Q3 2019 Earnings Call
Welcome to the Corning incorporated in quarter, three 2019 earnings call. It's my pleasure to turn the call over to and Nicholson Vice President Investor Relations.
Thank you Shawn and good morning, everyone and welcome to Corning third quarter 2019 earnings call with me today, our window weeks, Chairman and Chief Executive Officer, Tony Tripeny, Executive Vice President and Chief Financial Officer, and Jeff, Even said executive Vice President and Chief strategy 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, Oh statement involve risks uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the Companys financial reports you should also note that we will be.
Discussing our consolidated results using core performance measures.
Yes, we specifically indicator comments relate to GAAP data, our core performance measures, our non-GAAP measures used by management to analyze the business.
Reconciliation of core results for the comparable GAAP values can be found in the Investor Relations section of our website. According dot com.
You May also access core results on our website with downloadable financials in the interactive analysts center supporting slides are being shown live on our webcast. We encourage you to follow along there also available on our website for downloading now I'll turn the call over to Wendell.
Thank you and good morning, everyone. This morning, we reported results in line with the early update we released in September .
Sales were $3 billion net income was $397 million.
<unk> was 44 cents.
Well challenges unfolded throughout the quarter.
Results and expectations are consistent with our September update.
We are not immune to the types of challenges facing us in many other companies discerning seasons.
But I think we are more resilient then it any other time in our history.
And we are taking actions on the things within our control.
We're adjusting our cost and capacity while at the same time, maintaining focus on key growth initiatives.
We continue to invest in technology, and innovate with industry leaders across our markets as we pursue the rich.
Opportunities outlined in our 2020 to 2023 strategy and girls framework.
I'd like to share a few other important notes on the corridor.
The favorable pricing environment in the display market continued as third quarter glass prices in display technologies were consistent with the second quarter.
Environmental technologies grew sales, 20% year over year as the company's gasoline particulate filters solution propelled sales well above the underlying auto industry growth rate.
Specialty materials in life Sciences also grew faster than the underlying markets as adoption of Corning's, New technology continued.
Of course, we're living in an uncertain times.
We see it in the headlines about trade disputes political unrest and China's economy.
[laughter] amid this uncertainty you may be wondering why we continue to be confident that we will grow over the next four years.
[laughter] part about confidence stems from the relevant so by technology leadership, and the tangible customer commitments that support our build projects.
We're also confident because were not just counting on everybody buying more stock.
Instead, we're putting more corning into the products that people already bye.
This provides a mechanism for us to grow even when spending in the end market categories down.
There's no clear example, then in automotive.
In the third quarter, we grew sales and environmental 20%.
In a market that is expected to be down 3% this year.
Our growth is driven by increasing sales of our proprietary gasoline particulate filters, which tracks find particularly and help reduce harmful engine emissions.
From a financial perspective, G.P.S. increase corning's opportunity per car by $30.
These types of content plays create a path for growth, even when underlying unit demand is flat or declining.
As our environmental results are demonstrating.
Uh huh.
Back to double our sales to the auto industry by 2023.
By adding auto grade interior glass solutions to G.P.S., we increase our opportunity per car by another $25 to about $70 in total.
That's up almost a factor of five versus just two years ago.
And additional products will further increase our opportunity.
So we're not counting on more cars being sold were driving more corning into each car.
In short.
A big part of Corning story over the next four years is a content story.
We see it playing out in mobile consumer electronics display optical communications and life science vessels as well as automotive.
Because we're capturing significant technology substitution.
We have sales drivers beyond just end market growth.
Let's look at how we advanced our strategy in each market access platform in the third quarter.
In optical communications, we continued to be impacted by capital spending reductions in both the carrier and enterprise markets.
Despite this near term weakness.
We are confident in our ability to outperform the passive optical market over time.
As you've seen with fiber to the home and corporate data centers Corning is the unquestioned technology and market leader.
We delivered on those opportunities and we are well positioned for the next wave of growth as Fiveg and Hyperscale data centers drives the optical signal closer to the hedge.
Our near term goals in optical communications I do a line cost with demand.
And to continue in advancing our product portfolio through co innovation.
We made progress in both areas during the quarter.
[noise], Verizon and Corning, our coal innovating at our manufacturing and Technology Center in Hickory North Carolina.
