Corning Q3 2024 Earnings Call Transcript

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October 29, 2024

Key Takeaways

  • Corning delivered strong Q3 2024 results, with sales up 8% year-over-year to $3.73 billion, EPS up 20% to $0.54, operating margin up 160 bps to 18.3%, and free cash flow of $553 million.
  • Optical Communications outperformed, with segment sales up 36% YoY and the enterprise business growing 55% on continued adoption of generative AI connectivity products and new agreements with Lumin Technologies, AT&T and Verizon.
  • The SpringBoard plan tracking remains on schedule, with a $1.84 billion incremental annualized run rate toward the target of adding over $3 billion in sales and reaching 20% operating margin by end-2026.
  • In Display Technologies, Corning implemented double-digit price increases in H2 2024 to offset yen headwinds and expects to maintain a 25% net income margin with $900–$950 million in net income for 2025.
  • Environmental Technologies sales fell 11% sequentially in Q3 due to the North American Class 8 truck market downturn, and the segment is expected to remain muted in Q4.
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Earnings Conference Call
Corning Q3 2024
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Operator

Good day, and thank you for standing by. Welcome to the Corning Incorporated Quarter 3, 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentations, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations. Please go ahead.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Thank you, Dilem, and good morning, everybody. Welcome to Corning's Third Quarter 2024 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, and Ed Schlesinger, Executive Vice President and Chief Financial Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are Non-GAAP measures used by management to analyze the business.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

For the third quarter, the difference between GAAP and core EPS primarily reflected non-cash mark-to-market adjustments associated with the company's translated earnings contracts and Japanese yen-denominated debt, constant currency adjustments, and non-cash asset write-offs and charges. As a reminder, the mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. Now, I'll turn the call over to Wendell.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Thank you, Ann, and good morning, everyone. Today, we announced strong Third Quarter 2024 results. Year-over-year, sales grew 8% to $3.73 billion, and EPS grew 20% to $0.54. Our Quarter 3 outperformance was led by Optical Communications, where continued strong adoption of our new Optical connectivity products for Generative AI drove 55% year-over-year growth in the enterprise portion of the segment. Our momentum continues as we close out the year. In the fourth quarter, we expect year-over-year sales growth to accelerate and EPS to continue growing faster than sales, and Ed will elaborate more on that in a moment. Overall, our results and outlook show we're making strong progress on our Springboard plan to add more than $3 billion in annualized sales with powerful incremental profit and cash flow, and to achieve an operating margin of 20% by the end of 2026.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

So before Ed and I get into the details, let me just briefly recap the primary elements of Springboard. First, this chart reflects our internal non-risk-adjusted Springboard plan. This is what our business operators are focused on delivering. There's a lot to take away from this slide. We have a significant sales opportunity. We're looking at potential growth of $8 billion in annualized sales run rate by the end of 2028, with $5 billion by the end of 2026. Now, remember, this is our internal plan. When we say it's not risk-adjusted, what we mean is the projections are based on a number of assumptions, including markets recovering to historical trend lines with continued growth thereafter, successful adoption of new innovations across a number of markets and platforms, and successful execution of all our operational milestones for productivity and for price.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

But what we wanted to do was take our $8 billion opportunity and translate it into a high-confidence plan for our shareholders. To do that, first, we focused on a three-year time period. Second, we probabilistically adjusted for different potential outcomes in each of our Market-Access Platforms, including market dynamics, timing of secular trends, successful adoption of our innovations, as well as volume, pricing, and market share across all our businesses, as well as the potential that some of our markets may go through down cycles. And this is how we come to the high-confidence Springboard plan to add more than $3 billion in annualized sales and achieve operating margin of 20% by the end of 2026. It's also important to know that we purposely drew this as a wedge. We weren't trying to guide every quarter for the next 12 quarters.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

