Corning Incorporated (GLW) Earnings Call Transcript & Summary

Day 2 of Citi's TMT Conference. Asiya Merchant here. I lead the I lead the tech hardware and tech supply chain research here at Citi. Great to have all of you here with us today. On the stage here with me is Corning's EVP and CFO; Ed Schelsinger. We also have members of Corning's management here in the audience. I'm going to kick it off. I'm going to turn it over to Ed he has some prepared remarks, and then we're going to go into Q&A. I'll leave some time for investors to ask questions as well. Towards the end, please do raise your hand so we can bring the mic to you. Ed?

Thanks, Asiya, and thank you all for attending. Thanks for having us today. I just want to make a couple of comments. First, I may make some forward-looking statements I suggest that you review our filings and our website for potential reasons why actual results may differ materially from anything that I say today. Secondly, I wanted to just note that we had a customer announcement yesterday with Verizon. Hopefully, you've seen that announcement. It is a multiyear, multibillion-dollar deal to help Verizon build out a long-haul network, a new long-haul network that will support both their broadband part of the business as well as data center interconnect. And for us, it's really a great relationship with Verizon. We've actually been a supplier to Verizon had a relationship with them for 30 years. And here we are today, helping them build out the AI data center interconnect network of the future. So I think that's great. It's one of the reasons why we like these long-term relationships, and I'm sure we'll talk a little bit about some others as well today. The other thing I'd mention is we have previously shared that the data center interconnect opportunity for us was about a $1 billion opportunity, $1 billion a year by the end of the decade. Well, clearly, with the extension of our Lumen agreement, an agreement we signed with Zayo and announced a while ago and this Verizon deal, we're going to get to that number much sooner than the end of the decade. And I think the opportunity is bigger than that, and we'll come back at some point. We'll talk a little bit about what that means. So I think that's good news. We also -- I want to mention, in the context of our long-term financial plan that we call springboard, we had shared with investors that we expected to hit a $20 billion run rate by the end of this year. $30 billion by the end of '28 and $40 billion by the end of 2030. And deals like this really underpin our success and our ability to deliver those numbers, they give us more confidence in our ability to do that. We're not going to upgrade the $30 billion or the $40 billion today, but we'll certainly come back and share our views on how those things are playing out over time. But we do expect to deliver the $20 billion a quarter early here in the third quarter. And if you take that math and you compare it to the guidance we gave back in July, it means we're at the high end or slightly better than the sales guidance that we gave back in July. So the third quarter is running really well. And we expect the fourth quarter to be bigger than the third quarter. So we expect sequential growth, and if you take the year-over-year growth rate that we've been seeing in the second quarter, in the third quarter, we're in the high teens, and we expect that to continue as we go into the fourth quarter and into next year. So a lot of momentum at Corning, and we're glad to be here today. So I'll turn it back over to Asiya.

Great. That was a great segue into the questions because the first one was, I mean, you guys are doing high teens like you said, year-on-year growth, EPS growing even faster than that. As you kind of think about the springboard plan that you sort of provided the 2030, '40 back in May, like how are you thinking about end markets? Maybe you could just dig in a little bit where demand has been stronger for you guys, it underpins better confidence in the springboard plan that you're talking about. So just help investors think about that. Where is demand much stronger, maybe demands may not a little bit stronger in some of those end markets?

Yes. So if I start with optical, clearly, the demand is very strong. We had an investor event in May, where we laid out our Springboard plan, and we felt really good about the optical space, the enterprise space, as we call it, our data center the AI data center space. And we continue to see really strong momentum there. Orders continue to pick up. We signed -- we're continuing to sign agreements, and we feel really good about visibility going out the next several years. So that's all strong, and I'm sure we'll spend some time talking about that as well. And when I think about a customer like Verizon, that moves into the carrier space in optical and demand is also really good in the carrier space for us as well. In the solar space, I think the market conditions continue to get better. The demand for solar energy is strong. There's also been continued regulatory announcements. There was a Section 232 ruling that helps pricing in the solar space. So that's another space where I think the market is really good. And we have work to do to build out our capacity continue to take advantage of that. But I think the market environment is very conducive for success for us there. In our Glass Innovations segment, we really have a number of markets. We have the display TV market, which remains solid, continued good performance. The panel makers continue to run at relatively high utilization rates. We continue to see screen size growth. So in the display space, we feel pretty good. I think you all know that in the handheld space or consumer electronics, the markets are actually down. We're expecting them to be down year-over-year, primarily because of the price and shortage of memory -- we don't really see a change in that from how we've been thinking about it, but we'll continue to outperform those markets as we sell content into the handheld space. So we'll sell more dollars per device, so we'll do better than the underlying market. We also supply the semiconductor market in our advanced optics business, and that actually is a pretty strong market, and I expect that to be a grower for us over the next several years. So I think our glass innovation business will grow despite maybe the handheld market not being that strong. Automotive remains muted. No change in our view there. Heavy duty, maybe slight recovery. We're starting to see that in North America, but we're not expecting a significant change there. Again, we'll outperform the market as we sell more content into the market with respect to emissions as well as glass into the auto space. So that's probably the view. So definitely, overall, on average, a little better but mixed certainly across the board.

