Corning Incorporated (GLW) Earnings Call Transcript & Summary

Great. Good morning. Thank you, everyone, for joining. I'm Samik Chatterjee and I cover the hardware and networking equipment companies at JPMorgan. I have the pleasure, and we are really thankful for the company, making it an annual event of hosting both Wendell and Ed here from Corning. So thank you both for coming to the conference and really, again, always a pleasure to have you here. What I'll do is I'll hand it over to Wendell to go through some of his prepared remarks, but before I do, there would be potentially forward-looking statements. And if you have questions on that front, please go look up corning's website. Ann is here in the room. She can help you with any forward-looking statements as well. So with that, Wendell, over to you.

Thank you, Samik. Hello, everyone. It's always great to be here with you. Now at this very conference last year, I walked through the fundamental elements of our springboard plan to accelerate our revenue and earnings growth by adding more than $3 billion in incremental annualized sales by the end of 2026. Now what we was said then was that we already have the required production capacity and technical capabilities in place to deliver the sales growth and the cost and capital already reflected in our financials. And therefore, we expect to deliver very powerful incremental profit and cash flow, leading to our earnings growing much faster than sales. And as I said, because of our confidence in the plan, we started buying back shares in the second quarter of 2024 and here we are together again, and what a difference a year makes. Since we last met, we've made tremendous progress. In 2024, we grew adjusted free cash flow of 42% for the full year, and we repurchased over $0.25 billion worth of our shares and we plan to continue buybacks in 2025. Earlier this year, we actually upgraded our high confidence Springboard plan by $1 billion to now add more than $4 billion in annualized sales and to achieve an operating margin of 20% by the end of 2026. And a few weeks ago, we reiterated our commitment to delivering this upgraded plan on our first quarter earnings call. We also reported continued strong execution in quarter 1. Year-over-year, we grew core sales 13% to $3.7 billion. We grew EPS 42% to $0.54 more than 3x the rate of sales growth. We expanded operating margin by 250 basis points to 18%. We expanded ROIC by 300 basis points to almost 12%. Now interestingly, if you take a look at our quarter 2 guide and you compare it with our springboard starting point of quarter 4 of 2023, we expect EPS to be up about 50%. And our stock is also up about 50% over that same period. Now when we deliver our $4 billion high confidence plan in our 20% operating margin target, we will grow EPS 100% from our springboard starting point. So we have plenty of growth ahead, and we're well positioned for upside variants to that plan, and that is going to be my main topic today. And that's because given the strong start to springboard and the great growth opportunities we have in front of us, investors are actually asking us less and less about our ability to execute and more and more about how global uncertainty could impact Corning's ability to deliver that plan. And the news we've witnessed just over the past few days is a great example of that uncertainty. At Corning, our approach to uncertainty is to position ourselves for upside variance. On our quarter 1 earnings call a few weeks ago, we shared with you how we handle downside risk. First of all, on tariffs, we said that our long-standing philosophy to locate our manufacturing operations close to our customers serves as a natural hedge against tariffs and mitigates the financial impact. Our quarter 2 EPS guidance included the minimal financial impact of the then very high 100% plus tariffs between the U.S. and China, which was only $0.01 to $0.02. Of course, the situation is already looking up based on what we've all learned so far this week. We also shared that the impact of a potential economic slowdown was already built into Springboard as part of the $2 billion risk adjustment we made at the corporate level to translate our $6 billion internal plan into our $4 billion high confidence investor plan. We modeled the impact of different slowdown scenarios on our growth plan, including a shock case using the worst downturn in the last 25 years, and we were well within our risk adjustment. Now these were just a couple of the many reasons we reiterated our high confidence plan despite the current global uncertainty. Now thankfully, uncertainty is actually a two-sided distribution. And today, I want to turn to the other side, the significant potential upside variance to the Springboard plan. I'm going to give you 3 examples. I'm going to start with Gen AI. First, in our enterprise business, where we report sales for inside the data center, we saw a record $2 billion in sales last year. In March, we upgraded our 2023 to 2027 enterprise sales CAGR from 25% to 30%. Now the primary technical driver behind that growth is what the industry calls the scale out of the network. Now that basically means that hyperscale customers are scaling out the GPU clusters with more and