It obviously will not be a straight line. But we're also not dealing with a hockey stick. When we built the plan, we expected to see strong growth this year. And that's exactly what you're seeing in our results. So I'd like to take a moment to share two important observations about our performance. First, we're significantly improving our return profile. In the third quarter, we again drove sales growth while demonstrating our ability to deliver the powerful incrementals embedded in Springboard. In the third quarter, sales grew 8% year-over-year. EPS grew more than twice as fast as sales. Operating margin expanded 160 basis points year-over-year to 18.3%, and gross margin expanded 220 basis points to 39.2%. We also generated strong free cash flow of $553 million. And we continued buying back shares in the third quarter.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Second, we're reaching key strategic milestones that underscore the significant progress we've made against our high-confidence plan. Let me just briefly summarize the recent milestones in Display and in Optical. In Display, our Springboard plan is centered on maintaining stable U.S. dollar net income. To achieve this, we are raising glass prices. Our price actions, in combination with the hedges we have in place through 2026, will deliver consistent profitability in the segment. We expect to deliver net income of $900 million-$950 million next year and to deliver net income margin of 25%, consistent with the last five years. Simply put, our price increases offset the weaker yen in our hedges, and we expect to maintain the same profitability. Most importantly, we will continue to be the low-cost technology and market leader in Display. Overall, we're providing a strong base in Display for our Springboard growth.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

In Optical Communications, our Springboard plan is about revenue growth as cyclical and secular trends converge to drive demand for our unique capabilities. When we introduced our GenAI products in June, we said we expected to grow our enterprise business at a 25% compound annual growth rate over the next four years. Looking back to the second quarter, strong demand for our new GenAI products drove outperformance, and our enterprise business grew by 42% year-over-year. As I noted, outperformance continues. Enterprise grew by 55% in the third quarter versus last year. That growth reflects the GenAI opportunity inside the data center. We've also introduced a set of innovations to help our customers build a new network to interconnect AI-enabled data centers.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

As part of an agreement with Lumen Technologies, which reserves 10% of our global fiber capacity for each of the next two years, we recently launched the first outside plant deployment of Corning's new GenAI fiber and cable system that enables Lumen to fit anywhere from two to four times the amount of fiber into their existing conduit. This is an exciting new space, and we expect to capture other large opportunities. Optical is also marking important developments with other important carrier customers, Verizon and AT&T. At their broadband strategy event last week, Verizon highlighted their partnership with Corning and said we're delivering technologies that make it easier for them to reach their deployment goals. They plan to significantly expand their fiber footprint from 25 million fiber passings to more than 30 million fiber passings by 2028.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

We also just announced a multi-year purchase agreement with AT&T to provide next-generation fiber, cable, and connectivity solutions to support the expansion of AT&T's fiber network and help bring high-speed internet to more Americans. The agreement, valued at more than $1 billion, builds on a decades-long collaboration between our companies. AT&T is expanding its network to bring world-class fiber to more people and places across the country. By using Corning's newest pre-connectorized solutions, AT&T can accelerate its network expansion and enhance network performance while minimizing deployment cost. They'll leverage our latest additions to our portfolio of connectivity solutions, which are fully compliant with the Build America, Buy America provisions of the Broadband Equity Access and Deployment Program. The program, known as BEAD, is part of the government's efforts to bring high-speed internet to rural communities. Stepping back.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

As you can see, we're three quarters into our three-year Springboard plan, and we're making significant progress. Our third quarter results demonstrate the sales growth and the powerful incremental profit and cash flow we expect to deliver as we improve our return profile and march steadily toward our 20% operating margin target by the end of 2026, and we're marking significant milestones along our Springboard journey, and we have plenty of milestones ahead. In Optical Communications, we expect carriers to return to buying at deployment rates and for their deployment rates to increase and drive growth in 2025, and we expect the BEAD Program to gather momentum starting in the second half of 2025. We have a triple-digit Automotive Glass business today, and we expect sales in that business to almost triple by 2026. We expect recently announced U.S.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

