Corning Incorporated — 2024 Q1

I'll start with the second one and then maybe, Ed, you can discuss the first. So on BEAD timing, we tend to be relatively conservative in our outlook of how effective the government can be in allocating resources to build networks. We're in strong support of this. It requires U.S. content and we think it's aimed well and it will be done. The funds have been allocated. But the process, we would tend to be a little -- our expectations are being a little slower than what you see as the industry overall. We think they'll get allocated this year and you won't really start to see spending until next year. That's our current point of view [indiscernible]. Does that answer your question?

Yes, Meta, on your other question. So first, I would start with we actually have capacity to do much more than $3 billion in sales. I think we're framing it up as we see it. Where those sales come from, where those opportunities come from will depend on whether we need to add anything beyond what we have in place today, but we feel very confident in supporting a number well above $3 billion.

That's a great question. They're relatively recent, and we're still in the midst of trying to understand how that will play out when it hits the consumer. Our expectations have been for China retail demand to be relatively muted this year. You're right to point it out, we're just a little early in being able to analyze and predict what its impact will be like. We'll get back to you on that as our understanding evolves.

Right, that's -- let me take the first question. That is a wonderful deep question, Samik, on the first one, mainly because as the locus of panel manufacturing has shifted from Korea, Taiwan, into China and that high concentration there has begun to lead to sort of different behavior between set makers and panel makers. One of the things that led to the sort of classic crystal cycles would be that, a, you had a very strongly growing market, which meant predicting how much capacity you would need was challenging because you had to get the rate right.

Yes. Samik, as you articulate, panel maker utilization was low generally in Q1. We certainly saw a step-up towards the end of the quarter. We're expecting them to run at higher levels through the second quarter and really through the year because if retail is flat just to meet that flat unit demand, they would have to run at significantly higher levels for the remaining 3 quarters of the year to meet that demand. We're not guiding specific volume increase from Q1 to Q2, but I think it's pretty meaningful.

Thank you, Tim. On the 5G piece, I think that the challenge that our customers in telco have faced is that 5G, you move from a technology in 4G, which wireless is very wireless, right, to 5G, which, therefore, takes wireless and starts to make it more wireline. And therefore, taking a good amount of infrastructure to put in place. Now interestingly, what they've taken advantage of is if they're going to do that, you see them combining their networks from wireline and wireless into one. And that allows them some significant cost savings and offers many different potential revenue opportunities for a given deployment of network. Now -- so in a way, you're seeing their cost productivity improve, their ability to serve improve. There is a challenge of how much revenue -- incremental revenue the 5G at this stage has generated, and that is something they have wrestled with.

The answer to your question is yes. It is an interesting opportunity. And it is -- coming back to [ enhancing ], hey, capability we have that others don't, which is this ability for us to actually respond globally across a really big geographic footprint, not only in the U.S. but across the globe. Because this search for energy is more than just finding the exact right communities here. And so yes, it does offer a significant opportunity for us for both innovation as well as volume. But it's too early to factor that in because they haven't found all the energy sources yet that will be required, and they're still dealing with the infrastructure ramifications therein.

Sure. Thanks, Asiya. On inventory, just think of it as we had a very low volume quarter in general. Our volume will go up through the year. So we still view inventory as an opportunity to take it down from the level we're at and we think that will be a catalyst for cash flow in 2024. With respect to OpEx, I'm going to answer your question, but I'm going to reframe it a little bit as well.

Yes. No apologies necessary, Asiya. Yes, what I shared earlier was the most important thing is to think about the return we generate in this business, our goal is to generate an appropriate return. You could think of that as what we will deliver in 2024 or what we delivered in 2023. And we're going to use yen hedging and raising price in combination to generate that economics or those economics to generate that return.

Congrats on a solid quarter. This is James Cannon on for Josh. I just wanted to poke on the powerful incrementals you described. We're talking about a $3 billion sales opportunity. I mean if I look back at kind of last couple of quarters, your gross margin has held in pretty steady despite sales declining. I think there's some noise with display pricing coming through. Can you just give me some color as to how we should think about the cadence of gross margins as we go through the rest of the year?

Yes. Thanks for the question. I think the way to think about it is if you go back to Q2 of -- I'm sorry, Q4 of 2022, that was our low point. We've expanded our gross margin 300 basis points while our sales have come down almost $400 million. We've done that by improving our productivity ratios, running our factories better and by raising price.

Okay. I guess just another way to think about it is, as that $3 billion comes through, like I think 40 has typically been your target. Like has that changed? Or is that where you think -- that's where you think you can get to?

Yes. So I think we can get there. But just as a reminder, the 40, if you go back in time, we've absorbed a significant amount of inflation and raised price, which brings our margin percentage down. So 38% is sort of the new 40% in old math. But I still think despite that new base, we can get back to that 40% level as we accrete our sales up.

Yes. I think it was more or less in line with how we would have expected it. I think it's a business that will grow as we add more Corning content. That's the way we think about it for the year. We don't see smartphone market being up that much in units maybe a point or 2 for the year. There certainly can be some growth in the IT space, but even that is single digit, maybe mid-single-digit level.

And we just don't see a lot of that happening this year. Steve, we'll be -- this is most of our newest innovation will be aimed at the model year following this. So we're not looking at MC as being a big catalyst for near-term growth in terms of versus Q1, right, for this year, but future it will be.

Super. We've got time for another question.

The appropriate level of profitability would include any cost of hedging. We're long yen, right? And so the -- you heard, and Ed was pointing out sort of over the sweep of time, we generated on the order of $2.5 billion of cash, positive cash arising from our hedges, right? That or us hedging that long end position. And the way we think about this is that position is coming from the fact we sell in yen. And so we will resolve this either in the currency market should the yen come back to more sort of reasonable levels, right? And we'll be opportunistic about that.

Yes.

Thanks, George, and thank you, everybody, for joining us today. Before we close, I wanted to let you know that we will hold our Annual Meeting of Shareholders on May 2. In addition, we'll also attend the JPMorgan Technology Conference on May 21. And finally, we'll be hosting management visits to investor offices in [ select cities ].