existing business will have a positive impact on the long-term growth of the company.
Some of the neutral firms believe that growth opportunities are arising in the environmental technologies and pharmaceutical market, which will be beneficial for the company over the long term. However, uncertainty over the timing of these opportunities is a concern.
Corning’s diversified portfolio helps it to retain the top position in a wide variety of high-growth industries. Further, multi-year capital deployment strategy involves taking note of M&A opportunities and accelerating capital expenditure. This may revive growth in the LCD glass business in the long run. Moreover, its use of GG in the mass-market automobile segment is expected to drive growth for the company in the long term.
Under its Strategy and Capital Allocation Framework, Corning targets generating $26-$30 billion in cash through 2019. The company plans to return more than $12.5 billion to shareholders through repurchases and dividends. Additionally, the framework plans to increase dividend by at least 10% in 2018 and 2019. Further, Corning plans to invest $10 billion to sustain its leadership and deliver growth over the long term. Moreover, the company targets adjusted debt/adjusted EBITDA ratio at almost 2 times. Notably, the company has returned $9 billion to shareholders since October 2015, which has reduced outstanding shares by roughly 30%.
Corning expects to achieve $5 billion in optical communications sales by 2020. Management expects to double sales in mobile consumer electronics over the next several years.
Mar13, 2018
Target Price/Valuation[NOTE: Only highlighted material has been changed]
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive Ratings / 14.29%↑
Neutral Ratings / 85.71%↑
Negative Ratings / 0.00%↓
Digest High / $37.00↑
Digest Low / $30.00↑
Average Target Price / $33.08↑
No. of Analysts with Target Price/Total / 6/7
According to the analysts, the risks to rating and price targets include supply chain corrections, earnings quality, currency risk, pricing pressure in glass due to inventory buildup at key customers, increase in competitive pressure in glass, further deterioration in prices due to weaker-than-expected demand for TV, rising competition in China, manufacturing disruptions, macroeconomic adversities,new glass technologies and any changes to the oligopoly nature of the glass substrate market.
Recent Events[NOTE: Only highlighted material has been changed]
On Mar 12, 2018,Corning announced that it will demonstrate Corning TXF fiber at Optical Networking and Communication Conference & Exhibition (OFC). The cost-effective futuristic fiber enhances transmission of high data rates over longer time duration.
On Mar 9, 2018,Corning unveiled RocketRibbon cable. The high density cable will empower data centers and carrier platforms with 30 percent installation efficiency compared with similar products in market.
On Mar 6, 2018,Corning and AU Optronicscollaborated on a solar power generation project in Taiwan. The movewill meet the power needs of approximately 300 U.S. households for a year. Further, it will significantly reduce carbon dioxide emissions.
On Jan 30, 2018, Corning announced 4Q17 results. Highlights are as follows:
- Total revenues increased 7% to $2.739 billion.
- Non-GAAP EPS of 49 cents decreased 2% y/y.
- Corning ended the quarter with cash of $4.3 billion.
On Dec11, 2017, Corning announced the agreement of purchasing substantially all of 3M`s Communication Markets Division in a cash transaction of approximately $900 million. The buyout is anticipated to conclude during 2018.
Revenues[NOTE: Only highlighted material has been changed]
According to the 4Q17 press release, core revenues increased 7% y/y to $2.739 billion and 1% on a sequential basis.The results reflect strength in the company’s Optical Communications, Environmental Technologies and Specialty Materials business lines.
Corning recently announced that it has agreed to take over 3M’s Communication Markets Division completely in an all-cash deal for approximately $900 million. This strategic move is in line with the company's plan to invest $1-$3 billion in acquisitions. Moreover, it anticipates the deal to add 7-9 cents to 2019 earnings.
The acquisition will result in adding around 500 3M’s employees to Corning. This acquisition will strengthen Corning’s Optical Communications worldwide market access. Additionally, strong Gorilla Glass shipment drove Specialty Materials sales. The glass demand is improving consistently owing to increasing adoption by smartphone makers like Apple.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenues ($ in M) / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2Q18E / 2016A / 2017A / 2018EDigest Average / $2,551.0 / $2,700.0 / $2,739.0 / $2,482.0 / $2,669.0 / $9,710.0 / $10,514.0 / $10,849.0↑
Digest High / $2,551.0 / $2,700.0 / $2,739.0 / $2,484.0 / $2,676.0 / $9,710.0 / $10,514.0 / $10,868.0↑
Digest Low / $2,483.0 / $2,700.0 / $2,675.0 / $2,480.0 / $2,662.0 / $9,709.9 / $10,258.0 / $10,830.0↑
Y/Y Growth / 4.8% / 6.0% / 6.9% / 1.4% / 4.6% / -0.9% / 8.1% / 5.1%↑
Q/Q Growth / 0.2% / 4.2% / 1.5% / -7.8% / 7.5%
*Figures in the table are non-GAAP.*Blank cell indicates figures not available.