more connected AI nodes of server racks or simply put larger neural networks. Because each AI node is connected to the others in the cluster by fiber, this creates more volume for Corning. And that is what is primarily reflected in the 30% enterprise sales CAGR. Our upside variance to that growth rate inside the data center is driven by what the industry calls the scale up of the network. As hyperscalers create more capable nodes that move from less than 100 GPUs per node today to hundreds of GPUs per node in the future. Now historically, an AI node has been within a single server rack. As hyperscalers scale up, AI nodes are shifting to stretch across multiple server racks. This causes the distance to link these GPUs within the node to get longer. This will cause the links to reach about 100 gigabit per second meter. What we call the electrical to optical frontier line, which roughly marks the point where fiber connections become more techno-economical than copper. Now to help understand the size of this upside opportunity created by crossing that frontier, a single black well like node has more than 70 GPUs with more than 1,200 lengths using more than 2 miles of copper. As that node scales up, those 2 miles will be replaced by fiber connections. And those miles will grow over time as more and more GPUs are included in the AI node. Additionally, as data rates rise with more capable GPUs, our upside increases further. This opportunity alone is 2 to 3x the size of our existing $2 billion enterprise business if we are successful technically. And we're working with key customers and partners as we speak today on making that future a reality. Now you'll often hear folks in the industry talk about co-packaged optics or CPO. That is one of the key technologies that enables this scale up with optics. In fact, just yesterday, we announced a collaboration with Broadcom to accelerate their processing capacity with co-packaged optics. And you're going to hear a lot more about this area in the near future. So that's one. Another example of upside variance tied to Gen AI is playing out in our carrier business. We have been studying this space for some time, and we have been seeing most long-haul routes were approaching their maximum data rate capacity, creating a need for many new high bandwidth, low latency links between cities and data center campuses. And this essentially requires a rebuild of long-haul networks. And density, it turns out is every bit as critical outside the data center as inside. So to create a denser solution, we took our core innovations from inside the data center, applied them to this outside plant density channel challenge. We introduced a new technology connecting data center campuses. In the industry, this is referred to as DCI or data center interconnect, and we shared last year that we had reached an agreement with Lumen Technologies to provide our new Gen AI fiber and cable system that enables Lumen to fit anywhere from 2 to 4x the amount of fiber into their existing conduit. And the agreement reserved 10% of our global fiber capacity for 2025 and 2026. We have fully commercialized this product set. We now have 3 industry-leading customers adopting the technology. Now that being said, we are just in the very, very beginning of this new market. We expect this business to sale rapidly, reaching $1 billion opportunity for us by the end of the decade. Now I'll turn to my third example of upside variance, which is solar. At our March IR event, we shared our low-risk, high returns strategy to reenter the solar market. We generated over $1 billion in cash from 2020 to 2024 in this platform, and we expect 2025 to be another year of positive cash flow. We funded the expansion of our manufacturing assets, with the growing cash flow generated from the assets we acquired for less than $0.10 on the dollar, customer funding and government support all while generating positive cash flow every year. As a result, we have now built a platform for rapidly accelerating growth. We made process advancements to serve a higher-end chip segment in semiconductors, and we are on track to double our semiconductor business by the end of the decade. We activated idle assets to serve the need for domestic solar polysilicon. And we added the capability to transform our polysilicon into higher value domestically made solar wafers. All integrated together on our campus in Michigan. We now have committed customers for 100% of that capacity available in 2025 and 80% of our capacity for the next 5 years. Now because we have built this platform so quietly, while growing our cash flow, our new solar map has not garnered much attention from investors relative to the significance of the opportunity. So let me quantify this sum for you. In quarter 1, we generated $200 million of sales in the map. We expect to triple that run rate by 2027, adding $1.6 billion of new annualized revenue to Corning's earnings power. Now I hope that can help everyone understand the upside potential of that new map. So to wrap things up, we have built a high confidence Springboard plan that is well positioned to provide investors with upside variance. And with that, I'll be delighted to unpack this more with Samik and take some questions.

