Corning Incorporated (GLW) Earnings Call Transcript & Summary

All right. Good morning, everyone. Day 2 of Citi's Global TMT Conference. I am Asiya Merchant. I cover the tech hardware and tech supply chain here at Citi Research. So really excited to have Corning here. I have Ed here, the CFO of Corning. We have Corning's IR and members from the other management team as well in the audience. Corning has been a great stock and this fireside here is questions that I've prepared. I'm going to leave some time for Q&A. However, I do request if you can please raise your hand so we can bring the mic to you. So I'm going to turn it over to Ed first. He has some prepared comments, and then we'll get started.

Good morning, everyone. So first of all, it's great to be here today. Thanks for joining with us. I just want to note that I may make some forward-looking statements today and that you should review our filings on our website to see potential reasons that actual results may differ materially from the perspectives that I offer. So look forward to your questions, and thanks for joining.

All right. So I'll kick it off. We've been asking all our companies, especially companies like Corning that reported a very strong quarter with calendar 2Q. You guys are guiding to slight acceleration as well on the year-on-year growth rates. You're tracking well ahead of your risk-adjusted springboard plan. I think it's closer to sort of the internal plan that you have with your management. Just Ed, as you sit here in calendar 3Q and you reflect on all the puts and takes that were to the demand, let's say, 6 months ago, right? I mean there was tariffs, there was AI rolling off. There was a whole bunch of other stuff, currencies, FX, all that stuff, you guys had yen exposure. Like how do you think about how demand has evolved over these past few months relative to kind of what your expectations are and as you're sitting here in calendar 3Q?

Yes. Thanks. So if I think about our markets sort of broadly and in general state, we came into the year thinking we would see growth in optical communications, some growth in specialty materials or mobile consumer electronics space and certainly some growth in display. And I think we haven't seen a significant change in the end market demand, certainly not in display or in specialty materials. Automotive, sort of a flattish market for light-duty vehicles and down for heavy duty. And again, I don't think much has changed from the beginning of the year. The place that I would say is stronger or maybe has surprised us a little bit to the upside is in optical communications. In the carrier space, we've seen carriers essentially deplete all of the inventory they've had, which means they're buying now to their demand level, and we're starting to see their demand or their deployment levels go up a little bit. So that's a little better maybe than when we started the year. I also think, of course, in the Gen AI space, we've just seen that demand continue to accelerate and grow. So as I think about the back half of the year, 6 months later, the demand environment, I would say, is better than we would have said coming into the year.

Okay. And there's always concerns about regulatory stuff. I mean we've heard a lot about China, U.S. geopolitical conflicts. Just if you can shed some light on that because I do know you have obviously fabs in China. How do you guys think about your exposure to China, just broadly speaking, given the context of geopolitical conflict?

Yes. I think a good way to think about Corning is, first of all, we tend to locate our manufacturing facilities where our customers are. It's acted as a nice buffer or insulated us very much from the tariffing environment. We've talked about that direct impact being very minimal, $0.01 to $0.02 in the second quarter is a good way to think about it, $10 million to $15 million of income, net income for us. Because of that, we tend to operate in an environment where the customers are making -- the products that we sell into are being made in that particular jurisdiction. So the geopolitics are less impactful for us really across the Board. And we also are serving all of those markets. We actually have a big business that sells into China, certainly in display, consumer electronics and autos. And I don't think the environment has really impacted end market demand. So I talked a little bit about how we're seeing that demand really hasn't changed that much other than in optical accelerating. I don't think anything in terms of tariffs or just geopolitics has really changed the demand environment for us.

All right. Since you talked about domestic manufacturing, I think over the summer, you guys obviously had a positive announcement as it relates to your demand for domestic manufacturing. You talked about where you're seeing strength there. And you specifically talked about your investment -- the Apple is making investments in your plant in Kentucky, I believe, yes, where there is a lot of display glass right now that's being manufactured. Could you -- I mean, when we saw that press release, we're like, okay, you already do a lot for Apple. Obviously, you're on all the iPhones, et cetera. But just high level, help us understand how that's incremental to your business here because they've made investments for the long term here for you.

