Corning Caveats Rain on Earnings Parade

Despite a strong earnings report, investors have panicked over next-quarter guidance. Are they overreacting?

January 25, 2001

4 Min Read
Corning Caveats Rain on Earnings Parade

Corning Inc. (NYSE: GLW) announced strong earnings last night (see Corning Beats Q4 Estimates). But the company's cautious predictions for the first quarter of 2001 led investors to hit the selloff button soon after.

First, the good news: Growth in net sales for Corning's telecommunications segment, which includes fiber and photonic components, jumped 73 percent to $5.1 billion, over the fourth quarter last year. Net income for the year for the segment rose 119 percent.

Corning says its fiber sales for the quarter were $185 million, up 74 percent from the fourth quarter of 1999. Sales of photonic amplifiers and other optical components were $320 million, more than double what they were at the same time the previous year.

Overall, Corning reported net sales of $7.1 billion for the year, a 50 percent improvement on net sales of $4.7 billion for 1999. Corning's total quarterly revenues were $2.1 billion, up 52 percent over 1999's fourth quarter and an increase of 36 percent year over year.

Corning also reported pro forma net income for the year was $1.1 billion, up nearly 110 percent from 1999. Earnings per share (EPS) for the year were $1.27, versus $0.68 for 1999.

Now, the problem: Corning says that despite these strong figures, it's got to "widen" its guidance for the first quarter of 2001 to 28-31 cents per share, from 29-30 cents originally predicted. And even though the company is reaffirming estimates that pro forma EPS will be $1.40 to $1.43 on $9 billion revenues overall for 2001, it's got to reduce revenue expectations for the telecom segment. Instead of doubling, as predicted last month, Corning says the segment will grow 75 to 90 percent.

Corning says the reason for this is that several of its key customers, which include Alcatel SA (NYSE: ALA: Paris: CGEP:PA), Ciena Corp. (Nasdaq: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), and Marconi Communications PLC (Nasdaq/London: MONI), among many others, have very recently told the company that their orders for optical fiber and components won't be matching up to original expectations. The reason for this, Corning says, is that the carriers who buy from these system vendors aren't ready to make commitments in capital spending for 2001. Instead, they're holding off, telling equipment makers and OEMs they have to wait and see.

On top of this, Corning says "a weak retail environment" is affecting other segments of its business, such as LCD and TV glass.

Big deal? Corning thinks not: "We're widening our overall estimates by 3.5 percent. That's not a lot of variability," said Wendell Weeks, Corning's executive vice president for opto-electronics (see The Top Ten Movers and Shakers in Optical Networking) in a conference call this morning. And Weeks scoffed at hints that 75 to 90 percent growth year over year was a "weakening" of Corning's value proposition.

Weeks outlined Corning's strategy to deal with the situation: Any of the overflow resulting from orders of fiber and components that aren't taken up by U.S. customers is being peddled internationally in an effort to widen the company's scope and customer base. Weeks says a couple of "very large opportunities" are pending in Asia, particularly in China. Europe also presents a rich mine of untapped potential.

Weeks also reiterated Corning's fiber success story (see Corning Still High in Fiber). Particularly strong is the Metrocor fiber product, which Weeks says Corning can't make fast enough to meet demand, either domestically or abroad.

Analyst reactions to Corning's news have been mixed. Several, including Merrill Lynch & Co. Inc. (NYSE: MER) and Salomon Smith Barney, mildly downgraded the company this morning (from Buy to Accumulate and from Buy to Outperform, respectively).

Others see the news as part of an ongoing correction of inflated margins. "Investors don't like uncertainty," says Lawrence Harris, vice president at Josephthal & Co.. "Corning remains a leader in the fiber optic space. It is a core long-term holding. In the near term, there's a slowdown in general economic activity that affects a whole series of sectors and companies. Corning's no exception."

By noon today Corning stock was trading down 10.25 (14.62%) to 59.88.

-- Mary Jander, senior editor, Light Reading

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