Thank you. Amazing. Let me -- since you talked about the macro already, I won't go in too much into that, but would it suffice to say given some of the announcements over the weekend or on Monday, in terms of how you're thinking about the macro is a lot more improved relative to where I probably think your thinking was during the time of the earnings call.

It certainly seems that the probability of using that risk adjustment in the near term appears less. That being said, when we build Springboard to provide investors a high confidence plan. We always try to build into that $4 billion an economic cycle because if we don't build that in, right, then I can't give you a super high confidence plan. So yes, it does make it much more likely that we'll be at the 6 than the 4. If that's what you're asking.

Great. So I'll start off on -- and we'll focus on solar. But before I do that, I mean, you did mention on the earnings calls as well that due to the tariff policies, you're seeing early signs of stronger demand for your U.S. made innovations. Maybe unpack that and how much of that has come in just on your sort of solar business versus where else are you seeing that in your broader portfolio?

So we're actually seeing it across our platforms. In optical, we're seeing both new and existing customers look to take advantage of our U.S. origin assets. We're unique in the world, which is the 2 largest and lowest cost fiber facilities in the entire world or both in North Carolina and they're both ours, right? And we have that supported by cable and connectivity. So that's a unique asset. And with tariff pressures and increasing push for domestic content, we're seeing a large number of folks approach us for access to those platforms. And some will be significant enough that you'll see announcements in the coming months. But we're also seeing a similar type behavior in our life science platforms. We're seeing similar type behavior in solar, as you say, we're seeing similar type behavior in our mobile consumer electronics businesses as people seek to source more locally. We're still sorting through the size of this and how much is moving from -- if it's an existing customer, how much is moving from one of our other sources, right? If it's a new customer, then that's found revenue. And so we're still working our way through it. It's too early to embed in our plans, but it is a source of upside variance.

Okay. And maybe I'll just follow up on that. Obviously, there's one part of it, which is -- how much of that is incremental or a new customer versus existing but also where does your capacity stand today to even onboard a new customer?

So it all depends on what the product set is. We still have the capacity in place to support that Springboard plan without having to add significant amounts of capital. That was really sort of the core of Springboard is basically, there was an ability for us to create entire Corning in terms of earnings within the sort of 4 walls of our existing footprint as we filled up that capacity and our enhanced productivity. That still is all in place. So the key thing that will trigger whether or not we need more capacity will be how quickly do we get to that 100% growth from the original EPS at Springboard. The quicker we get there, the more likely it is that we will add to our capacity sets depending on the products. Where you'll hear rumors of our tightness, which I know you run into, is on these new Gen AI products where because of the uniqueness of our product set, we are experiencing more demand than we can keep up with. It is not a capacity situation at large. It is turning our production for these very -- for these new product sets and getting the productivity of that -- of those new product sets up. And that's what's causing that, and we're getting more share than we counted on originally. So that's why you always -- when people complain that they can't get enough from us, which you hear, that's what it is. And then we're out of capacity. It's just that product that's having explosive demand. That makes sense?

Yes. Okay. Let's move to solar, and I do want to take the opportunity to ask you to sort of dive into that opportunity a bit more. It's obviously your newest one. I agree. I mean it hasn't got the investor attention, particularly in terms of the magnitude that you're talking about. So maybe just outline your strategy there, you're thinking about what this -- what the driver for growth is, and then we'll go into maybe a bit deeper into the solar business.

The driver for solar is super simple, right? And the strategy is super simple, right? Let's do the strategy -- we'll just do the driver first. The driver is -- there's 50 gigawatts -- so think of a gigawatt as being about the equivalent of a nuclear power plant. There was 50 gigawatts of solar capacity installed last year in the U.S. Okay? Hardly any of it came from the U.S. So it's all important, right? Very small amount is made here. We looked at that opportunity and said, "You know what, that is not going to stand. People are going to want since it's the fastest growing, and it's the largest incremental adds of capacity people are going to want at least some U.S. source. That then plays to the strategy piece, which is we saw we had the ability to get assets fundamentally for free that we could then activate, turn into solar and because of our deep engineering and technical capabilities, we could move up the value chain to basically be able to displace what largely comes in from China-based suppliers into this market. And so all we're seeking to do is basically take share, we're not counting on solar to grow. We're just counting on us taking share with the domestic production. And therefore, when we say we've signed up for customers to take 80% of our capacity just so far, for the next 5 years, that is showing you sort of how we feel about where we are in that process.

