Weak Gorilla Glass Sales Hurt Corning's Profits And Margins

Corning announced its second quarter 2014 earnings result on July 29 2014, posting a decline in profits. Despite a 25.2% year-on-year growth in revenue, the company’s net profits declined 73.5% to reach $169 million primarily due to poor performance at its Specialty Materials segment, which includes Gorilla Glass – a protective cover glass for consumer electronics.

Poor Gorilla Glass sales also negatively impacted Corning’s operating margins which declined 2.9% year-on-year to reach 18.5%. Corning’s Display Technologies, Optical Communications, and Environmental segments posted double digit growth in the quarter. Its Life Sciences segment grew low single digits. Corning’s share price declined 9.6% following the weak second quarter earnings announcement.

Weak tablet demand tempers Gorilla Glass sales

Falling demand for tablets led to a decline in sales for Gorilla Glass during the second quarter resulting in a 1% and 33% decline in Corning’s Specialty Materials revenue and net profits respectively. With growing screen sizes and functionality of smartphones, tablets have been losing their appeal leading to a slowdown in their sales. This is also evident from recent quarterly sales results of major tablet manufacturers like Apple and Samsung. Additionally, intense competition has slowed down sales of high-end smartphones, the primary target market for Gorilla Glass, thereby tempering sales of the cover glass.

Corning expects Gorilla Glass sales to pick up in the coming quarter, driven by new model launches. We believe that this may be a hint towards the launch of Apple’s iPhone 6, which was expected to come with a sapphire cover glass. However due to production issues, it is believed that the iPhone 6 will launch with Gorilla Glass as its cover glass. Corning forecasts a 10% sequential growth in third quarter 2014 sales of Gorilla Glass taking into account the continued negative impact of slowing tablet sales. The company also reduced its annual sales forecast of Gorilla Glass, which is now expected to grow 20% compared to the previous estimate of 24%. The new projection also takes into account the impact of the launch of Gorilla Glass 4.

Poor Gorilla Glass performance negatively impacts margins

Production efficiency of Gorilla Glass was high in the second quarter 2013 since the company was manufacturing at high levels in order to replenish inventory after the huge sales volume experienced in fourth quarter 2012. However, Corning is now manufacturing Gorilla Glass in line with industry consumption rather than demand. Because of the low volume of Gorilla Glass sales in the second quarter 2014, production efficiency was greatly reduced and led to a 2.9% decline in Corning’s operating margin. Gorilla Glass price decline during the second quarter, though moderate compared to the previous quarter, also had a negative impact on Corning’s operating margin. Similarly, moderate LCD price declines also impacted margins.

Corning’s Optical Communications and Environmental segments help drive revenue

Though Corning’s Display Technologies’ 56% growth is the major contributor towards overall revenue growth, it isn’t an indicator of performance as much as the Optical Communications and Environmental segments. This is because revenue growth of the Display Technologies segment was primarily inorganic i.e. it was driven by the consolidation of the recently acquired CPM, whereas growth in the Optical Communications and Environmental segments came from growth in demand from end markets.

High demand for fibre-to-home solutions in North America and Europe, Middle East and Africa helped drive 14% growth in Optical Communications revenue. Environmental segment’s revenue grew 25% on account of increased regulation in Europe and China in order to curb harmful emissions. These segments are expected to grow through the year driven by the same trends.