Corning Inc (GLW.US) Q3 Earnings Call: AI Demand Shows No Sign of Slowing, Accelerated Optical Scale-Up Expected in 2028

Corning Inc (GLW.US) released its Q3 2026 results before the U.S. market open on October 27, followed by an earnings call. Core sales for the quarter were US$5.081 billion, up 19% year-over-year, above market expectations of approximately US$5.02 billion; the company called this the strongest growth rate since the launch of its "20-30-40" Springboard growth plan. Core earnings per share were US$0.91, up 36% year-over-year, also above expectations of US$0.89. On a GAAP basis, net sales were US$4.855 billion and diluted earnings per share were US$0.78, up 18% and 56% year-over-year, respectively. Management said on the call that optical communications remains the main growth engine, with revenue up 44% year-over-year, Enterprise up 84%, and generative AI product sales more than doubling. Enterprise annualized revenue has grown from US$1.4 billion at the launch of Corning Inc's multi-year Springboard growth plan to US$6 billion. The company reiterated that optical scale-up will accelerate in 2028, when fiber per GPU is expected to rise from 16 to 160 strands, creating tenfold demand headroom. On the carrier side, it has signed long-term agreements with Zayo, Verizon, and AT&T, and the DCI opportunity will exceed the prior US$1 billion target. The company maintained its goal of doubling revenue to US$40 billion by the end of 2030 and is smoothing cash flow for capacity investment through customer prepayment mechanisms; it generated US$2.3 billion of free cash flow in the first nine months. Although the CECEP Solar Energy business remains loss-making, the Section 232 trade ruling improved the pricing environment, and gradual improvement is expected in 2027. Management said AI demand shows no sign of slowing, customers continue to ask for more, faster, and broader products, and it has high confidence in the optical scale-up acceleration in 2028. The following are the details of Corning Inc's earnings call. I. Remarks by Chief Executive Officer Wendell Weeks Corning Inc delivered excellent third-quarter results. Revenue grew 19% year-over-year to US$5.1 billion, and earnings per share grew faster, up 36% year-over-year to US$0.91, both exceeding guidance. Gross margin expanded 150 basis points to 40.5%, operating margin expanded 310 basis points to 22.7%, and return on invested capital (ROIC) expanded 330 basis points to 16.7%. While investing more than US$500 million in capacity to support future growth, the company still generated US$661 million of free cash flow. Fourth-quarter outlook: Revenue expected to grow approximately 19% year-over-year to US$5.2-5.3 billion, and earnings per share expected to grow approximately 36% year-over-year to US$0.96-1.00. Springboard plan progress: In May this year, the company upgraded and extended the Springboard plan, targeting annualized revenue run rate of US$20 billion by the end of 2026, US$30 billion by the end of 2028, and US$40 billion by the end of 2030. The company plans to raise its compound annual growth rate to 19% from 2027 to 2030, 400 basis points faster than the 15% CAGR in the first three years of Springboard. Third-quarter revenue already reached US$5.1 billion, an annualized run rate of US$20.3 billion; based on the midpoint of fourth-quarter guidance of US$5.25 billion, the annualized run rate will reach US$21 billion. This means that just one quarter after the upgrade, the company has already exceeded its end-2026 target of a US$20 billion run rate and has already demonstrated the accelerated growth expected in the next phase. Today marks the third anniversary of the Springboard plan. Over the first three years (through Q4 2026), company revenue will grow 60%, earnings per share will grow more than 150%, ROIC will nearly double, and full-year free cash flow will more than triple. Looking to the next phase, the company plans to double revenue from US$20 billion to US$40 billion, with earnings per share growing significantly faster than revenue, ROIC continuing to improve, and strong free cash flow maintained while continuing to invest to capture growth opportunities. Customer relationships and risk-sharing: The company has established long-term agreements with key customers, and these relationships share two common characteristics: first, a focus on technology and joint innovation, sharing technology and development plans; second, a search for a reasonable sharing of risk and reward. Customers are responsible for determining the quantity of products needed, and the company is responsible for delivering products that meet performance standards on time and completing capacity ramps. The company uses various mechanisms to balance obligations on both sides, and one successful tool is customers providing cash in advance to fund capacity, which the company later returns as customers purchase committed volumes. This mechanism has been successfully used in the glass and CECEP Solar Energy businesses and is now being applied to optical communications. Financial performance: In the first phase of Springboard, the company more than tripled full-year free cash flow while investing heavily in new capacity. Entering the new phase of accelerated growth, the company seeks to continue increasing free cash flow and improving its financial structure while investing to double the company's size. II. Remarks by Chief Financial Officer Edward Schlesinger Third-quarter overall results: Revenue grew 19% year-over-year to US$5.1 billion, and earnings per share grew 36% to US$0.91, both above the guidance range. Gross margin expanded 150 basis points to 40.5%, operating margin expanded 310 basis points to 22.7%, ROIC