Engineers from both companies are using varieties and Fiveg ultra wide band service and corning's optical fiber and cable innovations to explore the capabilities of fiveg in a manufacturing environment.
Our work will demonstrate five g.'s ability to revolutionize the way goods and services are produced as the technology enhances capabilities like machine learning augmented reality and virtual reality.
Corning is also called innovating on Fiveg with Intel.
We're making future fiveg in building that works scale up all and easy to install.
Our innovations will allow for faster adoption of Fiveg features as they are standardized.
Shifting to Hyperscale.
Good morning, and Facebook I, demonstrating how to meet ever increasing bandwidth demand through space Division multiplexing or astea.
Internet content providers like Google and Facebook are making SDM their primary strategy for increasing capacity between their data centers across the globe.
In short this technology boost the number of fibers in submarine cable and multiplies corning's opportunity per cable by up to four times.
And mobile consumer electronics, we're well on our way to doubling sales despite a maturing smartphone market.
Apple announced that it is awarding $250 million from its advanced manufacturing fun to Corning.
This builds on the $200 million, we received from apples fund in 2017.
Both investments support Corning state of the yard glass processing equipment and materials integral to the delivery of next generation consumer devices.
In the third quarter, we continued to lead the industry as our innovations were adopted on more and more devices.
Apple announced phones with the toughest glass ever used on a smartphone.
And we saw the launch of multiple laptops convertibles in tablets with Gorilla glass.
Good morning continues to win new device categories with nine wearable launches in quarter three.
For featuring Gorilla glass de acts and de X plus.
Gorilla glass Dx delivers improved optics, well be X plus also provides scratch resistance approaching the finest watches.
Both maintain the superior drop performance of Gorilla glass.
Moving to the automotive market as I already noted our goal is to double sales by 2023.
In the third quarter, we continued ramping production capacity in halfway China to meet committed demand for both our auto glass solutions and our gasoline particulate filter products.
We're making great progress building 500 million dollar plus GPF business, and we expect over $200 million in 2019 sales.
Our auto glass solutions business continues to build its order book.
Next month Guandjo auto show.
Industries first shaped dual display module with a single cover glass part will be on display.
In the G.A.C. I on L. acts an electric vehicle.
The modules cover glass is produced using corning's three D cold for technology.
In life Science vessels, we have some very exciting news.
The F.D.A. has approved Corning valor glass for use as a primary packaging for an already marketed drug produced by a leading pharmaceutical company.
This approval makes a valid glass the first and only fundamentally new glass composition to be approved by the SDK since the advent of Boris silicate glass more than 100 years ago.
This approval also marks a major milestone in our strategy to build a long term multibillion dollar franchise.
And the success provides another step on our journey to create a new higher standard.
Pharmaceutical glass packaging.
Overall, we continue making good progress with our development partners interest engagement with other major pharmaceutical manufacturers continues to grow.
As well.
In display our goal is to stabilize returns in the near term retail demand continues to track to our expectations with TV viewing area growing year to date through August .
Set makers are purchasing panels more conservatively, apparently due to macro uncertainty withdraw panel maker utilization reductions in the third quarter.
This caused the panel makers to purchase less glass in the third quarter.
We expect this supply chain adjustment to be temporary and for panel maker utilization to increase in the first half of 2020 .
We remain confident in our long term strategy because our growth driver is large size TV.
Which are most efficiently produced by our customers on Gen 10.5 Fabs.
Our leadership in Gen 10.5 glass supports medium and longer term volume growth. Despite.
Temporary supply chain adjustments.
And we have great news about pricing.
We now expect full year glass price declines well have a low single digit percentage compared with our previous guidance of a low to mid single digit percentage.
You can see that across our markets, our strategic investments are well aligned with major trends and our relationships with industry, leading customers are creating new opportunities.
Of course, we understand our current environment.
And we'll continue to navigate thoughtfully through any headwinds that may arise.
Now, let me turn the call over to Tony for more details.
Thank you Wendell and good morning.
In the third quarter Corning took steps to offset recent market headwinds.
In display technologies, we aligned capacity to demand.
In optical communications, we idled capacity and reduced capital spending to reflect our customers near term infrastructure investment plans and across the company, we reduced operating expenses to align with near term sales projections.
Wow, we experience these headwinds and took steps to offset them. It is important to note that even in these challenging market. We grew sales year over year and faster than the underlying markets and environmental technologies life Sciences and specialty materials.