Great. The financial strength of solar companies sometime comes into question. And there's also uncertainty around government policy. I think we've seen some over the weekend, like -- so can you tell us about the risk profile to your solar business, customers, financial risk, technology sort of and government policy, most importantly, which seems to change very frequently.

I think the right way to think about this is -- and Ed did this pretty well at our IR event, is we feel there's relatively low risk to the revenue because we've already signed up for it. Now we've got to bring up these assets, right, and making wafers is new to us. So we've got to ramp those up and sell them. The real impact of government policy will be, what will the relative profitability of those assets be? There are scenarios of government policy, where that profitability will be well above Corning's average. There are scenarios and government policy where it can be a little below Corning's average. But one way or the other, we're highly confident that we'll make more money for Corning investors with the solar platform than we would without it. And then the question just is back to upside variance, how much more can we make? If you were to take a look at the current mark that just cleared ways and means. It's very advantageous in that current market for us. But it's politics, right? So we'll see how the whole thing works out. That's just a matter of how much upside there is for us in profit. Would you think that's fair?

Yes, I would agree. And I also think if you go back to Wendell's point about the number of new installations and how impactful solar is we don't see that necessarily changing. It's a low cost of energy. It's a critical source of energy. The most important thing that's changing is it's onshoring. So for us, it makes it higher probability of our ability to sustain the business and be a critical part of the supply chain. So there are no U.S. wafer makers today. We will be the only U.S. wafer makers. So to the extent it helps with someone else's costs, someone who's making a cell or a module, that makes our capacity that much more valuable to them for things like domestic content and so on.

So if they choose -- if the government, for instance, chooses instead the tariff to get domestic as opposed to an approach of tax credits, they will just work its way out in price, right? So we'll make the money, but then what the margin percent is if you get it in price is a little different than getting it in a credit and that's what's moving you around between where are you relative to our average profitability. Does that make sense?

Yes. A lot of investors I talked to think about the $2.5 billion 2028 target as going from 0 to $2.5 billion and see that as a very steep ramp. Good that you shared sort of what you're doing already, but maybe dive a bit deeper into sort of the $1 billion kind of run rate that you have for that business? What are you doing exactly there versus the incremental sort of $1.5 billion, where that comes from? And what share does that imply of the total market?

Yes. So today, our business is about 50-50 semiconductor-grade polysilicon and solar polysilicon. We started -- restarted assets that had been idled as Wendell described back in around 2021, and we've ramped the solar component. So when we took Hemlock, it was really semiconductor poly and we've grown that from $0.5 billion to $1 billion over the last 4 years or so. We're adding more poly capacity that's coming online this year. That will be a good hunk of what we see impacting us in the back half. And then we're adding the ability to make ingots and wafers, which will also come online, but it will be a little bit slower. It's newer technology, and it's really starting from 0 to where we are. So that's sort of what's driving the growth from the $1 billion. It will be predominantly in solar. Semi-capacity -- semiconductor poly sales for us will also continue to grow. We expect that to double over, let's say, the next 5, 6 years or so. So you'll see nice growth there, but a lot of the growth will come from solar side. And the only other thing I would say is that I think what will allow us to be able to get to that $2.5 billion run rate is mostly the domestic supply chain being built out here. You saw an announcement from us. We signed up with Suniva and Heliene. They're actually building out capacity. So when you take our ability to supply the U.S. 20% maybe of the installed base, that would be like a share target for us, something along those lines.

When we're fully ramped.

Yes, when we're fully ramped. Yes.