EPA regulations to force gas particulate filter adoption and drive hundreds of millions of dollars of growth for us in the U.S. alone, with sales starting in 2026. Finally, we plan to launch a new solar Market-Access Platform. Overall, we've positioned our businesses to benefit from a convergence of cyclical and secular trends to drive growth across the company through 2026 and beyond. We'll continue to update you as we hit significant milestones. Now, let me turn it over to Ed for some more detail and perspective on the quarter as well as Springboard.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Thank you, Wendell. Good morning, everyone. As you just heard, we had an outstanding quarter. Year-over-year, Q3 sales grew 8% to $3.73 billion, and EPS grew 20%, more than twice the rate of sales to $0.54, with operating margin expanding 160 basis points to 18.3%. We also generated free cash flow of $553 million.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Our outperformance was led by Optical Communications. Sales grew 36% year-over-year, and sales in the enterprise business grew 55%, driven by continued strong adoption of our new Optical connectivity products for Generative AI. We expect our momentum to continue. In the fourth quarter, we anticipate year-over-year sales growth to accelerate and EPS to again grow faster than sales, with sales up about 15% to approximately $3.75 billion and EPS up approximately 40% in the range of $0.53-$0.57. Today, I'll provide more detail on our Q3 results and Q4 outlook, as well as put them into the context of our overall Springboard plan. As a reminder, a key component of our plan is to deliver powerful incrementals. We have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026 with minimal cash investment.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

and the cost and capital are already reflected in our financials. This means that we expect to grow profit significantly faster than sales. And that's exactly what we're seeing in our third quarter results. so let's dive in. In Optical Communications, sales for the third quarter were $1.2 billion, up 36% year-over-year. And net income for the quarter was $175 million, up 92% year-over-year, as we delivered strong incremental profit on the higher volume. In our enterprise business, sales were up 55% year-over-year, driven by continued strong adoption of AI-related connectivity solutions. This marks another record quarter in this business and adds to our confidence in our plan to grow enterprise at a 25% compound annual growth rate from 2023 to 2027. We also grew year-over-year in our carrier business in the third quarter. We're encouraged by new customer agreements, including our recent announcements with AT&T and Lumen.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Overall, we expect both cyclical and secular drivers in Optical Communications to sustain growth in 2025 and beyond. Moving to Display Technologies, third quarter sales were $1 billion, consistent with the second quarter. Net income was $285 million, up 10% sequentially. Our third quarter volume was down sequentially as panel makers began to lower their utilization rates in the quarter. We expect panel makers to continue managing their operations to maintain healthy inventory levels. As a result, we expect the glass market and our volume to decline sequentially in the fourth quarter. Longer term, we expect the Display glass market to grow at a low single-digit rate, supported by stable TV unit sales and average screen size growing about one inch per year. As we shared with you at our September investor event, we are raising glass prices to ensure we can maintain stable U.S. dollar net income.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Specifically, we implemented currency-based price increases in Q3. Overall, our customers are experiencing a double-digit price increase in the second half of 2024. In total, our price increases offset the weaker yen in our hedges, and therefore, we expect to maintain the same profitability. As a result, when we move to our new yen core rate in 2025, we do not plan to recast our 2024 financials. As a reminder, we have the majority of our yen exposure hedged for 2025 and 2026, and we also have hedges in place beyond 2026. Our hedges are not at the 2024 core rate of 107, but they're much better than the current spot rate. We expect to deliver net income of $900 million-$950 million next year and net income margin of 25%, consistent with the last five years.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Turning to Specialty Materials, sales in the third quarter were $548 million, up 9% sequentially, primarily driven by premium glass for mobile devices. Net income was $72 million, up 14% sequentially, reflecting higher volume. In Environmental Technologies, third quarter sales were $382 million, down 11% sequentially, reflecting the continued impact of the Class 8 truck down cycle in North America, as anticipated. Net income of $75 million was down sequentially, reflecting lower volume. We expect the heavy-duty market weakness to continue and sales in Environmental Technologies to remain muted in the fourth quarter. In Life Sciences, sales in the quarter were $244 million, up 6% year-over-year. Net income was $15 million, up 15% year-over-year. Turning to Hemlock and Emerging Growth Businesses, sales in the third quarter were $298 million, consistent sequentially. Finally, I'd like to touch on operating expenses.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