Segment Revenue Details:
The Display Technologiessegment generated around 30.9% of total revenues. On an adjusted basis, revenues decreased 6% from the year-ago quarter and 2% sequentially to $847 million.
The LCD glass market and Corning’s volumes were up slightly better than expected.
Optical Communicationsgenerated 33.9% of total revenues. Reported segment revenues increased 13% year over year and 1% on a sequential basis to $928 million on the back of strong demand for both enterprise and carrier products. Further, acquisition synergies drove the segmental revenues.
The Environmental Technologiessegment generated around 10.6% of revenues. Reported segment revenues were up 19% year over year and 5% sequentially to $291 million. Strong demand for Corning’s solutions in the automotive market and additional contract wins drove y/y growth.
Specialty Materialsgenerated 14.3% of revenues. Reported segment revenues surged 17% year over year and 5% sequentially to $393 million on the back of strong shipment of Gorilla Glass.
The Life Sciencesbusiness accounted for around 8.2% of revenues. Reported revenues were up 9% from the year-ago quarter and 1% sequentially to $225 million.
Guidance
For FY18, Corning expects LCD glass market to be in the mid-single digit. Management expects Corning’s volume to grow faster than the market, primarily owing to robust world’s first Gen 10.5 fab. The company expects sequential LCD glass price declines to be moderate. Optical Communications sales areanticipated to increase by approximately 10% for 2018. This increase excludes any contribution from the pending acquisition of 3M’s Communications Markets Division.
Environmental Technologies sales are expected to increase by high-single digit percentage, while Specialty Materials sales are anticipated to increase y/y. The Life Sciences business will grow mid-single digit percentage y/y.
Firms’ Outlook
Majority of the firms are optimistic about the optical and specialty materials businesses. Most of them believe that optical will benefit from increasing carrier spending on 5G network and large data centers. They note that fiber supply remains constrained, which is a positive for Corning. Moreover, rapid Gorilla Glass adoption is expected to drive growth, going forward.
Some of the firms noted Corning’s improving position in the automotive market, where Gorilla Glass is gaining rapid adoption, is significantly positive.
Firms believe that Corning’s great visibility in pricing, volume, and capacity rise from its G10.5 LCD glass customer is a tailwind for the company.
However, weakening demand in smartphone, tablet, TV andPC markets will create a downward pressure on pricing, consequently, hurting revenues.
Please refer to the Zacks Research Digest spreadsheet on GLW for more details on revenue estimates.
Margins[NOTE: Only highlighted material has been changed]
Per the 4Q17 press release, adjusted gross margin contracted 200 basis points (bps) from the year-ago quarter and 100 bps from the previous quarter to 41%.
Adjusted selling, general & administrative expenses (SG&A), as a percentage of revenues, increased 50 bps from the year-ago quarter and 40 bps sequentially to 14.2%.
Moreover, research & development expenses (R&D), as a percentage of revenues, increased 200 bps on a y/y basis and came in at 8.8%.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 4Q16A / 3Q17A / 4Q17A / 1Q18E / 2Q18E / 2016A / 2017A / 2018EGross / 42.6% / 42.0% / 40.6% / 40.0% / 40.8% / 42.1% / 41.5% / 41.3%↓
Operating / 21.5% / 20.3% / 16.7% / 15.9% / 18.7% / 21.2% / 18.6% / 19.0%↓
Pre-Tax / 24.7% / 19.7% / 20.1% / 14.3% / 17.9% / 21.6% / 19.4% / 18.4%↓
Net / 20.6% / 16.0% / 17.2% / 11.3% / 14.1% / 18.3% / 16.1% / 14.6%↓
*Figures in the table are non-GAAP.*Blank cell indicates figures not available.
Guidance
For 1Q18, core gross margin is projected to be around 40%. SG&A is anticipated to be slightly more than 14%, while RD&E is expected to be slightly more than8%.
For FY18, pretax gross equity earnings are projected around $200 million, primarily from Hemlock Semiconductor.
Tax rate is expected to be in the range of 20-22% for both 1Q18 and full year.
Firms’ Outlook
Most of the neutral firms believe that Corning’s aggressive investments for growth will drag margins in the near term.
According to the Zacks Digest model, R&D expenses areexpected to increase 6.1%, faster than revenue growth of 5.1% for FY18.However, SG&A is expected to grow 3.6%, slower than revenue growth of 5.1% for FY18.
However, R&D and SG&A expensesare expected to grow 5% and 5.9% respectively, slower than revenue growth of 6.4% for FY19.
Please refer to the Zacks Research Digest spreadsheet on GLW for more details on margin estimates.
Earnings per Share[NOTE: Only highlighted material has been changed]
According to the 4Q17 press release, Corning reported adjusted EPS of 49 cents, which decreased 2% y/y but increased 14% sequentially. Growth was driven by improvement in revenues.