Corning Incorporated (GLW) Earnings Call Transcript & Summary

Good morning, everybody. This is Meta Marshall from Morgan Stanley. I head up the networking coverage here. And we are pleased today to have Mike Bell, SVP and General Manager of the Optical Communications business from Corning. I'm going to start with a short disclosure and then I'll give a little bit of Mike's bio. Please note that this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So again, we're delighted today to have Mike Bell, SVP of -- and General Manager of Optical Communication. He's been with Corning since 1991 and working in leadership positions within optical units since 2012. He is also -- given today is Veterans Day, he was a submarine wartime -- warfare officer with the U.S. Navy. So Mike, I know you were going to kick off with just some slides to go over the Corning business. And let's start with that and then we'll jump into Q&A.

Okay. Thanks, Meta.

All right. We've got the slides up.

Okay. For some reason, I'm not seeing the slides.

All right. Where we are on the Internet Traffic Growing slide.

Okay. Well, let me just -- I know what the slides say. So let me just get started. I've got a local copy. Just 1 second.

Great.

Okay. So thanks, Meta. And I just want to start with some of the bandwidth trends we're seeing. These are generalized bandwidth trends. Internet traffic grows about 25% per year. That's been happening for a number of years, and it's projected to continue so through the next several years. And what's interesting about that is 70% of that traffic is video, and it's growing to 80%. What that means for us is it's really rich content. It's not just any IP traffic, but it means each connection has to be a higher bandwidth connection. During the pandemic, we've seen some interesting trends where that has spiked up even further. In fact, open vote analysis shows that a monthly increase of average broadband user or subscriber is up 25%, even beyond this 25% per year over prepandemic level. So we're continuing to see this even accelerate as we're all home trying to be entertained and educated. Next page. Another thing that we track pretty closely is connected devices. So right now, there are about 20 billion connected devices, and that's going to be increasing to about 28 billion by 2023 or 3x the global population. And during COVID, we've actually seen a little bit of a slowdown in connected devices, but increased demand through each one of those connections, as I spoke about on the prior page. We expect connected devices to surge once the pandemic subsides and permits recovery. We have seen a little bit in our business with glass volume growing by about 10% in our Display business as people have upsized their televisions, I think, to have a better viewing experience during this crisis. Next page, please. The other interesting trend is wired versus mobile devices. So about half of the connections are through wired devices now, but we believe that mobile connections are going to grow and surpass wired connections by 2023. You would think that with everybody cooped up that mobile traffic or mobile connections would have slowed down; it was just the opposite. Surveys have shown a 37% increase in texting, 32% increase in video calling. Facebook, for example, reported a 70% increase in group calls through the messenger app. And contactless payments increased 150%. So this mobility trend continues even despite being in a pandemic. Next page, which should be Slide 5. So all this growth in bandwidth has really congested our networks. Some of these shots on here, maybe you can resonate with. Sometimes you're driving and you can't get a network connection, it doesn't help when you're trying to use a GPS. Sometimes you have 5 bars but you still can't send a text message. Or you're downloading something and you got an hour and 21 minutes to wait or you're waiting for your movie to load patiently and you only have 26 hours and 27 minutes left. So all those things tell me -- or tell us here in Corning one thing, on Page 6, we need more fiber. And if you go to Page 7, I can explain that briefly why we believe that. So the first click should show data rate on the vertical axis. This is the speed of a link in gigabits per second. And on the horizontal axis, you see link length. And when you multiply those 2 together, you get a data rate x length for each link. And what we found through detailed research and lots of experience over the past several years is once that combination reaches 100 gigabit meters per second, optical networks are preferred. And if you click one more time, we got a couple of trends that are happening. The little antenna that's rising shows is supposed to represent 5G. So because the signal sources are being centralized, that means higher data rates over longer distances. Clearly, optical networks are required for all these connections now. The next click is a big building representing hyperscale data centers. And when we think about one building or one big data center being connected to another, really high data rates over longer distances drive optical. And the last one is the server connections. And we see, over the next few years, more and more optical links the whole way down to the server level from the switch to the server. And that data rate is interesting because if you go to like a 40 gig per second link over 2.5 meters, you're right at that magical 100 gigabit meters per second. And as transceiver speeds increase beyond 40 gig, then we'll be clearly into the optical domain, which means a lot more fiber needed for all these connections. And we use these examples because 2 of -- the 2 mega trends I'd like to talk about are 5G and the access network, and of course, hyperscale data center explosion in the cloud. The next page talks about cellular a little bit. So if you look at legacy cellular, you'd have a baseband unit and a fiber connection to that one antenna. And the big thing about 5G, if you click one more time, is we just have to densify a lot more. Reason for that is there are really 3 things that drive better user experience in 5G cellular. Number one is more spectrum, number two is more efficient use of that spectrum, and then number three is the densification so that fewer people share each signal source. And that densification, we believe, will be up to 10x. That means 10x more fiber and connections in the network. Go to the next page, which is Page 9, you can see a picture of a legacy data center, traditional 3-tier data center. And as we've gone to hyperscale architectures, you can see it's flattened the data center and there's a lot more interconnectivity between what we call the spine and leaf layers of those data centers. This is sort of the fabric layer of the data center that you hear so many people talk about, and what we're seeing is 5x more fiber in connections. Now the reason for this flattening is simply a latency as the data centers are used for a lot more things besides just storage and retrieval. All this computing creates the so-called side-to-side or east-west traffic, which those massive connections of optical fiber help with the latency in those data centers. And so as we think about these trends, you move to Page 10, we're best fit -- since there's going to be a lot more optical, Corning is best fit for that trend. First slide you can see is we're #1 in optical fiber. And just recently we produced our billionth-kilometer of fiber, which is quite incredible. Then the next slide is Page 11. We're also #1 in outside plant cables. You can see one of our featured newer products, RocketRibbon extreme density cable. This thing goes up to 3,456 fibers, soon to be 6,912, and it's used for high-density applications in the metro rings around big cities and also connecting buildings and different layers of data centers. Page 12 is something we're quite proud of. We've just launched the new Evolv Hardened connectivity solution. And so what you see featured on the left is our OptiTap -- OptiTip solution, which we've had for a number of years, introduced way back in 2004 as Verizon started to introduce fiber to the home. And this is what's been serving fiber customers for many, many years very successfully. But as we've looked to the future with 5G access networks and frankly the convergence of wireline networks that may cover -- connect customers, connect businesses as well as wireless networks that connect all these antennas, we saw the need to invent a smaller, more agile platform. This thing is 5G-ready. It's configurable, and it will basically go anywhere. In fact, you can see on a historic building, I believe this is in the U.K. It makes a nice -- quite a nice solid application you can see there on the building. And this thing actually, it's reduced in size, can go in all different kinds of small spaces, and it can save our customers up to $500 per installation location because of the small size. Last up, we have next-generation hyperscale data center solutions. Now we do a lot of tailored solutions for the biggest hyperscale data center customers all over the world. We use this image because to do everything you do in your home, there's always a data center in the background. And so we've got lots of innovations that we're rolling out today to make these hyperscale data center customers -- enable them to go faster, do much more fast deployments at even lower costs. So I just wanted to end these brief remarks on Page 14. And during the pandemic, during COVID, we're seeing all kinds of trends towards things we've been talking about for many years, but they seem real-life examples right now during this pandemic. First of all, telemedicine, none of us want to go to the doctor's office if we're feeling sick. We don't want to be contaminated by folks that might be carrying the disease. So telemedicine has been a huge trend, and we're seeing lots of connectivity needs from there. Working anywhere; I happen to be working from home today, as an example. And that's causing all kinds of network bandwidth demand, specifically off-peak during normal working hours. Remote learning. We probably can all resonate with this. We have children, grandchildren, nieces, nephews and the like that are all either all the time or part-time learning from home. And then since we can't really go see friends, neighbors and family, being connected is really important for all of us psychologically. And we like to say we build connections so the world can make them and these are great examples of how Corning does that. So with that, I'd like to move to questions. Meta?