As we've told you in the past, our pay is tied directly to our financial performance. As our performance has accelerated this year, we have increased our variable compensation accruals accordingly. This leads to temporarily higher operating expenses in the back half of 2024. With that, I'd like to shift gears and put our third quarter results and Q4 guidance in context of Springboard and update you on how we are tracking against the plan. This chart shows both our non-risk-adjusted $5 billion sales plan and our $3 billion high confidence sales plan. So how are we doing? Let me first explain the $1.84 billion dot point you see on the chart. Our Q3 2024 sales were $3.73 billion. Our Q4 2023 sales, which is our Springboard starting point, were $3.27 billion. So our sales were $460 million higher in Q3 2024 than in Q4 of 2023.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

When you annualize that, you get to $1.84 billion. Therefore, we're currently tracking at a $1.84 billion incremental annual sales run rate against our $3+ billion target. That trend continues into quarter four. The additional sequential growth implied in our Q4 guidance increases our run rate in the fourth quarter to $1.9 billion. As we shared in September, our Springboard plan includes an operating margin target of 20% by the end of 2026. This target leads to an improving return profile with profitability growing significantly faster than sales. You can see this in our third quarter results, where EPS grew 20% year-over-year, more than twice as fast as the sales growth rate. Additionally, our operating margin was 18.3%. This represents a 200 basis point improvement from our starting point of 16.3% in Q4 2023.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Stepping back, we've made great progress against our sales and operating margin targets to date, but please remember, we're only three quarters into a 12-quarter plan. Springboard is a milestone-based plan evolving through 2026, and finally, we expect to generate significant cash flow over the Springboard timeframe because we already have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026. For the year, we've reduced our capital expenditures to approximately $1.1 billion, so let me spend a minute on capital allocation. Our priorities remain the same. We prioritize investing for organic growth opportunities. We believe this creates the most value for our shareholders over the long term. We also seek to maintain a strong and efficient balance sheet, and we're in great shape here. We have one of the longest debt tenors in the S&P 500.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Our current average debt maturity is about 23 years, with only $1 billion in debt coming due over the next five years. And we have no significant debt coming due in any given year. Finally, we expect to continue our strong track record of returning excess cash to shareholders. And because of our growing confidence in Springboard, we started to buy back shares in the second quarter, and we continue to do so in the third quarter. So as I wrap up today, I'd like to reiterate that we had an outstanding third quarter. We're tracking ahead of our Springboard plan. We expect continued strong performance in Q4, with year-over-year sales growth accelerating and EPS again growing faster than sales. And we expect to sustain our momentum in 2025 and beyond. We look forward to updating you as we continue to make progress.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

With that, I'll turn it back to Ann.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Great. Thank you, Ed. We're ready for our first question.

Operator

Thank you. As a reminder, to ask a question, you would need to press star one one on your telephone. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And the first question comes from the line of Samik Chatterjee from J.P. Morgan. Please go ahead.

Samik Chatterjee
Samik Chatterjee
Analyst at J.P. Morgan

Hi. Thank you for taking my questions. And I guess for the first one, if I can start with the agreement that you signed with AT&T and Wendell, you spoke about the opportunity there.

Samik Chatterjee
Samik Chatterjee
Analyst at J.P. Morgan

But if you can just more sort of dive into the details in relation to how much of that is sort of an incremental opportunity that you're seeing relative to some of the existing business that you do with AT&T on an ongoing basis. And sort of a broader question to the fiber opportunity is, is there something that's fundamentally changed? The question we're getting a lot from investors is in terms of fiber utilization, is there something that's fundamentally changed that is going to drive a significant cycle on the fiber side just because fiber utilization has changed over the last few years? Can you help us think about that more on a longer-term basis as well? Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

And Samik, a question for you on clarification. When you say fiber utilization, you mean?