expanded 330 basis points to 16.7%, and free cash flow was US$661 million. Optical Communications: Revenue was US$2.4 billion, up 44% year-over-year; net income was US$532 million, up 80% year-over-year, once again setting a profitability record for the segment. Enterprise revenue grew 84% year-over-year, with generative AI product sales up more than 100% year-over-year, significantly faster than GPU shipment growth, mainly due to rapid broad adoption of the company's innovations and continued capacity expansion. At Springboard's launch, Enterprise annualized revenue was US$1.4 billion; it has now quadrupled to a US$6 billion run rate. Growth is currently driven mainly by scale-out, and as optical connectivity penetrates the scale-up portion of networks, the revenue opportunity will increase substantially. Carrier revenue grew 4% year-over-year, mainly driven by data center interconnect (DCI) growth. During the quarter, the company announced long-term customer agreements with Zayo, Verizon, and AT&T to supply fiber and connectivity solutions for their broadband and data center interconnect network expansions. These agreements demonstrate the long-term opportunity in the carrier space and give the company confidence that the DCI opportunity will exceed its prior US$1 billion target. Glass Innovation: In end markets significantly affected by memory prices, the company outperformed the market through its "More Corning" strategy. Third-quarter TV unit sales fell 4%, and notebook and handheld device sales fell about 20%. Segment revenue was US$1.5 billion, down 3% year-over-year (down US$54 million); net income was US$328 million, down 10% year-over-year. The company continues to advance its nearly 20-year collaboration with Apple Inc. By the end of 2026, all cover glass for globally sold iPhones (including iPhone Duo) and Apple Watch will be produced at the Harrodsburg, Kentucky facility. In addition, the company recently announced display glass substrate price adjustments effective in the fourth quarter to address the weak yen and rising costs for key materials and energy. Automotive revenue grew 4% year-over-year, as the North American Class 8 truck market recovery offset a 3% decline in the light vehicle market; net income was US$67 million, down 1% year-over-year. CECEP Solar Energy: Third-quarter revenue was US$436 million, up US$117 million or 37% year-over-year; segment net loss was US$7 million. The company continues to ramp production at its wafer and module plants, but more slowly than expected. As productivity improves, output and profitability will increase. Demand remains strong, and market preference for U.S.-made CECEP Solar Energy products continues to strengthen. Recent U.S. trade actions under Section 232 of the Trade Expansion Act of 1962 have improved the overall pricing environment and demand for Corning Inc's CECEP Solar Energy products. The company is steadily progressing toward building a CECEP Solar Energy business with more than US$3 billion in revenue and above-company-average profitability. Life Sciences and Emerging Growth Businesses: Revenue grew 1% year-over-year, with Life Sciences outperforming its end markets; net income decreased US$13 million year-over-year, mainly due to investment in emerging growth projects. Fourth-quarter outlook: Revenue expected to grow approximately 19% year-over-year to US$5.2-5.3 billion, and earnings per share expected to grow approximately 36% year-over-year to US$0.96-1.00. Capital allocation and cash flow: The company plans to double its size from US$20 billion to US$40 billion by the end of 2030. Historically, the company has had to invest capital ahead of revenue and free cash flow, then earn high returns and strong free cash flow. The company is continuously improving this model by reasonably sharing investment risk and responsibility with customers. The customer prepayment mechanism is reflected in operating cash flow under the "customer deposits" line item; in the first nine months of this year, this amount was US$639 million, including net customer prepayments received during the period (net of prior deposits returned as customers purchased committed volumes). This mechanism smooths the cash impact of capacity additions at the macro level, first funding upfront investment and later returning customer deposits through operating cash flow generated by profitably delivering committed volumes. In the first nine months of this year, the company generated US$2.3 billion of free cash flow while steadily investing US$1.3 billion in capital expenditure to add capacity. Planned 2026 capital expenditure is approximately US$2 billion, mainly to support optical communications growth. The company plans to keep this flywheel running in the new phase, continuing to increase free cash flow and improve its financial structure while investing to double its size. On capital allocation, the company prioritizes investment in organic growth opportunities that generate significant returns while maintaining a strong and efficient balance sheet. Its debt maturity profile ranks among the best in the S&P 500, with current average debt maturity exceeding 20 years and no significant debt maturities in any single year. The company expects to continue its strong track record of returning excess cash to shareholders. With an already strong dividend, the primary means of returning cash in the future will be share repurchases. Key takeaways: The Springboard plan has been a great success to date, delivering significant growth and substantially improving the financial structure while building strong capabilities, manufacturing platforms, and deep customer relationship foundations. Third-quarter results and fourth-quarter guidance