Corning Beats but Fails to Inspire

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Corning (GLW - commentary - Trade Now) reported third-quarter 2009 results this morning that were easily ahead of Street consensus. However, the limited commentary on the fourth quarter suggests that we should expect a sequential decline.

Revenue in the quarter was $1.48 billion (down 5% year over year but up 6% quarter over quarter), with pro forma EPS of 42 cents (GAAP = 41 cents). The gross margin in the period was 40.5%, down about 680 basis points year over year and 70 basis points sequentially. The sequential decline was largely due to accelerated depreciation for the Schizuoka plant impacted by an earthquake. The operating margin was 15.6%, down 680 basis points from last year and 20 basis points from second-quarter levels.

Cash from operations was $530 million, down about $230 million from the year-ago period. The cash account decreased about $140 million, to $2.93 billion. Accounts receivable increased about $45 million but days sales outstanding was flat at 51 days. Inventory decreased about $30 million, reducing days of inventory by eight days, to 63 days. The supply chain inventory is thought to be at "appropriate levels."

Display revenue (46% of total revenue) increased 1% from the second quarter's strong rebound. Internal volumes and prices were flat sequentially as demand has remained strong for LCD TVs. SCP (joint venture with Samsung) volumes were up from second-quarter levels with prices flat. Management estimated that the supply chain inventory stood at about 800 million square feet exiting the quarter vs. 650 million square feet in the second quarter.

Telecom revenue (30% of total) was up 3% quarter over quarter and was in line with expectations. Demand remained strong in China and in some private networks but fiber-to-the-home applications were weak. Environmental revenue (11% of total) was up 27% sequentially and was well above expectations. However, this is believed to be driven by non-recurring events (e.g., "Cash for Clunkers" and some regulatory changes in 2010). Specialty Materials (6% of total) was also above expectations as demand remains strong for the "Gorilla Glass" as well as the rebound in demand from semiconductor manufacturers. Life Sciences (6% of total) revenue was up 14% sequentially as the business bounces off its recent bottom.

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At the time of publication, Faulkner had no positions in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.