Samik Chatterjee
Samik Chatterjee
Analyst at J.P. Morgan

In the more telecom networks, but in relation to the investment in fiber over the years, has something changed in relation to being a lot more congested on fiber or very high fiber utilization already and seeing that drive of a significant cycle, or are we sort of extrapolating just the amount of announcements, not really looking at the utilization, which is still probably low?

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Totally understand. Thank you, Samik. I would divide this really into two major sections. The first, let's address the AT&T announcement. That's really our carrier segment, and it's part of the cyclical upward trend that we identified as part of our Springboard plan. That we're viewing this to be very much in line with Springboard and an encouraging sign for us that we can expect the carrier spring to activate sometime here in the near future.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

We're not calling that yet because we'd like to see a couple more quarters of the actual order rate and the actual deployment rates. But it's certainly encouraging, and this is what we mean by one of the cyclical trends in our Springboard plan for Optical, so encouraging, but we're not yet calling the spring activated. To your next question, one of the things you've seen with a lot of the announcements sort of has to do with GenAI and interconnecting GenAI-enabled data centers. Of that, we are seeing really a different link have to get activated, and therefore, using your terminology, fiber utilization on those links between GenAI data centers are relatively full, and that's what you saw with the Lumen announcement.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

We'll have to see how GenAI develops and how they end up splitting the very large clusters, but that could develop into a very significant growth driver for us going forward, Samik.

Samik Chatterjee
Samik Chatterjee
Analyst at J.P. Morgan

Thank you. Thank you, operator. Thanks for taking my questions.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Next question.

Operator

Thank you. The next question comes from the line of Matt Niknam from Deutsche Bank. Please go ahead.

Matthew Niknam
Matthew Niknam
Analyst at Deutsche Bank

Hey, guys. Congrats on the quarter. Thanks for taking the question. I guess first, on the 4Q revenue guide, if there's any additional color or context you can share in terms of unpacking expectations across the different segments? And then one follow-up on Optical. Can you clarify whether there was any contribution from the Lumen deal in the third quarter, whether that is expected to kick in in the fourth quarter? Just trying to get a sense of that ramp up to the run rate. Thanks.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Yeah. Hey, Matt. It's Ed. Thanks for the question. So first, on Lumen, no impact in the third quarter, and I would say minimal to no impact in the fourth quarter expected. We see that as a 2025, 2026 opportunity. And with respect to our guide, as we always do, we factor in a number of potential outcomes across all of our different segments. I think the one thing that's maybe a little noteworthy about the fourth quarter guide is typically we're not seasonally up Q4 versus Q3. We're typically flat to slightly down. So we're seeing a lot of positive momentum in general, in particular in Optical Communications. But in general, I think that's what's driving us to guide ourselves a little bit above normal seasonality.

Matthew Niknam
Matthew Niknam
Analyst at Deutsche Bank

Great. Thank you.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Next question.

Operator

Thank you. Our next question comes from the line of Steven Fox from Fox Advisors LLC.

Operator

Please go ahead.

Steven Bryant
Analyst at Fox Advisors LLC

Hi. Good morning, guys. Two questions from me, if I could. Real quick on the cash flows. Ed, can you put a little bit of context around the free cash flows you generated in the quarter? I think it was the best I've seen from you guys since 2018 in the third quarter. How do we put that in perspective with future free cash flows? Was there any one-time things we should think about? And then from an Optical standpoint, just on the cloud side of the business, can you give us a little more perspective on the relative momentum versus enterprise and how you think about that momentum into next year? Thanks.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Hey, Steve. Let me do the free cash flow one first. So yeah, we agree Q3 was a great free cash flow quarter, very strong.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Nice call out on the last time we were at that level. I think if you think about Springboard and the way we've positioned ourselves, we're not adding capacity. So we're not spending capital at a level where you would have seen us potentially do that in the past. And we're converting our income, which is growing, into cash. So I don't know that every quarter is going to be at this level of conversion, but I do expect us to continue to generate strong free cash flow as we go forward.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Thank you. And on the cloud, Steve, as you'll recall, when we looked at the GenAI driver, what we said is we would expect that to drive a 25% compound annual growth rate through 2027 on that enterprise segment portion of our Optical segment.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Obviously, we are growing a lot faster than that at this time, and our momentum is very strong. We'll be reflecting more on that, and when we get together at the investor event in quarter one of next year, we'll update with our latest architectural thoughts and our various modeling to see how we feel about that long-term guidance.