It is also important to note that why we are taking these steps we continue to advance our long term growth initiatives and investing in technology and innovating with customers to capture future commercial opportunities.
Now before I get into the details of our performance and results I want to note that the largest difference between our GAAP and core results.
From charges related to capacity realignment in display technologies and optical communications.
Other differences between our GAAP and core results come from a noncash mark to market adjustment for our currency hedge contracts and a change in our tax reserves.
With respect to Mark to market adjustments GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark to market and recorded a card value at the end of each quarter, even though those contracts will not be settled in the current quarter.
For us this impact a GAAP earnings in the quarter in quarter, three by $72 million out to be clear this mark to market accounting has no impact on our cash flow.
Our currency hedges is our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for earnings and cash flow, our ability to invest for growth and our future shareholder distributions.
Our non-GAAP or core results provide additional transparency into operations by using a constant constant currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty. It provides we received $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
That brings me to our results and outlook for the third quarter sales were $3 billion net income was $397 million an S was 44 cents.
Operating cash flow in the quarter was $864 million as we said in July we built working capital in the second half. We also said we expect it to reduce working capital in the second half.
We sorry, it as I said in July we built working capital in the first half. We also said we expect it to reduce working capital in the second half and we did reduce working capital in Q3 and expect to further reduce it in Q4.
Now, let's look at the detailed segment results and outlook.
In display technologies third quarter sales were $793 million and net income was 185 million.
Net income was down year over year, primarily driven by the lower volume.
Third quarter volume was down high single digit sequentially and prices were consistent with the second quarter.
Well as expected.
Now there's no change in our outlook in terms of volume retail demand is tracking to our expectations with TV viewing ariad growing year to date through August and preliminary data for September is also encouraging.
The industry, However remains conservative on inventory and panel maker utilization is expected to stay at current levels in the fourth quarter.
Consequently, Consequently, we expect our fourth quarter glass volume to be down mid single digits sequentially.
That said, we expect this current supply chain adjustment to be temporary we expect panel maker utilization to increase in the first half a 2020 over the second half of 2019.
Glass pricing in the fourth quarter continues to be positive, we expect prices to the client only slightly sequentially, which is equivalent to down low single digits year over year.
For the full year, our volume outlook remains consistent with our September 16th update we expect our volume to be up slightly year over year, which is higher than the glass market driven by the ramp of our Gen 10, and a half facility and halfway.
In terms of price our outlook is more favorable than our previous guidance. We are revising our full year price guidance, the low single digit declines from prior expectations.
Lower to mid single digit declines.
And we expect that the favorable pricing environment well continue into 2020.
Now three factors drive our view.
First we expect glass supply to continue to be balanced it demand or even tight.
For Corning, we're aligning our capacity with demand. We are also pacing our gen 10, and a half capital projects to align with panel makers schedules.
Second our competitors continue to face profitability challenges at current pricing levels.
And third display glass manufacturing requires periodic investments in existing capacity to maintain operations glass prices must support acceptable returns on those investments.
In summary, we are experiencing a temporary supply chain correction.
However, retail TV viewing areas growing and expected to create more demand for display glass, especially a gen 10 and a half.
As the leader in Gen 10, and a half we expect to capture most of the growth and we expect the favorable pricing environment to continue.
Results in optical communications were consistent with our September update.
In the third quarter sales were $1 billion and net income was $127 million.
Our third quarter sales and net income were down versus last year.
These results reflect overall, mark this market weakness, including the spending decisions of several major carrier customers.
For the full year, we continue to expect sales to decline in the 3% to 5% range as previously guided.
We have taken actions to align our cost to our current sales reality, including idling capacity pacing capital projects and reducing operating expenses to align with near term sales projections.
At the same time, we continue to innovate to improve network speed cost and capacity and to secure a long term agreements with major industry players sustaining our confidence in our ability to outperform and deliver long term growth.
In environmental technologies third quarter sales were $397 million up 20% year over year and ahead of expectations driven by continued adoption of gasoline particulate filters and strong demand in the heavy duty diesel market.
Net income grew 32% driven by strong operational performance and successful ramping of additional G.P.F. capacity in China.
We are well on our way to building a greater than 500 million dollar gasoline particulate filter business.
