RealMoney Silver - GLW: Good Numbers, Great Outlook

GLW: Good Numbers, Great Outlook
By Bob Faulkner
RealMoney Contributor
1/28/2008 10:23 AM EST

Updated from 8:42 a.m. EST on Jan. 25.

Corning (GLW) reported fourth-quarter 2007 results earlier today that were slightly above Street consensus. More importantly, the guidance for the first quarter (ending March) is materially above current average estimates.

Revenue in the quarter was $1.58 billion (up 16% year over year and 2% quarter over quarter), with pro forma EPS of 40 cents. GAAP EPS was 45 cents but included a one-time tax benefit.

The gross margin in the period was 47.9%, up 390 basis points year over year and essentially flat with third quarter. Higher volumes and more stable pricing were the contributors to gross-margin improvements. The operating margin was 20.9%, up 340 basis points from last year's levels but down sequentially after a one-time gain last quarter.

Cash from operations remains quite solid at about $730 million, up about $100 million from last year's level. The cash account increased about $200 million after a dividend increase and the repurchase of 5 million shares. Accounts receivable declined about $25 million, knocking two days off days sales outstanding (49 days). Inventory dropped about $30 million, reducing days of inventory by five days (69 days).

Within major product segments, the display business continues to drive fundamental improvement. Revenue was $774 million, up 25% year over year and 10% sequentially. Total volumes increased more than 6% quarter over quarter internally and from the joint venture. Pricing was again "moderate" given the capacity limitations. The all-important channel inventory was characterized as being "healthy," with panel makers running at full capacity. Eagle XG (i.e., "green") glass met its production targets at 100% of internal volume and 50% for the joint venture.

Within telecom, revenue was $430 million, up 6% year over year but down 9% quarter over quarter, as expected in the seasonally weaker fourth quarter. While the demand for hardware from the new European FTTC customer increased, it was more than offset by U.S. declines. The much anticipated "Clear Curve" glass had its first commercial shipments in the quarter, but the significant event was the completion of a first test by Verizon (VZ) in a multiple-dwelling unit field trial. A second test is currently being planned.

Environmental revenue was $189 million, up 22% year over year but down 5% quarter over quarter. Automotive applications continue to be strong, but diesel has been sluggish all year.

Management guided the first quarter well above current Street consensus. Revenue is expected to be in the $1.59 billion to $1.62 billion range, or up 1% to 2% sequentially. Pro forma EPS is expected to be in the 41-cent to 43-cent range. Current Street consensus is $1.51 billion and 36 cents. Display output is expected to be flat essentially, with pricing consistent with recent levels. Telecom and environmental are each anticipated to be up about 5%, and life sciences flat to up slightly.

The company is having an analyst meeting in two weeks, so there were a number of questions on the conference call that were deferred pending "more information." Obviously, management is resetting the bar on a number of its assumptions relative to the markets and/or Corning's performance.

As has become the case on most calls recently, management spent a few minutes on the macro concerns. Like most, Corning management has not seen anything to suggest weakening demand for its corporate or consumer products, and it stressed that numerous times on the call.

One area that was mildly concerning, however, from my perspective, was the suggestion that display panel makers are trying to restock some inventory in a seasonally slower period. That suggests that first-quarter end-user demand is not as high as Corning indicates. With the current skittishness in the markets, this issue should be watched by investors very closely for the first sign of end-user demand deterioration.

GLW Preview: Conflicting Themes

Corning (GLW) is scheduled to report its fourth-quarter 2007 results Monday morning before the open with a conference call at 8:30 a.m. EST. Current Street consensus estimates are for revenue of $1.54 billion (up 13% year over year and down 1% quarter over quarter) and pro forma EPS of 39 cents.

In the prior quarter, revenue was $1.55 billion (up 21% year over year and 10% quarter over quarter), and pro forma EPS came in at 38 cents. The gross margin in the period was 47.8%, up 370 basis points year over year and 130 basis points vs. second quarter. Higher volumes and normal pricing were the contributors to gross-margin improvements. The operating margin was 25.7%, up 980 basis points from last year's levels and more than 1,000 basis points quarter over quarter. The operating margin benefitted from lower SG&A as well as a credit from the asbestos litigation settlement.

Cash from operations was about $870 million, or double the prior year's level. The cash account increased about $100 million after a dividend increase and the repurchase of 5 million shares. Accounts receivable increased about $80 million, adding one day to days sales outstanding (51 days). Inventory dropped about $10 million, reducing days of inventory by six days (74 days).

Within major product segments, the third quarter turned out to be a positive surprise in the display business, where revenue was $705 million, up 34% year over year and 16% sequentially. Total volumes increased 15% quarter over quarter, and pricing was better than expected. The all-important channel inventory was characterized as being in "great shape."

Within telecom, revenue was $472 million, up 4% year over year and 8% quarter over quarter, after the divestiture of its submarine cable operations in second quarter. The company initiated shipments to its new FTTP customer in Europe during the period as well.

Environmental revenue was $198 million, up 29% year over year and 4% quarter over quarter, and above expectations. This may have been the result of automobile manufacturers adding inventory ahead of a union strike vote.

Management guided fourth-quarter revenue to be in the $1.50 billion to $1.55 billion range, or down 3% to up 1% sequentially, with pro forma EPS of 36 cents to 38 cents. Display volumes were expected to be up 2% to 5% quarter over quarter, with the price declines in the mid to high single digits year over year. Telecom is normally down in the fourth quarter, and management expected a 10% sequential drop.

On Monday's conference call, I'll be focused on the following areas:

display volume growth and pricing;

substrate inventory at Corning as well as the channel;

conversion level to new XG substrate;

Gen 10 status;

telecom growth for optical fiber and hardware;

status of the new bendable fiber;

revenue growth for automotive vs. diesel truck applications; and

the all-important outlook for all the segments.

There are a handful of conflicting themes coming out of the December quarter. Just how strong was the holiday season for LCD-based products? There is certainly plenty of anecdotal evidence that it was less-than-great for retailers. Is it possible that telecom did a little better than expected with the new European customer ramping? Did environmental fall off because of the inventory build in the third quarter?

Any or all of these will make for a very interesting conference call.