For Corning, Weakness in Optical Communications Overshadows the Positives

Corning (GLW 1.17%) announced second-quarter 2019 results on Tuesday morning. With shares down around 7.5% as of 3 p.m. today, it's obvious the market isn't pleased.

The company pointed to continued challenges for its large optical communications business, and followed by once again tamping down expectations for its full-year growth. Let's look at what Corning accomplished to end the first half, and what investors should watch for the rest of 2019.

Corning optical fiber. Image source: Corning.

Corning's results: The raw numbers

Data source: Corning. GAAP = generally accepted accounting principles. 

What happened with Corning this quarter?

• On a non-GAAP (adjusted) basis -- which excludes the impact of items like foreign currency exchange, restructuring, and acquisition costs -- Corning's core sales grew 8% year over year to $2.986 billion.
• Core earnings climbed 14% to $410 million, and increased 18% on a per-share basis to $0.45.
• Corning doesn't provide consolidated revenue or earnings guidance. So for perspective -- and though we don't usually pay close attention to Wall Street's demands -- most analysts were modeling lower core earnings of $0.44 per share on core sales of $2.98 billion.
• By business segment:
  • Display technologies net sales grew 9% year over year to $848 million, in line with expectations and outpacing the broader display-glass market's mid-single-digit percentage growth, thanks to the ramp up of Corning's new Gen 10.5 factory. Segment net income grew 11% to $213 million, helped by a more favorable moderation in glass-price declines.
  • Optical communications net sales climbed 7% to $1.09 billion, on the light side of guidance for high-single-digit growth, led by hyperscale data center and optical fiber customers.
  • Environmental technologies sales increased 15% to $366 million, significantly above expectations, driven by adoption of Corning's gas particulate filters (GPFs) and heavy-duty diesel demand. Segment net income climbed 20% to $65 million.
  • Specialty materials sales grew 8% to $369 million, in line with guidance for high-single-digit growth and led by demand for mobile consumer-electronics glass. Segment net income rose 5% to $67 million.
  • Life sciences sales rose 6% to $260 million, near the high end of guidance for low- to mid-single-digit growth, and segment net income soared 29% to $40 million driven by sales leverage and manufacturing optimization.
• Corning reiterated the longer-term goals outlined under its new 2020-2023 Strategy and Growth Framework, including plans to invest $10 billion to $12 billion to drive growth, while returning $8 billion to $10 billion to shareholders through dividends and stock repurchases.

What management had to say

CEO Wendell Weeks said:

Our second-quarter performance reflects our strong execution against our now-completed Strategy and Capital Allocation Framework, which guided Corning during the 2016-2019 period. We're outpacing the markets we serve, which demonstrates the resilience of our portfolio in the face of macroeconomic headwinds. We look forward to extending our strong performance under our new 2020-2023 Strategy and Growth Framework. [...] Our capabilities are becoming increasingly vital to diverse industries, and multiple opportunities support continued leadership across all of our market-access platforms.

Looking forward

Corning also says its optical communications business should continue growing at rates well above those of the passive optical market (where sales will likely decline in the mid to high single digits this year). However, sales from this segment -- its largest -- are now expected to increase in the low to mid single digits for all of 2019, down from its old guidance for 10% growth, due to weakness in the carrier market.

Meanwhile, Corning anticipates larger display sizes, manufacturing volume growth, and slightly better low- to mid-single-digit price declines for the full year (versus previous guidance for a more firm mid-single-digit drop) to benefit its display segment.

Next, thanks to ramping up GPF sales and more new platform wins than expected, the company raised its outlook for environmental technology sales to increase in the low teens (up from 10% previously).

Specialty material sales are still expected to increase this year, with exact growth depending on the rate at which customers adopt Corning's latest premium glasses and consumer-electronics product innovations. And finally, the company now sees life sciences sales climbing in the mid single digits in 2019, up from previous guidance for low- to mid-single-digit growth.

Alas, given the relative underperformance of Corning's enormous optical segment for now, it seems the market isn't willing to focus on the strength of its other businesses.

"Now, we are not immune to challenges, but we are more resilient than ever," Weeks added. "[...] As conditions improve, our growth will accelerate."