Yes. No, that was a great overview, Mike. So the theme of the conference is kind of life after COVID. And you spoke to a lot of the changes that we've seen as a result of the pandemic. But with all of the changes to bandwidth, whether it be more distributed traffic, whether it be more mobile traffic, whether it be more video traffic, how does that change how you see the Optical business of Corning evolving post COVID?

Well, we talked about some of those big unprecedented demands on our customers' networks. The Internet & Television Association reported upstream traffic is up 37%. And so normally you have a lot of downstream traffic because people working from home they're having to use services like we're using right now, Zoom, to go upstream. Also Microsoft Teams has set a new single day record recently of 4.1 billion minutes, up fourfold from what we had seen prior. And we've heard similar sort of stories from all the different collaboration tool providers. And then Nokia just reported recently peak network traffic, which is an important factor. It's up 25% above pre-COVID levels. And so to address this spike in demand, network operators have committed to adding capacity. A couple of examples. In quarter 3 earnings call AT&T; John Stankey is a great lover of fiber apparently. He talked about their fiber network investments. And this is a quote from John. He said, "I will step on the gas in a way that I think everybody will look at to say, those returns are so darn good, why wouldn't you do that?" So I think that's a great example of a big customer that's building large networks in the United States and other places in the world. Also from a data center perspective, Synergy Research recently reported 26 new hyperscale data centers opened this year but there are another 176 in the pipeline, which sounds like a lot of growth in the future to me. But these capacity additions, exactly when they're going to happen, very hard to predict. That's why we haven't guided recently. And as we receive an increase in our back order -- order backlog, then we'll be sure to let you know.

