Growth In Data Traffic Will Drive Corning's Optical Communications Segment

Mar.28.14 | About: Corning Inc. (GLW)

Corning (NYSE:GLW), a leading manufacturer of glass substrates for LCDs in consumer electronics, generates close to 30% of its revenue from its Optical Communication segment. In 2013, Optical Communication division revenue grew 9.2% to reach $2.3 billion. We believe that the segment will continue to grow driven by growth in data traffic over communications networks. Cisco forecasts that global network traffic will increase 23% every year through 2017. [1] In order to support the increasing traffic, sales of optical fiber cables, components and equipment will increase, driving the segment's revenue.

A Brief Overview About The Segment

The Optical Communications segment, formerly known as the Telecommunications segment, was renamed in 2013 to better represent the optical based solutions offered by Corning. The division offers optical fiber and telecommunications hardware and equipment. The division is segregated into two segments - Carrier Network and Enterprise Network. The two segments offer relatively similar products, however the difference lies between the end customers they serve. The Carrier Network segment offers products and solutions for video, voice and data communication, and is utilized by end users like telecommunications service providers and cable operators. The Enterprise Network segment caters to the needs of individuals and businesses looking to use optical fiber and cable to fulfill their personal network requirements.

We currently have a price estimate of $18.88 for Corning.

Trends Supporting Growth In Data Traffic

Increasing use of video content: The growth in traffic will primarily be driven by online video traffic. People nowadays prefer to watch video content such as movies, TV shows and news over the Internet. Additionally, the convenience and cost efficiency of web-based video conference and calls also encourages people to use the Internet. By 2017, video based data traffic is expected to grow to 69.4% of overall data traffic, up from 60% in 2013.

Penetration of mobile devices: Growth in data traffic will also be driven by growth in mobile devices such as smartphones, tablets and notebooks. Mobile devices have enabled greater access to the Internet. With capabilities such as video calling, browsing, online video streaming, emails and online messaging, the increased penetration of mobile devices will help growth in data traffic. Data traffic originating from mobile devices is expected to grow at a rate of 61% every year until 2018. [2]

Growth in demand for cloud computing: Consumers are moving away from traditional storage and processing methods toward cloud computing since it offers the flexibility of accessing data from any location. It also saves costs since it reduces hardware requirements for storage and processing. A very simple example for cloud computing would be where a person stores photos online though services such as Dropbox or Google Skydrive instead of storing on the hard drive of their computers, laptops or mobile phones. Global cloud traffic is expected to grow 35% every year until 2017. [3]

Optical Fiber Will Be Preferred Over Copper Wire To Support High Volume Of Data Traffic

In order to cater to the high data traffic expected in the future, the medium through which data travels should be able to support huge amounts of data and facilitate high speeds with minimal data loss. There are two options available that offer the means to transport data - one is copper wire and the other is optical fiber. Optical fiber is far superior to copper wire.

Since optical signals are based on light, they travel faster than the electric signals traveling through copper wire. Optical fiber has greater bandwidth - i.e. capacity to carry data compared to traditional copper wire. Also, loss of data is higher in copper wire compared to optical fiber, reducing the requirement of equipment to boost signals. Therefore, optical fiber will be preferred over copper wire in order to support growing data traffic and will help boost sales of optical fiber cables, components and related equipments.

Sufficient Production Capacity At Corning Will Help Cater To The Growing Demand And Improve Margins

Given the above trends and the advantage of optical fiber over copper wires, the optical fiber components market is expected to grow to $80.6 billion by 2018, a growth rate of around 14% every year. [4] Corning is well positioned to capitalize on this growth opportunity since it has sufficient capacity to cater to the demand. In 2000, Corning had invested heavily in its optical fiber production capacity expansion. [5] However, due to the IT bubble burst around the same time, the majority of that capacity was left unused. Utilizing the excess capacity will also enable Corning to improve margins since fixed costs will be spread out over a larger number of production units.

Disclosure: No positions.