With a market leading product we continue to earn a majority position globally as automakers award platforms to meet Euro six and China sex regulations.
Sales are accelerating is euro six regulations are in full effect and automakers are preparing for China six implementation in 2020.
Our halfway plant startup is ahead of schedule and has been key to delivering incremental sales and net income.
As a result, we continue to expect GPF sales to exceed $200 million in 2019 and to grow robustly thereafter.
Our strong performance is expected to extend into the fourth quarter with sales growth up by a low teen percentage year over year.
Given a strong second half we now expect full year sales to be up by a mid teen percentage compared to our previous guidance of a low teen percentage.
In specialty materials third quarter sales were $463 million and net income was $92 million.
We were pleased with strong sales from our new innovations as Wendell noted.
However, our overall sales growth was muted because our gorilla glass shipments in China were lower due to the current trade environment and advanced optics sales were down on semiconductor market weakness.
From a profitability standpoint, some of our newer innovation start initially at lower margins and could not offset the loss them higher margin gorilla glass and hail products.
We anticipate these issues will improve over time as the trade situation is resolved the semiconductor market returns to growth and we reduce cost on newer innovations as we come up the learning curve.
For the fourth quarter, we expect sales to be approximately flat year over year.
We expect for full year sales growth again, despite a smartphone market that is down year over year.
This growth is driven by adoption of new innovations, including premium cover glass and innovative parts products, including Dx plus for Wearables.
Life Sciences third quarter sales were $256 million up 11% year over year net income was $41 million up 37%.
For both the fourth quarter and the full year, we expect sales to be at mid single digits year over year.
In summary, our third quarter performance was impacted by changes in the display and optical markets and we took actions to lower our cost to align with those lower sales.
We now expect the full year price decline in display to improve to a low single digit percentage.
We grew sales and environmental specialty materials, and life sciences year over year and faster than their underlying markets.
And we delivered strategic milestones with apples investment and after FDA approval of Valor glass.
Now, let's turn to the consolidated PNM.
Gross margin in the third quarter was 39% as expected.
Last quarter, we talked about the Gen 10, and a half facility and I'd like to give you an update we continue to make progress coming up the learning curve and improving our cost in our Gen 10, and a half plant, which should lead to further improvement in 2020.
We are excited about our gen tenant have projects because they enable us to capture the majority of the market growth and will ultimately provide a step change in glass manufacturing.
For the rest of RPN out there has been no change in our guidance.
Gross margin is expected to be approximately 39% in the back half.
SGN NRG any are expected to be just under 14% and approximately 8.5% of sales respectively for the year.
And capital expenditure expect are expected to be approximately $2 billion.
Moving to additional outlook details, we expect other income other expense to be approximately $260 million for the full year.
Full year gross equity earnings are expected to be approximately $230 million predominantly from hemlock semiconductor.
And we expect our effective tax rate for 2019 to be approximately 20%.
In closing we acted quickly in the third quarter to address changing market conditions, we met our revised targets. We continued our actions to advance our long term growth plans and we remain confident in our strategy.
We are operating on the strong foundation that we built over the last four years, and we're making progress in key areas as evidenced by our ongoing customer announcements.
This makes us confident in our ability to achieve the objectives, we laid out in our 2020 to 2023 strategy and growth framework.
With that let's move to Q in eight and.
Thanks, Tony pay Sean we're ready for our first question. Thank you and ladies and gentlemen, if you do wish asked a question. Please press star one under Touchtone phone.
Our first question is going to come from line of see a merchant. Please go ahead.
Hi, good morning, everyone. Congratulations.
Well executed wondering given the macro environment I.
Two quick question for both.
The multiple growth drivers that you talked about obviously, they're coming into play as you talk about valor here, you're glad that Europe when should we expect pointing to demonstrate like gross margin leverage from these initiatives.
Now and then secondly, just given the macro environment.
Well and the.
The issue for Twinkie 19.
Andrew I mean should we.
Revenue growth for 2020, just sort of.
Thank you worth your.
Strategic outlook, which is around 8% revenue growth gager. Thank you.
So I think from a gross margin standpoint, I mean, clearly what's happened to us and gross margin is really all about volume.
We have lower volume in the back half than what we were expected and it's going to take greater volume.
For us to recover that gross margin, but once that volume occurs you know than our gross margin is going to increase and in terms of these innovations specifically it depends on when those into patients calm, but when they do come they will come with gross margin.
