Corning sees data centers, FTTH opportunities ramping amidst poor Q1 2016 outlook

Corning's optical networking segment is finding fortune in the FTTH and data center market segments, but spending patterns within these segments vary due to the timing of build out cycles.

Wendell Weeks, CEO and chairman of Corning, told investors during the fourth quarter earnings call that he sees growth continuing to be driven by technology trends in optical communications, particularly in FTTH and what he calls hyper-scale data centers.

"Optical was really strong throughout the year, but we think it can get stronger because we had two areas that were in a low cycle in the fourth quarter and somewhat in the first quarter, which is the ultra-data center market," Weeks said. "We're in between big builds in fiber-to-the-home and we are wrapping up in Australia and have others coming on board."

Weeks said that the company is going to pursue more data center market opportunities, one that's being driven by more enterprise customers adopting cloud-based services.

"The main thing that's happened with the hyper-scale data centers is an adjustment from just a couple of key customers that adjusted their inventory and we expect them to come back online," Weeks said. "We're going to look to expand our presence there."

On the FTTH side, the challenge for Corning will be in wading through the build out cycles service providers have as they expand service within existing and new territories.

"We have to wait for the right cycles to build on fiber-to-the-home," Weeks said.

Nevertheless, U.S. wireline operators have set some aggressive FTTH timelines for 2016 and beyond.

While Verizon (NYSE: VZ) is going to focus on expanding service within existing markets, AT&T (NYSE: T) and CenturyLink (NYSE: CTL) have set aggressive FTTH targets for 2016.

As one of the provisions it promised the FCC it would meet in getting approval for its DirecTV acquisition, AT&T said in 2015 would build 1 Gbps service to an additional 11.7 million customer locations over the next four years. In December 2015, AT&T laid out a plan to extend service to parts of 38 additional metro areas.

No less aggressive is CenturyLink, which has passed over 780,000 households and 490,000 businesses with its gigabit service.

Driven by carrier sales for FTTH and data centers, Corning's fourth quarter 2015 optical communications sales were $736 million, up from $676 million in the same period a year ago. Core optical communications earnings were $47 million, compared with $48 million in the fourth quarter 2014.

Within the optical segment, carrier sales were $551 million, up 7 percent from fourth quarter 2014, while enterprise sales rose 13 percent to $185 million.

Looking forward, Corning expects first-quarter optical communications sales to increase in the low-to-mid-single digit percentage range over its sales in the comparable period a year ago. For the full year of 2016, the company expects sales to increase by a mid-single-digit percentage and exceed the goal of two times the growth rate of industry capital expenditures.

From an overall financial perspective, Corning reported $2.4 billion of core sales in the fourth quarter of 2015, down from $2.5 billion in the fourth quarter of 2014. Core earnings per share declined to 34 cents from 42 cents. On a GAAP basis, net sales declined to $2.4 billion and earnings per share to 17 cents, compared with $2.4 billion and 70 cents, respectively, a year earlier.

Corning's fourth quarter results surpassed Wall Street expectations. The average estimate of analysts surveyed by Zacks Investment Research was for earnings of 31 cents per share.

Despite the healthy opportunities in its optical communications business, the overall company outlook for the first quarter of 2016 is less promising. Corning expects the first quarter to be the weakest of 2016, before a recovery of growth will take place in subsequent quarters.

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