Corning Beats, Guidance Positive

Zacks

Yesterday, before the market open, Corning (GLW) reported fist-quarter core earnings of 31 cents, which beat the Zacks Consensus Estimate by a penny.

Apple’s (AAPL) decision to use Sapphire Glass instead of Corning’s Gorilla Glass (GG) has increased caution about the company’s future. But the concern may be overblown considering the fact that Apple is just one of several mobile device makers and most Android devices continue to use GG. Further, the specialty materials segment of which Apple’s business is a part, accounts for less than a fifth of Corning’s total revenue and the rest of the business, remains strong. 

Revenue

Corning reported revenue of $2.29 billion, which was up 14.2% sequentially, 26.2% year over year and in line with our estimate.

The Display Technologies segment generated around 43% of total revenue. The segment was up 67.0% sequentially and 58.3% year over year. The inclusion of CPM helped revenue in the last quarter. Overall volumes were down mid-single-digits due to an issue with a Korean customer and price declines were also greater than expected.

Optical Communications (25% of revenue) declined 2.0% sequentially and grew 26.2% from the year-ago quarter, much better than Corning’s guidance of a mid-teen percentage point increase from the year-ago quarter. Both carrier and enterprise sales grew strongly in the last quarter, but the strength in carrier revenue, particularly in North America and EMEA was stronger. Corning also saw strength in FTTH and data center products in North America. Fiber sales in China were weak.   

The Environmental Technologies segment generated around 12% of revenue, up 15.5% sequentially and 20.6% year over year. Heavy-duty diesel sales were particularly strong, driven by new regulations in China and Europe, with North America also improving. Auto also grew albeit at a slower rate.

Specialty Materials generated 11% of revenue, down 8.4% sequentially and up 1.2% year over year. Management was looking for flattish revenue on a year-over-year basis. Management said that GG volumes grew high single-digits, but pricing was weak, as the company had make some compromises in renewing some key contracts. Price declines are expected to moderate in the next quarter.

The Life Sciences business accounted for around 9% of revenue. The business was flat sequentially and up 1.4% from a year ago.

Margins

The gross margin was 40.8%, up 125 bps sequentially and down 160 bps from last year. Synergies related to the CPM integration started to kick in even as volumes increased in some segments. Pricing was a negative in the quarter.

The operating expenses of $601 million were up 23.1% sequentially and 35.4% year over year. Inclusion of CPM in the results raised costs. As a result, the most significant increase from both the previous and year-ago quarters was in SG&A (as a percentage of sales). R&D increased 22 bps sequentially but was down 116 bps from last year.

Net Income

Corning’s core net earnings were $461 million, or 31 cents a share compared to $431 million or 29 cents a share in the year-ago quarter. Net income on a GAAP basis was $301 million ($0.22 a share) compared to $421 ($0.30) in the previous quarter and $494 million ($0.33 a share) in the March quarter of 2013.

Balance Sheet

Inventories were up 9.8% during the quarter, with inventory turns increasing from 3.8X to 3.9X. DSOs went up again from 57 to 63. Corning ended the quarter with $5.61 billion in cash and short term investments, up $377 million during the quarter. However, the company has a huge debt balance. Including long term liabilities and short term debt, the net debt position was $635 million at the end of the quarter, higher than the net debt balance of $307 million at the beginning of the quarter.

Cash generated from operations was $1.74 billion, of which $246 million was spent on capex, $1.90 billion on share repurchases and $136 million on dividends.

Guidance

Corning said that the TV market would remain strong in 2014, with average screen sizes continuing to increase. LCD TV units will grow low-to-mid-single-digits, with the ultra-high definition category (4K) growing from 1.5 million units in 2013 to 10 million units in 2014.  Desktop monitor and notebook markets are expected to be flat.

For the second quarter, Corning expects its LCD glass volumes to increase high single digits, sequentially with price declines much lower.

Optical Communications revenue is expected to be up mid to high single digits (compared to the year-ago quarter) Environment sales are expected to be up low to mid-teen percentage rate, Specialty Materials to be up 20-25% sequentially and Life Sciences consistent with last year.

Equity earnings are expected to be down sequentially due to weak polysilicon sales (a situation that is expected to continue until the fourth quarter.

The gross margin will be 46% and opex lower than the year-ago quarter (as a percentage of sales). The effective tax rate for the year is expected to be 20%.

Recommendation

Corning’s first-quarter results were better-than-expected, although the GG business remained soft, impacted by pricing. But the situation should normalize in the next quarter itself and continue on an uptrend thereafter. Management commentary about the display business was also encouraging, as was the optical and environmental businesses. Overall we come away with a positive feeling about the company’s growth prospects this year.

Corning shares carry a Zacks Rank #3 (Hold) But some other stocks in the same sector that may be worth considering include Clearone Inc (CLRO), Harmonic Inc (HLIT) and Seachange International (SEAC), all of which carry a Zacks Rank #2 (Buy).

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