Got it. And so is there a way to think of as we have more bandwidth strain on the network, does fiber density increase 1:1? Or just like how do we think of how fiber density increases as we see some of these increases in bandwidth in a more distributed fashion?

Yes, I think it depends on what part of the network that we're talking about. We tried to show examples in the brief presentation. Like for 5G, you can see, it takes a lot more fiber density just because there are a lot more cells. And so because there are more cells, fewer users share each one and fiber has to connect to each one of those cells from a centralized signal source. The same thing happens in these hyperscale data centers, as they put more and more capacity online and they're trying to create less latency. There's just a lot of connections among all those different servers, switches and routers in the data center. Like I said before, demand on network is at an all-time high and currently pandemic constraints and, in some cases, recessionary concerns limit broad network expansion but operators are focusing on addressing bottlenecks where they see them, what the capacity they are deploying. And we do believe that all these strains on the network will require a return to growth to restore that network capacity headroom that we like to talk about. And these projects, we believe, will be large, and the growth could begin as early as next year.

Got it. And just in terms of your -- you kind of have 2 distinct customer sets. You have the service providers and then you have kind of the hyperscalers. And so how are their needs different when it comes to fiber in terms of density or just kind of what they're looking for in their fiber?

Well, I think in the access network, like the Internet service providers, it's primarily just getting more people connected. We've talked before about, as you get deeper into the network, there are just a lot of connections. So it takes a lot of fiber volume. It takes a lot of connectivity volume. One of the reasons why we've launched this new product set to make that easier and faster to connect all these customers in the outside plan or internet service provider realm. In the cloud, it's a little different and it's getting more dense. The reason that is, is a lot of the hyperscalers are evolving to an integrated structure of compute storage and networking. And the optical fabric has to be fully nonblocking connectivity. And that's what enables the reliable, low-latency connectivity among all servers. Now it sounds like maybe a bunch of gobbledygook to some, but when it comes to nonblocking, what we mean is, traditionally there have been faster lanes from the Internet down to the servers and then slower lanes that have to be prioritized back up. They're trying to equalize that. That's what nonblocking means. That the lanes up are just as fast as the lanes down. You sort of have equal flow back and forth. And that's necessary because there's so much east-west or server-to-server traffic now where they need that bandwidth, that capacity. So it takes more fiber down today to provide those sort of same speed lanes in both directions. And so that's one of the things we see that's a little different. Facebook was quoted recently to talk about how they've gone from really big clusters of servers to smaller pods that are all interconnected. What they said was instead of large devices and clusters, we brought the network up into small identical units or server pods and created uniform, high-performance connectivity among all pods in the data center. And so that's what we're talking about with that nonblocking architecture.

Got it. And you noted in one of your slides that there was more fiber density in 5G. And when those -- in the past, as noted, 5G could require up to 100x more fiber to deploy in a city than previous generation. So what is it? Is it the small cell, kind of additional small cells that lead to that fiber density? Is it just more use cases? Just help us explain why you need more fiber with 5G?

Yes. I think it's both, Meta. I tried to explain a little bit more earlier that there's just a lot more cells. What's interesting about that is, as I mentioned, there are 3 factors. Let's take out the efficiency of use of the spectrum because that's based on the current state of play of how the antennas and signal sources everything are built. And that will improve over time. Let's talk about spectral -- how much spectrum is available and the density. Those are the 2 primary factors. And what's interesting is, as you go to higher frequency bands, like you've heard about millimeter wave, probably, connections. And that would be in the 20 to 30 or even higher gigahertz spectrum. There's just higher -- bigger slice -- they're bigger slices of spectrum. So you can pack more information into those slices. Problem though is those are typically line-of-sight So if there's a building in the way or a tree in the way or something else, then you can have connectivity problems. What's interesting is as you go to smaller cells, they become closer and those blockages aren't there anymore. So the 2 factors going to higher frequency bands, which are richer in spectrum and the density of the cells go together. So as you get more cell density, fewer people share and you get an even better experience because you can use these different bands. So that's the reason for all the fiber connectivity.