From a gross margin favorable gross margin for us because of all beyond the end of its a really good question and.
It'll be the interaction of we invest.
Usually with very strong customer commitment.
And we need to put it in place ahead of the time as when the demand comes Onstream and in almost all of our cases, we're building the spoke proprietary equipment so as those plants Phil.
And as we work our way through those learning curves, we'll see that leverage.
We'll add as we go through the year next year.
More information for folks.
We're trying to model all this to try to be helpful. On how do we think about these new innovations as they become a bigger and bigger part.
Our of our revenue growth story overtime, So fair request.
And then in terms of 2020, obviously, we're not giving guidance for that but the reason we choose chose compounded annual growth rates in our strategy and girls framework is that we knew there would be times of economic headwinds like we're experiencing now when we you know not likely to have that level of sales growth and there'll be times when.
There's a either really great adoption of our technology, our economic Tailwinds, where that will be greater so you really should think about those objectives, just as we intended and to be which is over a four year period.
Thanks, I'll see you next question.
Thank you [noise].
Our next question is going to come from line of Peters Askew from Barclays. Please go ahead.
I guess slows the Peter over time long I wanted to ask about it and environmental and the outperformance there obviously.
GPF has been doing very well.
How should we think about going into 2020, though.
The the more conventional parse that business the.
Heavy duty diesel for example, and that I've a follow up.
We're not giving guidance on 2020 on today's call, but clearly there have been.
Macroeconomic headwinds that have impacted.
If the automotive market and a appear to beginning to impact the heavy duty diesel market in North America cars at the same time in China. There are new regulations that are going into effect on heavy duty diesel. So you have to factor that in addition, plus the adoption on the G.P.F. you know continues to grow into 2020, because that's actually when the regulator.
Since becoming effect in China.
That's helpful. Thanks.
And then and just to touch on optical.
It looks like or the performance was a little bit better than the the low teens that that.
That that you had guided for.
Is that is that.
Are you seeing any kind of nascent strengthened in the in the service for our spend there or and you factor that you would point to.
Let me address both optical and ER and then you also use it as a bit as an example of.
The more general rule.
Forecasting approach.
So.
As you noted in your earlier question, we tend to grow.
Much faster than our underlying markets as customers adopt more of our innovations in their products.
And this has been true and Opto life Sciences Gorilla in auto over the last four years, where our growth rate has been significantly higher than that of.
The underlying markets, we serve and that's a good thing.
Up but it also means that from a forecasting perspective.
We need to be right about both the underlying market.
And the rate of adoption of specific technologies.
That specific customers in a specific timeframe.
This can be difficult.
During quarter three Oh, we heard from some key customers that they plan to reduce their spending on our products below.
Our existing run rates and our expectations, we in turn lowered our expectations across those industries.
And we initiated actions to adjust our cost and capacity accordingly.
Now as we finished the quarter some customers exceed that assume take rate and we perform better.
That being said our approach for the remainder of the year is the same and we're reaffirming our guidance.
At this time.
Is that helpful to serve.
That's helpful. Thank you.
Thank you.
Our next question that will come from one of Brian Young from Deutsche Bank. Please go ahead.
Hey, Thanks for taking my question.
Want to asked about the automotive gorilla glass opportunity I saw a recent public announcement kinda highlighting gorilla glass windshield as an option on the new Florida 150, it sounds like there's going be multiple new product announcements sort of a in line with commercial trucks.
My question is are you seeing an uptick in the exterior glass interest and if you could just update us on the broader interior automotive glass opportunity that'd be helpful.
Thank you for the question. So the answer is yes.
Continuing to see a momentum building on X.
However at the same time, the very strong positive upside has been demand for our new technologies in interior.
And we've been shifting more of our resources because the key to innovation is you have to go really towards those positive surprises.
Towards interior.
And we continue to build volt, our order book and momentum there.
We were expansively excited about being able to demonstrate our proprietary cold foreign technology.
In commercial offering.
And I talked about for J C.
And we expect to have more momentum there as well.
So right now Oh, we're beginning to scale our plant that we just put in place and have a China and we're really excited about our opportunities.
That being said.
Much like you point out on exterior.
The way the car industry works is we will get a nomination.
Well before.
The sales actually begin.
And so.