Okay. And then I know we'll jump into the DCI and optical in a bit here. But at the event back in May, you guys have the springboard plan 2030, '40, but then you also layer in kind of like a high confidence plan an internal plan just help investors understand like what needs to happen for that gap to narrow? I mean, clearly, '26 is entering very soon. But like when we look into the '28 and 2030, what needs to happen for that gap to sort of narrow between your high confidence plan and the internal plan?

Yes. I mean I think signing deals like we did with Verizon and have done with other customers and have others in the works, that certainly gives us more confidence that we can get to that the upper bound and maybe beyond those numbers that we shared. I think the largest variable, especially as you go out to the end of the decade is CPO or photonics what happens with adoption of those types of products. We are planning to build out a $10 billion business where today, we have no sales by the end of the decade, selling products into NPO and CPO applications, so inside of a server tray. And I think the timing of that and the adoption rate of that will have an impact on our ability to close that gap. I think the good news is -- we're starting to see a lot of activity. We're starting to build out our supply chain. And hopefully, next year, we'll start to see some sales there. We'll have a little bit of a better sense for how that plays out over this next several years.

Okay. Great. And then I've been asking all the companies that are presenting here that I'm hosting about the AI demand. And clearly, it's a big driver for you guys, especially in your optical segment. You just talked about the deal with Verizon. Just as you think about it, it was a strong driver for you guys in 2Q as well. What gives you the confidence that this AI has durability to it. It's not just a short-term capacity push because everybody is obviously constrained for capacity, including fiber?

Yes. I think there are a lot of vectors or ways we try to triangulate around the certainty of demand. First, our orders are going up. So our customers are telling us they want to buy more to build out their data centers. That's a good data point, and it gives us good visibility into the next -- certainly the next 2- to 3-year period. Our customers are also signing up for long-term agreements. They're giving us cash in some cases, to build capacity and reserve that capacity. So that is also a good sign. I think -- if I think about it from a market perspective, token usage is going up quite significantly the companies that are generating revenue from AI, they're doing really well. So there seems to be adoption, and the opportunity continues -- the potential opportunity continues to increase. I think a lot of folks who predict the spending into the space are continuing to raise their targets for whether it's -- how many XPUs or accelerators will be deployed or how much data center capacity will be deployed, those numbers continue to go up. So I think that's also important for us. Now we're realistic and we want to risk against potential slowdown. So we do things to ensure that we're prepared for that, but we want to also be able to supply upside to the extent that it's bigger than what we have in our plan. So we're managing that as we add capacity, and we're trying to stay close to how we think the infrastructure gets built out.

Before we jump into enterprise AI, we can talk a little bit about DCI first because that is the major agreement that you guys signed yesterday. You talked a little bit about that $1 billion opportunity would be sooner -- just help understand investors understand the difference when we think about DCI versus traditional carrier fiber-to-the-home demand that is part of this Verizon deal, how should we think about the ratio between that -- what's more beneficial for Corning as you guys are deploying both on the carrier side, both on the broadband as well as on the DCI side.

Yes. So first for us, we have a lot of -- we are Corning as a technology company at its heart. We innovate, we introduce new products. We tend to lead in the industry or in the space in the market that we serve. So we have a very dense fiber cables. We introduced those inside the data center. We're selling those to Lumen for their DCI interconnect. So it allows them to have a lot more fibers packed into the same diameter cable. And that's one of the reasons why we think we're successful in the DCI space. Now if I think about Verizon, they're going to do both broadband and genAI, so they want a lot of fiber. So they want to do their deployment and get the maximum out of that. And I think that's one of the reasons why our innovations are successful and we're able to take that business. I don't know that I would say DCI or fiber to the home, one is necessarily more beneficial. We like to sell a solution. So a fiber-to-the-home solution is a good outcome for us in both Verizon and AT&T have talked a lot about passing more homes by the end of the decade. So we expect to continue to see growth in the broadband space that we like. If to the extent we can sell full connectorized solutions to someone like Verizon for fiber-to-the-home, that's a great outcome for Corning. And data center interconnect is really important because if we can connect data centers and allow the hyperscalers and others to continue to build that out, also really important for us. So I don't know that I would say one is necessarily better than.