Yes. Maybe stepping back, we have 34 advanced manufacturing facilities in the United States. Really, the only one of our markets that isn't served out of the United States is the LCD, the display business. That's primarily an Asian-based business, China-based business. So we've actually seen an increase in inquiries and demand for our U.S. assets kind of across the Board. I'm sure we'll talk a little bit about solar. We're certainly seeing demand there. You saw the Apple announcement and maybe just a couple of comments on that announcement. So Apple has committed $2.5 billion for us to make all of their cover glass and the glass for their watches, so cover glass for smartphones and the glass for their watches in our Kentucky facility, which is a significant increase in volume coming out of that facility. It allows us to invest in capital in technology and they're funding a lot of that investment for us. It also allows us to increase our workforce in the U.S. and to leverage an asset that wasn't fully utilized. So all that is good. But the thing that I think is probably the most important thing is we're setting up an innovation center. So we'll co-innovate with Apple for future glass compositions, future devices, it allows us to essentially be really close to a very important customer, and they're very invested in this facility. We'll move capacity to the U.S. We can use that capacity in other places, for example, in auto glass or other -- for other consumer electronics customers out of Asia. So I think it's actually good financially for us in the short term and midterm, but it's also really good in the long term because of the innovation component of that investment.

Okay. And just on that, does it free up R&D dollars that obviously Corning invests in, like you mentioned, auto glass, solar, optical. Does it free up R&D dollars that would have gone towards this consumer electronics to these other ventures that you have?

Yes, I think it's a good way to think about it. We like to invest long term. So regardless of the economic cycle, we try to preserve our RD&E dollars and even to some extent, our capital dollars. So we spend about $1 billion a year in RD&E regardless of sort of the economic environment because we want to make sure that we're ready for the next technological node in whatever industry we're serving or in certain industries where today, we're not necessarily participating. So to the extent we can have customers co-innovate and help fund some of that, yes, it definitely allows us to take those dollars and put it in other places.

Okay. Just before we talk a little bit more about optical, I just want to understand recent geopolitical, I know you mentioned it hasn't been a much bigger this thing, but I think there was a press release or something out there yesterday about China, U.S. optical. Is this something -- I know your exposure to China and optical is probably negligible or very, very low, and you can correct me there. But on display, because you have fabs in China right next to your major panel customers, does this dynamic get affected by any of the antidumping that's coming for optical?

No. That announcement was specifically around optical fiber and that duty has -- that dumping duty has been in place before they're just sort of updating it. And the most important thing is we're making what we sell predominantly locally. So there's really not an exposure for us in any material way from that duty. It doesn't really change our environment or our outlook at all.

And just to be clear, your exposure on optical fiber to China is...?

Not that significant.

Yes. Okay. That's what I remember. All right. Switching to optical. I mean that's been obviously a great story for you guys here. You've seen some M&A in this business recently. We hosted Amphenol earlier yesterday as well. So just help us understand how material is this AI opportunity for Corning. Obviously, you've seen very strong growth. How sustainable is this growth over the next few years?

Yes. Maybe if I go back a little bit, we have an optical communications business that has two segments, Enterprise and Carrier. Our Enterprise segment is predominantly data centers. If you go back to 2023, it was about $1.3 billion or so in sales. Last year, that business grew about 50%. So $2 billion or so enterprise business. That growth was all driven by Gen AI data centers. That's the sort of way to think about it. First half of this year, that level of growth continues. In fact, actually, we're growing at a higher rate than that in the first half of 2025. And we expect that growth to continue at a very good clip. We'll end the year with more than a $3 billion Enterprise business, right? So that kind of growth is what we're seeing today, and I think we have pretty good visibility for the next year to 2 years, and I would expect the growth to continue. We put out a growth CAGR for this business about a year, maybe 16 months ago, that was 25% over a 4-year window. We upgraded that to 30% and we've been outperforming that. So at some point in time, we'll come and update how we think about it. We don't want to change that outlook quarterly. But clearly, we've undershot the opportunity size there. Now I also think if you want to think midterm and long term, there's a couple of ways to think about it. First of all, what's driving the growth is what we call scale out, which is essentially just building larger data centers with bigger Gen AI clusters, more GPUs. That's what's really driving our growth. There's -- that's going to continue for -- certainly for the next several quarters, years and so on. But there's an opportunity for scale up, which is optical replacing copper in the racks, kind of the early phases of co-packaged optics and then you have generations of technology after that. We also see that as a significant opportunity, at least as big an opportunity as our existing Enterprise business. So the ability to double or triple that Enterprise business by the end of the decade or certainly as you go into the beginning of the next decade. So I think there's a significant amount of growth ahead of us. Now I always want to be thoughtful that it won't be a straight line of growth. We won't necessarily see 50% quarter-over-quarter or year-over-year every single quarter, but we think the market opportunity is significant. And that is really all inside the data center, and that's part of our Enterprise business. We also see growth outside the data center, data center interconnect or long-haul connecting data centers over long distances. We include those sales in our Carrier segment. So it's still Gen AI related driving growth, but not part of that enterprise growth math I just shared.

