Corning Touts China, Rips Analyst
The Chinese market took center stage during the second-quarter earnings report from Corning Inc. (NYSE: GLW) this morning.
Sales in China helped Corning show a 30 percent year-to-year increase in fiber revenues, offsetting a widening gap in U.S. and domestic sales. And in an unusual move, Corning executive VP Jim Flaws devoted a substantial part of his introductory remarks to attacking a report on Corning's fiber pricing in China, issued last week by Morgan Stanley Dean Witter & Co. (see Corning Price Cuts Scrutinized).
That report, written by analysts David Jackson and Jason Yablon, states that fiber prices worldwide are under pressure and that Corning slashed prices by 50 percent on fiber in China in a deal with the country's Ministry of Telecommunications.
Without naming the report specifically, Flaws referred to its specifics and contradicted them. "That report was inaccurate... Fiber prices are stable worldwide and they remain stable in China," Flaws said. He also noted that Jackson got the name of China's telecom regulatory body wrong and that Corning has no deal with it regarding fiber sales: "We have never discussed fiber pricing with [the ministry]."
David Jackson says he'll be issuing another report dealing with the comments later today. Stay tuned.
In terms of the overall financials, investors seem pleased with the company's modest revenue growth and liquidity -- as evident from today's upsurge in stock value. At press time, Corning shares were trading at $14.57, up 0.80 (5.81%).
But analysts say the company's lack of ability to provide guidance for the rest of the year hints that the good news may be short lived.
Quarterly results include sales of $1.9 billion, up 5 percent over the same quarter last year (see Corning Posts Q2 Results). Pro forma earnings per share were $0.09, compared with $0.31 last year. Revenues from Corning's core telecommunications business, which includes fiber and photonics, accounted for $1.4 billion of that total, a figure 8 percent higher year to year.
Gross margins were 18 percent, Corning says, and excluding a necessary pre-tax charge, they'd be 43.4 percent. Executives also boast an improved cash position, with $1.3 billion in cash on hand, as compared to $1.1 billion last quarter. And credit lines are $2 billion to $2.5 billion -- although execs refused to divulge details of the covenants that may be attached.
In the core business, fiber was the story -- particularly fiber in China. Revenues from fiber cable were $939 million, up 30 percent year to year. And while overall fiber volumes were down 35 percent in the U.S. versus last year, the international market, specifically in China, helped even the scales. Execs refused to divulge how much of Corning's fiber revenues actually came from China, however.
"International markets were a key driver in our growth," CFO Jim Flaws told analysts on the conference call today. And later on in the call, Corning's Optical Communications president, Wendell Weeks, said that with the purchase of Chinese ventures from Lucent Technologies Inc. (NYSE: LU), announced this week (see Corning Buys Lucent China Interests ), Corning will own roughly half the fiber market in China.
The company expects that market to grow, although its emergence within the past six months makes it tough to forecast, execs said.
In other results, Corning took an expected $4.8 billion pre-tax second-quarter charge for impairment of goodwill and intangible assets related to the purchase of Pirelli's components unit and Netoptics. The company also took a pre-tax charge of $273 million ($0.20 per share) for obsolete and excess inventory in the company's photonics business. While this was slightly lower than the roughly $300 million some analysts had expected, it couldn't be called good news.
Overall, the photonics unit garnered just $158 million in sales for the quarter, 33 percent below what it did last year and last quarter. Executives say they expect those losses to hold for the full year. And despite recent layoffs and plant closings (see Optical Hearts of Darkness), Corning will be eyeing the business for further cuts and reductions.
Despite the upbeat angle, analysts are hedging their bets on Corning for now, in light of Corning's refusal to provide financial guidance for the remainder of the year. "We're maintaining a Hold rating on Corning. The outlook for their core business is deteriorating," says Joseph Wolf of UBS Warburg. He maintains that if Corning execs were confident their core business would stay good, they would provide guidance to sustain that assertion.
- Mary Jander, Senior Editor, Light Reading
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