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Corning: Solid Quarter, Sour OutlookCorning: Solid Quarter, Sour Outlook

Quarterly earnings are admirable. But analysts say the company may be leaning too much on fiber

April 27, 2001

4 Min Read
Corning: Solid Quarter, Sour Outlook

Corning Inc. (NYSE: GLW) this morning reported better-than-expected financials for its first fiscal quarter 2001. But executives say the company's not out of the woods. And analysts think Corning may be counting too heavily on its fiber business to pull it through.

"We have three messages today," CEO John W. Loose told analysts on a conference call before the market opened. "One, our quarterly results were excellent in a very tough environment. Two, our outlook is deteroriating, as the telecom capital spending slowdown worsens. And three, we are taking action in this time of weakening demand."

Overall, Corning's pro forma earnings per share for the quarter were 29 cents, up 26 cents versus last year and a penny over analysts' consensus estimates, according to Corning. Sales were $1.9 billion, up 26 percent.

Executives said Corning achieved these results in large part by reallocating the fiber originally meant for North American customers that canceled their orders to international carriers.

Corning execs hinted that one of the quarter's cancelers may have been Aerie Networks, which struck a $1 billion contract with Corning in June (see Aerie Places $1 Billion Fiber Contract). Aerie's changed its business plan, Corning says, and will now build out its network by preselling capacity to customers. "We wish them well... We have no forecast for further demand from Aerie this year," said Wendell Weeks, executive VP for opto-electronics (see The Top Ten Movers and Shakers in Optical Networking)

Corning reported quarterly net sales of $1.433 billion from its telecommunications business, which includes optical fiber and components and accounts for roughly 74 percent of the overall business of Corning.

This figure represents a 7 percent drop from last quarter's net sales for the segment, but Corning says fiber's still in good shape, considering the economic environment. Revenues from fiber cable were up 50 percent sequentially, to $875 million, and the overall volume of fiber shipped was up 25 percent this quarter. Further, sales of the company's premium Metrocor and Leaf fiber, which accounts for about 35 percent by volume of all the fiber Corning ships, were up 30 percent year over year.

When it comes to the components part of its telecom business, Corning says the economic slowdown has hit it harder. It blames softening in the optical amplifier market for a 35 percent sequential drop in revenues -- to $208 million.

Execs were careful to stress their hopes for Corning's newer components, such as wavelength management switches and dynamic spectral equalizers, in the future performance of the company. New DWDM modules and Raman pumps are in trials, and Corning's 80-channel wavelength-selectable switch is in "design activity" with about five system customers, Weeks said.

In answering analyst queries, Weeks also mentioned growing relationships with Ciena Corp. (Nasdaq: CIEN) and ONI Systems Inc. (Nasdaq: ONIS). And, interestingly, he hinted that Corning stands to fare well in supplying Marconi Communications PLC (Nasdaq/London: MONI) with parts for a high-channel-count DWDM system designed for British Telecom (BT) (NYSE: BTY).

To cope with the demand problems in the market, Corning is cutting costs across the board. Capital spending will be cut by $500 million. The company's plans to expand manufacturing capacity for photonic components will be stalled, and about 1,000 employees will be cut from the photonic components roster, bringing total layoffs this year to 4,300 (about 11 percent of the the workforce, and 30 percent of the photonics business staff).

The company will not cut staff or expansion costs in the optical fiber business, executives said.

Corning hopes these moves will help it to reach EPS next quarter of 18 cents to 21 cents on sales of $1.8 billion to $1.9 billion.

In the longer view, Corning's optimistic about all aspects of its telecom business. The volume of fiber sold will grow 15 to 20 percent for the year 2001, execs say. They're particularly optimistic about selling in China, where the company's won a number of new contracts with carriers, including China Unicom, China Telecom, and China Netcom. And while growth will be flat for the year in the components business, new products and customer activity are seen as an upside.

While analysts applaud Corning's quarter, their prognoses are cautious. "The assumptions they're making about the growth of the fiber business are definitely open to question," says Max Schuetz of Thomas Weisel Partners. He sees some exposure for Corning in putting so much emphasis on fiber while not reducing costs in that segment. He notes that the company risks spending big on the high fixed cost of making fiber and then losing customers due to weakening demand.

At midday, Corning shares were trading at 20.31, down 0.69 (3.29%).

- Mary Jander, Senior Editor, Light Reading http://www.lightreading.com

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