already demonstrate the momentum of the next phase of Springboard. The company expects revenue to double from US$20 billion to US$40 billion by the end of 2030, with earnings per share growing significantly faster than revenue, further improvement in financial structure, and free cash flow growing throughout the planning cycle, even with continued investment. III. Q&A Session UBS Josh Spector: What is the margin trajectory for Optical Communications? Incremental pre-tax margins are still above 40%; do you have confidence to provide a target? Edward Schlesinger: Optical Communications net margin has risen from the mid-teens to the low-20s, with room for further improvement, and is significantly driving the company's operating margin up to the low-20s. The company will continue to add optical communications capacity, while the CECEP Solar Energy business remains a margin drag. We are not ready to provide a new target yet, but you should expect the company to maintain current levels and improve gradually as it grows. Josh Spector: Company expenses decreased by about US$50 million year-over-year, an important reason Q3 met expectations. Does this involve cost allocation between the company and segments? What is the Q4 assumption? Edward Schlesinger: No special changes. Variable compensation expense in Q2 and Q3 was slightly above normal levels, flattened in Q3, is not expected to accelerate in Q4, and will reset as we enter next year. Operating expense growth will be slower than revenue, which is a leverage point for the company. Citi Asiya Merchant: The market has concerns about the sustainability of generative AI demand, including constraints such as financing. How does the company view these constraints and incorporate them into Springboard? Wendell Weeks: Anthropic's recently filed S-1 shows three things: growth is strong; the implied profitability of inference tokens looks very substantial; and its primary and persistent constraint is compute, and Corning Inc provides the network connectivity for compute. Customers continue to ask for more, faster, and broader products. Through multi-year agreements, the company requires major hyperscaler customers to help fund and lock in capacity to reduce shareholder risk. Currently no customer is asking to reduce; all are asking for more new products, faster and broader. Asiya Merchant: Any update on the scale-up opportunity? What is the photonics roadmap through 2030? Wendell Weeks: Current demand is mainly from scale-out, i.e., connecting every GPU in the cluster; current architectures use about 16 fibers per GPU. Scale-up architectures are currently 100% copper; if 100% converted to optical scale-up, fiber per GPU would increase to 160 strands, a tenfold increase. The company remains firmly convinced that optical scale-up will begin to accelerate in 2028; this is a classic technology development process, and the company is inside that ecosystem and highly confident. Morgan Stanley Meta Marshall: Is there a capacity allocation conflict between carrier and enterprise businesses? How has the CECEP Solar Energy drag been quantified previously? Wendell Weeks: The company started early and laid out capacity in advance, so revenue growth has been relatively smooth. Adoption of the latest high-density products has been faster and broader than expected; traditional carrier customers also want to use these products in DCI architectures, and the same conduit can hold 2-4x more fiber; generative AI is also driving demand for high-density products. Capacity is tight mainly because customers all want the latest products, and the company is still ramping output of these products across all platforms. On allocation, the company prioritizes customers with whom it has partnered for decades; when adding capacity, it favors customers willing to fund capacity, which will change the revenue allocation mix. Edward Schlesinger: The most important thing on CECEP Solar Energy is the Q3 Section 232 ruling, which has a positive impact on both the pricing environment and demand for U.S.-made CECEP Solar Energy products, reinforcing the company's confidence in building a business with more than US$3 billion in revenue and good profitability. The company produces polysilicon, wafers, and modules in the U.S.; Q2 marked the bottom, Q3 was roughly flat, and the margin drag was similar to Q2. Gradual improvement is expected through 2027, with productivity gains driving profitability. JPMorgan Marc Vitenzon: Revenue growth accelerated from 17% in Q2 to 19% in Q3; how much came from demand and how much from new capacity? Wendell Weeks: Supply and demand are tight, and revenue growth comes from both new capacity and demand. The company already has a capacity plan to support the next phase of accelerating from 15% CAGR to 19%. In addition, realized prices are rising; new products create value for customers, and the company increases revenue per unit of capacity by sharing value creation with customers. Marc Vitenzon: Carrier business has historically grown at mid-single digits. With Verizon and AT&T signed this quarter, plus Lumen and Zayo previously, what is the carrier growth outlook for 2027? How much will DCI and fiber-to-the-home each contribute? Edward Schlesinger: DCI is the larger opportunity in the carrier space and is expected to drive good growth next year and beyond. The company previously expected DCI to become a US$1 billion business by the end of this decade; that will clearly happen earlier and exceed the target. No new target has been set yet and will be updated later. Fiber-to-the-home will also continue to be a growth driver, major carriers will proceed with deployments, and the company is well positioned. BofA Wamsi Mohan: Of the US$2 billion 