Shares of Corning (GLW +11.88%) hit a 52-week low after the company's first quarter report on April 24 failed to impress investors. On the surface, the numbers weren't bad: Corning's core (non-GAAP) revenue rose 4% annually to $2.51 billion, beating estimates by $10 million. Its core EPS dropped 14% to $0.31, but still topped expectations by a penny.
However, sluggish LCD sales, higher investments, and a mark-to-market loss from currency hedging caused Corning to post a GAAP loss of $589 million, or $0.72 per share, compared to its GAAP profit of $86 million, or $0.07 per share, in the prior year quarter.
Image source: Corning.
Corning reiterated its guidance for a "strong" 2018, and claimed that its sales would accelerate in the second half of the year. It also stated that its core sales would rise 5% to $11 billion for the year, but that would mark a slowdown from its 8% growth in 2017.
Corning posted year-over-year sales growth in Optical Communications, Environmental Technologies, and Life Sciences during the quarter. However, its Display Technologies and Specialty Materials revenues declined. Out of those five segments, the drop in Specialty Revenues was the most disappointing since it was previously Corning's fastest growing business.
Why does the Specialty Materials business matter?
Corning's Specialty Materials unit produces Gorilla Glass, the chemically hardened glass used in Apple's (AAPL +1.18%) iPhones and other mobile devices. It constantly upgrades Gorilla Glass with tougher versions, like Gorilla Glass 5, and develops variants like Gorilla Glass Auto for cars and Gorilla Glass SR+ for wearables.
That business, which accounted for 11% of Corning's top line last quarter, was a major growth engine over the past few quarters -- but that abruptly ended with its sales decline last quarter.
|
Q1 2017 |
Q2 2017 |
Q3 2017 |
Q4 2017 |
Q1 2018 | |
|
Revenue |
$300 million |
$337 million |
$373 million |
$393 million |
$278 million |
|
YOY growth |
32% |
27% |
26% |
17% |
(7%) |
Source: Corning quarterly reports.
This deceleration will hurt Corning, since the growth of its Specialty Materials partly offset the ongoing declines at its Display Technologies business. During the conference call, Corning CFO Tony Tripeny forecast a "similar year-over-year decline for the second quarter."
Why are sales slowing down?
Tripeny noted that demand for Gorilla Glass was cyclical, and that the business' robust growth throughout 2017 was supported by "the timing of supply chain builds in front of customer product launches."
On a brighter note, CEO Wendell Weeks stated that demand during the second half of 2018 would be "much stronger than the first half" thanks to "major product launches" from OEMs. Corning also plans to launch the next generation of Gorilla Glass in the near future.
Image source: Apple.
However, the bears will likely note that several major companies recently warned that demand for higher-end phones would be much softer this year. Chipmaking giant TSMC (TSM +6.30%) recently lowered its full-year sales estimate based on softer demand for smartphones.
Many investors interpreted that lower guidance as a red flag for Apple, TSMC's top customer. Samsung (NASDAQOTH: SSNLF), which sells displays and components to Apple in addition to its own smartphones, also recently dampened investor expectations with a warning about "slow demand" in the smartphone market.
On the bright side, Corning might offset that weakness with content share gains in new phones. Weeks noted that of the 13 new devices launched at Mobile World Congress in February, "five used Gorilla Glass 5 on both the front and the back." Weeks also expects to make "significant progress" in the auto sector, which already includes collaborations with more than 20 OEMs.
Is this a cyclical hiccup, or the start of a decline?
As a Corning investor, I was disappointed in the decline in Specialty Materials revenue, but wasn't surprised due to the slowing demand for higher-end smartphones. However, I believe that demand for Gorilla Glass will keep rising as design standards rise in tandem with consumer expectations.
Moreover, the expansion of Gorilla Glass into adjacent markets, like wearables and cars, could gradually offset the importance of the smartphone market. The rest of 2018 will be challenging for the business, but I think investors who wait for a turnaround in the second half of the year could be pleasantly surprised.