Okay. And then just to -- again, just talk about within the data centers, you have increased need for connectivity. Do you see -- as we transition, there's GPUs, there's a new GPU every year. There is also ASICs. Like anything you can help us understand about the content variability between the two as well as does each iteration of GPU, does that drive more connectivity content?

Yes. So -- in a Gen AI data center, what's driving the scale-out growth today is a combination of more GPUs and the fact that to run a neural network, you need to actually connect every GPU to every other GPU. So it creates like a web of connectivity. So there's sort of a content per device, if you want to think about it that way. There's an increase in content per device for us and you actually have more devices or more GPUs being installed. So as those technology generations increase, that also increases the amount of fiber connectors that need to go into the data center. When you get into co-packaged optics, which is, again, generations from now in terms of technology, we see the increase coming additionally in just more fiber because today, some of that connectivity is copper. So you're sort of increasing the market opportunity because of the number of GPUs, the technology within the GPUs and then the fact that, that technology moves optics closer and closer to the box or eventually inside the box.

So AI has been a great tailwind for Corning for a lot of the other companies as well, but it's also very lumpy, right? And you can see a lot of companies talk about no transitions that are happening in GPU level that ends up eventually being a tailwind, but in the near term, could result in maybe underutilization of certain assets. So how do you manage that on the optical side for your business? Any kind of lumpiness? And what are you thinking about as we're doing these transitions with every chip iteration?

Yes. I mean, generally, philosophically, we want to have all our assets full. I mean that's kind of our mode. It's expensive to melt glass or to make fiber. So we want to put capacity in when we know we can sell it out. And we also philosophically look to get assistance from our customers to actually add capacity. So we've kind of made our business model, a lot about making sure others have sort of a vested interest in filling our capacity, whether it's in the form of some kind of a take-or-pay contract or cash upfront to help us put assets in. That's just philosophically how we think about it. In optical communications, specifically, we have different types of capacity. We have connectorization, which is kind of what goes on the end of the fiber cables. That capacity is not that expensive, and we really don't want to run out of that. So we're willing to take a little bit more risk and ensure we can capacitize. In fact, with the new products we introduced for Gen AI, smaller fibers, smaller cables and smaller connectors, we're actually continuing to ramp that capacity. It's in our current run rate because, again, the demand has sort of exceeded our expectations, if I go back, let's say, a year, 1.5 years ago when we introduced these products. When we add cable or we add fiber, in particular, the cost of doing that is a little bit higher. So we'll be very thoughtful about adding the next tranche of capacity, and we'll look to derisk it in some way, getting assistance to fund that capacity or ensuring that, that capacity is sold out. Right now, we're not necessarily planning to do that. But when we do that, we'll share our thoughts a little bit with you all on how we expect to sort of derisk it.

Because right now, you're still ramping, like you talked about.

Yes.

Okay. On the other side, on the DCI side, it was very interesting at your Investor Day where you showed where the data centers were previously just located in certain regions. Now they're being spread out across various geos, various cities just because of power needs. Just if you can click on that. I think the Fiber World Association had some very interesting comments on how big that business could be. And I know you've talked about it at your Investor Day as well. So can you elaborate on how big this opportunity could be? It obviously sits within your carrier portion of your optical. But just if you can -- because this is something that's new, and that's not just the typical fiber-to-the-home broadband that carriers are deploying.