Okay. And then you have talked a lot about enterprise optical. Obviously, you've provided some interesting stats at your Investor Day, you could see that market growing 1.3x to 1.5x GPU growth, you talked about large clusters, bandwidth growth. Which one of those drivers do you see as the biggest -- most favorable development that's going on since maybe the Investor Day? Is it bandwidth clusters? Is it -- or sorry, bandwidth growth, clusters, scale-up optical? How are you thinking about the growth drivers there?

Yes. I think longer term, so certainly, let's say, from now to the end of the decade and beyond, scale up, photonics are going to be the largest driver, the growth driver. It adds to our TAM significantly. So if I think about what we sell today, your -- the TAM we will have in the future as optics begin to replace copper inside the data center, that TAM is a multiple of what we have today. So that's the largest driver. I would say what's driving our sales today, let's say, 2025, '26 into '27 is scale out of the network, larger data centers, more GPUs, those GPUs need to be connected to each other. So much more fiber is being sold. And as you get into the larger cluster size, which we expect to see, $130,000 is a good barometer, you add another layer to the network, so you add more fiber even just in the scale-out part of the network. So that is definitely happening, and that is driving our growth now, and we expect that to continue certainly in the short term. And I would expect scale up of the network to begin as you get into the end of next year into 28 through 2030. And then as I mentioned earlier, photonics is a huge driver, and we'll learn more quarter-over-quarter, and we'll be able to share our perspective. And you should certainly listen to what a lot of the large players, NVIDIA, Broadcom, et cetera, are saying when they talk about deploying their product sets.

And I know Wendel often talks about, if I could sell more, we would buy more. And you guys have talked about increasing fiber capacity even connector capacity. I think you said connectivity capacity by 10x, fiber production by 50%. What are the time lines for these ramps to happen for these production to catch up to demand?

Yes. So we have been adding capacity, certainly, the last several quarters, maybe almost a year now, kind of quarter-over-quarter, we've been bringing on capacity. It's primarily been able in connectivity as Asiya mentioned, we're committed now to significantly increase our fiber capacity. We're doing that here in the U.S. We're the world's largest, lowest cost fiber factory is. So I think that actually sets us up really well to supply that $40 billion opportunity and beyond. The net fiber capacity will start to come online in not that distant future and certainly continue out over the next several years. We are not fiber constrained today. We expect to be, and that's why we're bringing on that capacity. It's tied to our customer agreements. We're also adding cable capacity and connectivity capacity. And as you mentioned, we're significantly increasing our connectivity capacity as we expect scale up to drive a lot of growth, and that's where we expect to really be constrained relative what our capacity is today. Another thing that I would mention is a lot of our long-term agreements and just in general, require us continue to do technology work and advance the types of connectivity that will be required. So if I think about moving inside of a switch tray or a server tray, you're going to need different connectors, you're going to need different optical components, and we're innovating to bring those things to market. We expect to be a leader in that. And I think that's part of our capacity add as you go out towards the end date.

And when you think about the development of all these various productions and whether it's connectors, whether it's on the fiber side, are there things in your supply chain that need to catch up as well so that your -- the demand is fulfilled as you see it as you see your own supply coming online?

Yes. I think the biggest thing that investors should watch is the build-out of the CPO supply chain. I think that is the largest build out certainly in the passive optical space that needs to happen. Some of that is us, some of that is componentry that we may purchase. We may ultimately make ourselves. That sort of doesn't exist today, certainly the scale that is required does not exist. I think that is the largest bill. We're in the midst of doing that. I don't see anything that seems like a showstopper, but certainly, there's a lot of work that has to happen for that to occur to be able to hit that $10 billion run rate we talk about or to hit the levels of growth that you'll hear in video talk about things like that.

Now some of your peers, whether it's Prismian, Sterlite, for example, they have also beefed up domestic fiber production capacity fiber and cable, I would say. So when you think about your own fiber and cable production coming online, what -- how do you think about the supply demand? How are you making sure Corning is managing that risk so we are not oversupplied by, let's say, fiber and cable?

Yes. So we're fully integrated. We're really the only fully integrated supplier. We make fiber, we make cable, we connectorize it. Most of our competitors either make only fiber or fiber and cable or they make connectivity and they purchase their fiber, right? So that's sort of the way the industry is set up. There are some Japanese competitors that are integrated, but they're much smaller or much lower scale than us. So for us, the primary thing is we plan to consume the fiber we make into connectivity solutions, which are tied to these long-term agreements. So I think we're in a good place. We're managing our capacity relative to what we expect our demand. I think it's okay that others are adding capacity into the system, but I don't think of their risk profile necessarily as the same as ours.

Okay. And then when we talk about AI and build-outs of data centers and consuming cables or consuming connectors, there is a lot of lumpiness, broadly speaking, some of the on the server side, on the compute side, people will talk about customer-readiness and delays. Like how does Corning think about managing the build-outs of these large data centers, clearly, they tend to be working capital intense as well? I know you're very focused on free cash flow generation.