Let me ask you one on optical and then I'll open it up to the audience, if there are any questions. You mentioned you have raised the enterprise, the optical enterprise CAGR target at the Investor Day 2025 to '30. The question which you've got, I'm sure, from investors as well is more about visibility into the next year? And what is the visibility that your customers are now willing to provide you, particularly given that your capacity constrained on some of these Gen AI products, like I'm assuming you get a longer visibility on those than others. How would you sort of characterize 2026 or early indications for 2026 shaping up?

We get very good visibility. Having products, people really want improves customers' willingness to share, we find, right? So we have pretty good visibility. I think most of the dynamics is around when you hear different things in the industry. We will experience them differently because of the breadth of our footprint. What happens with a given hyperscaler or a given player in Gen AI, if they let go some leases, some place there or do something like that there is it is more about who's going to get those Gen AI loads. And one way or the other, they tend to find their way back to us. So we have to worry less about which players were aligned with and how each individual player is doing in that particular piece of the industry as we do on really how is GPU growth working in the scale-out piece? Are the clusters becoming bigger? Yes, really good easy visibility for that. I think it's probably one of the most studied things in the world is how many GPUs are going to sell every year. So there you go, there's that, right? And then the real uncertainty we just haven't built into the plan which is does a brand new link fall to optical. And that's why we didn't put the scale up piece in the 30 because that is a technological node that has yet to occur. It would have to occur, which takes a new ecosystem built, it would have to get adopted and our solutions would have to get adopted. So we just don't count on that until we hit the node. Does that make sense?

Yes. Let me see if anyone in the audience has a question. This one here.

[indiscernible]

Are you having any manufacturability issues with it? And is there any margin or pricing from that technology?

Well, now there is an inside baseball question. [indiscernible], good for you. For those of you who don't know, this is a technology that's been studied for many years. I've worked on it personally when it was photonic band gap fibers. And what it's seeking to capture is that the speed of light through air is about 30% faster than the speed of light through glass, okay? And so there are situations that could potentially emerge in Gen AI, where that 30% matters. Today with like high-speed traders and things like that, what we do is we will straighten out, will use very high-performance fiber, and we literally just straighten out the links so that the light doesn't travel as far. And then they locate relatively close, and that is their advantage for people who play in that microsecond sort of game. Okay? There are technical futures in which Gen AI believes that you could end up with clusters that are going to span enough distance that need to be synced depending on where you put the shards, right? And you'd want to have lower latency and that 30% will matter. Technically, I don't know, right? 30% in everything that's in a network, 30% playing around with the speed of light in air versus glass. I'm not convinced as a super powerful value prop. That being said, yes, of course, we'll do it. Right? That's what we do. And that if it does happen, that is complex enough and different enough that it will be a new fiber cable connectivity system that we will be a significant player in. And that will have a different pricing entirely right? So wow, I wasn't expecting that question. Good for you.

Maybe, Wen, staying with optical, you talked about the carrier side of the business. DCI being a big driver of the growth there. Maybe parse that out in terms of your outlook for growth in DCI versus what is traditional carrier spend doing? Is this still a bit sort of depressed relative to what you would expect at the current levels? And do you see a catch-up there eventually as well?

What we see in our traditional carrier business is their deployments are relatively steady. What happened is during the pandemic, they built up inventories. And then they're well above their deployment levels. And what they're doing is they're just sort of been drawing that down which caused a lot of people in that industry suppliers to that industry for that to go through sort of a cyclical downturn. What we're now seeing is that, that inventory looks like from our analysis and direct discussions with them that they will now start purchasing much closer to the deployment levels. We're seeing that in our order books. And we think sort of the ground is there for this business to start growing nicely this year.

Okay. Last question, and I'll make a hard pivot here to mobile consumer electronics, but rather than sort of talking about the industry, your primary customer there, there's a lot of innovation supposedly coming on foldables and there's also a need to go support the customer in additional regions given their exit from China. How are you feeling about the basket of opportunities there? What are you more excited about?

I never talk about anybody who lives in the area code of Cupertino.

Okay. So I will wrap it up there just because we have run out of time. But thank you. Thanks for coming to the conference.

Always a pleasure my friend.

Thanks.