Corning's Q1 optical communications revenue dips to $609M on manufacturing issues, but foresees Q2 recovery

Fiber going into a LAN box

Corning's first quarter 2016 Optical Communications revenue took a hit as an issue with its manufacturing software prevented it from getting customer orders delivered on time.

Speaking to investors during its first quarter earnings call, Wendell Weeks, chairman, president and CEO of Corning, said that although service providers are ramping up Optical Communications purchases the software issue was a disruptive setback.

"Demand in Optical Communications was as strong as we expected, but deployment issues with new manufacturing software interrupted our cabling production and interfered with our ability to fill customer orders," Weeks said during the earnings call, according to a Seeking Alpha transcript.

Weeks said that the customer region that was most impacted by the Optical Communications issues was in North America "because that's the area where we had the software implementation points, and telecom customers tend to qualify specific product sets in particular production facilities."

Regardless of the loss, Corning said that demand for Optical Communications products continues to be strong and it expects production "to recover in the second quarter."

Corning's Optical Communications sales were $609 million, down from $697 million in the same period a year ago.

Optical Communications core earnings also declined year-over-year to $26 million from $72 million. Net income was down 64 from the first quarter due to lower sales volume and additional costs associated with software implementation issues.

The vendor said the first quarter impact on Optical Communications revenues from production issues related to manufacturing software implementation issues was approximately $100 million in sales and $40 million in profit including additional recovery-related expenses.

Looking towards the second quarter, Corning expects Optical Communications sales to be up more than 20 percent sequentially, but down mid to high single digits from a year-over-year perspective.

For the full year 2016, Corning has forecast Optical Communication sales to be up low single digits, with the change due to the software implementation issues.

Weeks said that with the strong service provider customer demand for its products as they roll out more FTTH networks, the Optical Communications division will make a comeback in the coming quarters.

"In telecom for the core network stuff, we expect that demand to be strong this year," Weeks said. "Just because of where they rely on us and where they don't, we do expect to recover a significant hunk of our missed shipment set to just go into extended backlog. But we'll also lose some business too. It's hard to exactly estimate that right now, but I think you integrate everything together and the way you should think about it is we're going to be growing in quarter three and quarter four with the software issue behind us, sort of in double digits in OpCo, despite any sort of lingering impact."

From an overall financial perspective, Corning reported core sales of $2.17 billion and core earnings per share of $0.28, compared with $2.43 billion and $0.35 respectively in 2015, falling short of analyst expectations.

Analysts surveyed by Zacks Investment Research forecast revenue of $2.22 billion.

Shares of Corning closed at $19.22, down $1.75 or 8.35 percent, in Tuesday afternoon trading on the New York Stock Exchange.

For more:
- see the earnings release
- see the Seeking Alpha earnings transcript (reg req.)

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