Steven Bryant
Analyst at Fox Advisors LLC

Fair enough. Thank you. Thank you.

Operator

Thank you. And our next question comes from the line of Wamsi Mohan from Bank of America. Please go ahead.

Wamsi Mohan
Wamsi Mohan
Analyst at Bank of America

Yes. Thank you so much. Similar to cash flows, gross margins also were very impressive in the quarter, north of 39%. I'm wondering if you can unpack that a little bit in terms of the drivers there, how much of that was mix versus leverage.

Wamsi Mohan
Wamsi Mohan
Analyst at Bank of America

Given the strength in Optical relative to Display, you'd think that that would put some mixed pressure, but it would be helpful to get some context around that and how we should think about that going into fourth quarter. Are we now renormalizing at a higher rate in general for gross margin? Thank you so much.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Yeah. Thanks, Wamsi. So I think what's really driving it is operating leverage, consistent with how we've been sharing our view on Springboard. We have the cost and the capacity in place, technical capabilities to deliver the higher sales. So as our sales go up, we're experiencing a higher gross margin. 39%+ is a great place.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

I would say my only caution on thinking about it going forward is that not every quarter is necessarily going to be up, but we do think we can go higher from where we are at these levels.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

And all I would add to that, Wamsi, is we do expect to see our return profile to continue to improve, and that's how we hit our operating margin target of 20% by the end of 2026.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Next question.

Operator

Thank you. Our next question comes from the line of John Roberts from Mizuho. Please go ahead.

John Roberts
John Roberts
Analyst at Mizuho

Thank you. a CHIPS Act award during the quarter here. How are you thinking about it? It was all on the semiconductor side, I think. So how are you thinking about semiconductor versus solar in terms of the outlook for Hemlock?

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Yeah. Thanks, John.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

So yes, we did receive a CHIPS grant award, and we are looking at what it would take to build out additional semiconductor capacity. I think it's a great opportunity for us to do that. We will figure out sort of the timing. I don't think you should think about it as necessarily having an impact in the Springboard window of time here that we've been talking about through 2026. We've sort of factored in the cost and capacity that we need to support the sales in that window of time, but it's certainly an upside opportunity to that as we go forward.

John Roberts
John Roberts
Analyst at Mizuho

Thank you.

Operator

And our next question comes from the line of Asiya Merchant from Citi. Please go ahead.

Asiya Merchant
Asiya Merchant
Analyst at Citi

Great. Thank you. Two if I may. Just on Display, you've put in some pricing actions here.

Asiya Merchant
Asiya Merchant
Analyst at Citi

Just if you could help us understand how your customers are responding to that and expectations for further price increases in calendar 2025. And if I may, just on OpEx, I know you talked a little bit about elevated levels here, variable compensation. How should we think about these OpEx levels to moderate in the fourth quarter? I think the assumption implies or the guidance implies some moderation here. Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

We remain confident that our customers will experience a double-digit price increase in the second half of this year. Our goal, as we have shared, is for us to deliver consistent profitability in Display, a 25% net income margin next year, and generate net income between $900 million-$950 million. As time goes forward, we continue to be quite confident in being able to deliver that.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Yeah.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Obviously, on OpEx, I think the only thing that I would note other than what I shared is that when we book our accrual in the third quarter, we did have a catch-up for the first nine months of the year. So as our performance has accelerated and we've increased our accrual, we've done that in a catch-up. We don't have to book that catch-up in the fourth quarter, but I would expect our OpEx to be temporarily elevated as well in the fourth quarter.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Next question.