2026 capital expenditure, how much is customer-funded? How will the proportion change in 2027 and beyond? How much will customer deposit returns affect free cash flow in 2027 and 2028? Edward Schlesinger: Not all capital is optical communications or growth-related; some is maintenance capital. Excluding maintenance capital, most capital is funded by signed long-term agreements, and over time this will trend toward balance, though it may not match perfectly in any single quarter. The company typically receives cash before spending capital. On cash flow, the company's goal is to continue increasing free cash flow throughout the planning cycle as CKH HOLDINGS investment increases, as already reflected in 2026. Even with returning customer deposits, the company still expects good free cash flow growth because committed sales volumes will generate good profit and cash, part of which is returned through incremental operating cash flow. This mechanism smooths cash flow, reduces volatility, and drives free cash flow growth as sales grow. Wamsi Mohan: How large is the display glass price increase? How much will be reflected in Q4? Will it fully offset the weak yen? Will Q4 return to normal? Edward Schlesinger: The price increase is being implemented and takes effect in Q4, but the Q4 impact is expected to be insignificant, mainly targeting 2027 and beyond. The yen remains weak, and some input costs have risen. In May, the company lowered the yen assumption in its long-term plan to 150 and continues to hedge; it hopes hedging performs better, which is the reason for the price increase. We do not disclose the specific magnitude; you can refer to previous adjustments. Wolfe Research George Notter: What is the impact of Chinese fiber on the business? Are you seeing Chinese fiber enter the market? Wendell Weeks: The market exposure share of Chinese fiber continues to decline, partly because more and more fiber is used in highly integrated complex connectivity products; after integration, shipping and tariff costs are higher, and it is no longer as simple as shipping fiber spools. The company has always competed with Chinese manufacturers in China, relying long-term on its position as the world's highest-quality, lowest-cost, largest-scale producer and continuing to widen its advantage. We do not see significant competitive pressure at present, but we are always prepared for the moment it may appear. Truist Matthew Niknam: How will Q4 revenue of US$5.2-5.3 billion be distributed across segments? What are the relative changes versus Q3? Also, the company filed a US$2 billion ATM equity program a few months ago, has US$2.5 billion of cash on the balance sheet, and cash flow is growing. What is the rationale for the ATM? Under what circumstances would it be used instead of debt or customer prepayments? Edward Schlesinger: Q4 optical communications will be very strong and contribute the vast majority of the year-over-year increase; within Enterprise, the AI data center portion is growing 100%, with very strong demand. CECEP Solar Energy will also continue to drive growth; as capacity comes online and productivity improves, it will begin to affect profitability, but at a slow and steady pace. Overall dynamics are similar to Q3. On the ATM, the company already has a debt shelf registration; this is similar to an equity shelf registration, a routine arrangement with no current intention to use it, just a tool for future needs. The company values a strong balance sheet and invests in innovation over long cycles; it is currently growing fast, adding capacity, and has many technology opportunities. It wants to ensure it can continue investing through cycles regardless of the external environment, so it continues to improve its balance sheet; the ATM is just a routine tool on the shelf. Oppenheimer Martin Yang: What is CECEP Solar Energy's mid-term profitability? Company operating margin continues to rise; is the target of CECEP Solar Energy reaching the company average by the end of 2027 still valid? Is it chasing a moving target or reaching the prior company average? Edward Schlesinger: CECEP Solar Energy is currently below the company's operating margin and is a drag. As productivity improves, profitability will increase, at a slow and steady pace. The Section 232 ruling is favorable for the pricing environment and has a positive impact on margins. It should be viewed as continuing to help raise the company's average margin as it improves. If CECEP Solar Energy margins exceed 20%, it would significantly improve the company's overall average. The company's average margin may rise faster than CECEP Solar Energy reaches its ultimate profitability level; that is a "happy problem." Mizuho John Roberts: Starlink is usually seen as a competitive threat, but as it expands into terrestrial networks and data centers, is it becoming a "frenemy" or even more important? Wendell Weeks: The company is positive on low-earth-orbit (LEO) satellites for two reasons: first, the company has related product content; second, LEO can connect sparsely populated areas and network blind spots, and shared architecture can improve bandwidth; as it moves more into data centers, it will become an important driver of the company's products. Data landing networks will inevitably rely on fiber. Overall, we are very positive on LEO and believe it is an important part of the ecosystem; the company likes its customers. John Roberts: The yen hedge ratio fell from 98% to 94%; do you plan to reduce it by about 4% each quarter? Edward Schlesinger: No such plan. The company tries to hedge most of its exposure each quarter; the ratio fluctuates slightly depending on the quarter, and the goal is to hedge as fully as possible.