Operator

Thank you. And our next question comes from the line of Meta Marshall from Morgan Stanley. Please go ahead.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Great. Thanks. Maybe kind of expanding upon the gross margins.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

In the past, you guys have talked about 40% being a bogey, but then also said that 39%, just given some of the price increases, is kind of a more appropriate new bogey. I know you guys have talked more in terms of operating margin targets and kind of this 20% operating margin targets, but just how do you think about kind of gross margin leverage into the next year? Maybe as a first question.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Yeah. So I would say 39% is a great place. We're happy we delivered that in the third quarter, but I think there is opportunity for us to go up from that level. I just would be cautious that it may not be up every single quarter as we go forward.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

I think, as Wendell pointed out, the 20% operating margin target as we exit the Springboard plan is where we have high confidence, which implies we can do better on gross margin.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Got it. Then at the event earlier this quarter, you guys had mentioned kind of a lot of kind of key milestones that may be coming on kind of the Hemlock business or just how to think about incrementals on the project Springboard. I noted that you guys got the CHIPS Act funding kind of earlier this week. Just anything else or any updates that we should be thinking of in terms of timing there or kind of TBD?

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

We continue to make progress on hitting the milestones we need to launch a new solar MAP for us, and that will add significantly to the significant part of our Springboard plan, especially the non-risk-adjusted portion of it. We would expect to be able to provide you with a relatively detailed explanation of the various pieces, and we would expect to have the major milestones in place around the timing of our IR event, our investor event in the first quarter of next year.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Thank you.

Operator

Thank you. And our next question comes from the line of Martin Yang from Oppenheimer. Please go ahead.

Martin Yang
Martin Yang
Analyst at Oppenheimer

Hi. Good morning. Thank you for taking the question. One question on CapEx. Can you talk about some of the puts and takes and what led to the slight reduction in CapEx guidance for the year?

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

I would say we're not necessarily adding much capacity. We have some small capital projects that we're finishing up. I don't think there was anything specific to note in the guidance reduction, mostly just where we're running. So we wanted to make sure people understood that. And we continue to believe we have the capacity in place to support at least the $3 billion in sales. If that changes or we have any other plans, we'll certainly share that.

Martin Yang
Martin Yang
Analyst at Oppenheimer

Thanks, guys.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Next question.

Operator

Thank you. And our next question comes from the line of Josh Specter from UBS. Please go ahead.

James Cannon
James Cannon
Analyst at UBS

Hey, guys. This is James Cannon on for Josh. I just wanted to say congrats as you guys are still tracking well ahead of that $3 billion plan. But I just wanted to ask on kind of going along with the CapEx thing.

James Cannon
James Cannon
Analyst at UBS

At what point in terms of sales growth would you need to start ramping CapEx back up? If you guys continue on this trajectory, should we be assuming that you'll have to start ramping up sooner than kind of 2026?

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

To deliver the Springboard plan, we don't anticipate a significant sort of increase in our capital investments. If, of course, the $8 billion begins to look more and more probable, that could generate some more investment on our part in terms of capacity. What you see in our capital today is much more aimed at continued productivity improvement as well as reconfiguring some of our factories to produce some of our new GenAI products set. So it's cost a lot less for us to tailor our equipment and to upgrade than it does to put in place a significant new plant and equipment.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

So unless we start really moving towards that $8 billion non-risk-adjusted revenue run rate, I would say we have an appropriate amount of property, plant, and equipment in place and that our capital plans will continue to be relatively modest.

James Cannon
James Cannon
Analyst at UBS

Got it. Thank you.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Next question.

Operator

Thank you. Our next question comes from the line of George Notter from Jefferies LLC. Please go ahead.

George Notter
George Notter
Analyst at Jefferies

Hi, guys. Thanks very much. I guess I just wanted to ask about the Display price increases. I think as you guys were hedging the business at 107 on the yen, those hedges were in place through the end of this year. Yet you were able to institute price increases here in Q3. I thought that was quite impressive. Could you give us a sense for how that conversation went with customers? What kind of leverage you have in the relationship?

George Notter
George Notter
Analyst at Jefferies

Anything you can tell us about your ability to institute price increases even ahead of the hedges running off? Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Our price increase is aimed at maintaining stable U.S. dollar net income, and that's exactly what we're doing, and that's what you see with our customers experiencing a double-digit price increase in the back half of this year, and what that is meant to do is that price increase will offset the weaker yen in our hedges for 2025 and 2026, delivering after that move a stable Display net income percent of around 25% and the $900 million-$950 million expectation we have for the net income. Remember, all we're doing here is more appropriately sharing the benefits that our customers get from buying at that yen rate. So, of course, anytime you increase prices with customers, it is always challenging.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

But we've been able to do it successfully, and that's what you see in our guide, George.

George Notter
George Notter
Analyst at Jefferies

Got it. And then any sense for where the new hedge rate will wind up as we roll into next year? Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Yes. But we will plan to share that as we turn the year. We just want to make sure everything is in place and all of our commercial agreements before we are too forthcoming on where our hedges are at.

George Notter
George Notter
Analyst at Jefferies

Okay. Thank you very much. Appreciate it.

Operator

Thank you. And we have our last question in the queue. It comes from the line of Tim Long from Barclays. Please go ahead.

Tim Long
Tim Long
Analyst at Barclays

Thank you. Two-parter if I could on Optical. First, looks like obviously a good recovery going on here. On the carrier side, still meaningfully below the levels we saw a few years ago. Could you talk about that piece?

Tim Long
Tim Long
Analyst at Barclays

Will these new agreements, do you think, get you back to those 2021, 2022 levels for the carrier piece over the next year or two? And then secondly, just talk a little bit about the op margin. Despite being a lower overall base than what we saw in those peak years, margins are pretty comparable. So this all mixed, and does that mean if we move higher from here that we could see above historic margins for that Optical business going forward as the business scales further from here? Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

Okay. Let me start with carrier. I think it's too early. First, your observation is correct. We are seeing carriers still at a relative cyclical low, as we have talked about before. I think it's still a little too early for us to be able to confidently call the turn.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning Incorporated

But you are quite right in observing that all of these customer announcements show carriers leaning into we have to increase deployments. And they're establishing with their lead technology partner, who is us, the necessary capacity reservations to facilitate those builds. So you're right. It's very encouraging, but we just don't have enough evidence yet, Tim, to reach a conclusion on that spring is activated. And we'll keep you posted as we go forward.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

Yeah. And Tim, on your margin question, I just want to clarify. You're specifically talking about Optical?

Tim Long
Tim Long
Analyst at Barclays

Yeah. Just in the Optical business. Correct.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

So I think the thing to think about is it ties a little bit with what you asked in terms of your first question, right? So our sales are starting to get back close to the peak level, but we haven't yet filled all of our capacity, right?

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning Incorporated

We have capacity in place to support a higher level. So I actually think we can improve our margins in Optical as we fill that capacity and grow from here, which we expect to do. So I do think our margins accrete up in Optical.

Tim Long
Tim Long
Analyst at Barclays

Okay. Thank you.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning Incorporated

Thank you, Tim. Thank you, Dilem. And thank you, everybody, for joining us today. Before we close, I wanted to let you know that we are going to attend the UBS Global Technology Conference on December 3rd, and we'll be scheduling management visits to investor offices in select cities. Finally, a web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Dilem, that concludes our call. Please disconnect all lines.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Executives
    • Ed Schlesinger
      Ed Schlesinger
      EVP and CFO
    • Ann Nicholson
      Ann Nicholson
      VP of Investor Relations
    • Wendell Weeks
      Wendell Weeks
      Chairman and CEO
Analysts
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