Sometimes when you're watching the press there can be some time delay and delayed gratification and seeing when a customer says well when we say we're building our order book at the time period when that revenue shows.
Did I get to the core of your question.
Yeah, absolutely. Thank you.
Thank you.
Our next question that will come from one of James Fawcett from Morgan Stanley . Please go ahead.
Great that's great.
Meta Marshall for James Boss, Oh their games are you on.
Oh go ahead and you got.
Just a question on.
Going to expand upon you mentioned change and timing to the pacing of additional glass facilities and just wanted to know if there's any thing form all around kind of some of the change in timing there and then second on the impact of Valor glass you know just any timing or additional milestones we should expect there [noise].
So I think in terms of the pacing of the Gen 10, and a half facilities I really need to go to each of the customers either on what they're planning to do like the important thing is is that we're in lockstep with them and we're adjusting.
Our pacing and consistent with what they're doing.
And on a valor.
I would expect.
US to continue to build momentum.
We are.
The nature of that industry.
Is one where.
Confidentiality agreements abound.
And so when we announce it is largely dependent.
Uh huh.
How are customers want to handle that topic.
There is an interesting position because.
What we have on offer here is a superior packaging for both the patient safety and productivity standpoint.
Yet at the same time.
First a long period of time this new ascendant technology will live side by side.
With the older technology.
So what our customers have to work through.
As.
As they manage through their change process and their customers. They don't want to be in a position of sort of which customers get the new technology, which can be old and how that works out. So everyone is better served until such time as we build up enough momentum.
And we build up enough capacity.
Hey, we're working with regulators and our customers that this can be talked about in a more easy fashion.
Hi, Thanks.
Thank you.
We have a question one of Rod Hall from Goldman Sachs. Please go ahead.
Hi, This is RK on the alpha flawed. Thanks for taking my question I wanted to ask on display and I'm not giving guidance on 2020, but given the slowness in the second half can we expect glass volume growth better than the mid single digit growth you've talked about in the past.
And should we think about this recent drawdown in inventory, that's a reset to appropriate levels or or I found that doesn't that makers being overly cautious if retail demand continues to hold.
So you're right, we're not gonna give 2020 guidance, but I think the way that you should think about you know what happens.
Hi is what's really happening from a retail demand standpoint, because at the end of the day, that's what's going to drive this market, it's going to drive.
You know, what's going to drive a panel maker Utilizations and it's not only just the number of TV sets that are being sold but it's the size of those TV sets and is you know both went along I said I mean, we haven't really changed our perspective on the market for the rest of the year for the full year and in fact, you know things are coming out a little bit better than what we are.
Originally expected, but equally maybe even more important than that is what's happening with TV sizes 65 inch Tvs are growing greater than 40% on a year over year basis, and 75 inch TV is a growing greater than 60% on a year over year basis. So you know we believe a in the fundamental drivers of.
This what's happening in this business and what's really happening right now is caution with the panel makers in the supply chain, but the set makers in the supply chain because of all the trade uncertainties and you know we think that gets itself worked through the rest of this year and in the first half of next year volume is gonna be better than the back half of this year.
But I think the core of your question is is really good and that if you haven't changed your long term end market view as Tony just went through.
Then as you take a look at supply chain corrections, where you grow.
In some periods.
The supply chain goes faster than that end market and some periods slower. So really you sort of asking when exactly to is that correct.
And when does that growth rate accelerate and I think in Tonys answer you see that we do expect in the first half of 20 right that to be above that of the back half of 29 team.
That being said sort of the core of what we do is not to try to call sort of specific quarters in specific time periods around supply chain. It is a worthy exercise.
But we're re tend to be focused more on that long term market and to get.
Our capacity in the appropriate spot to be able to serve our customers.
That's super helpful. Thanks for that but you also comment on visibility the optical segment and any color on when you expect spending to region.
Yes.
Vertical.
Right.
Here's one of those that so that's a good example of.
Having grown so much faster.
Then the underlying market.
As we entered this year.
We would see a number of signals that the end market.
Would be going.
Down.
And then but at the same time.
We saw adoption of our new technologies.
At some specific customers more than offsetting that sort of underlying heartbeat.
And I think there's probably led to us.
To being able to believe as long as that continued.
We could ride out this temporary dip in the in the end market for optical without had much impact on us that turned out not to be true has some specific customers who are adopting the strong tech changed some of their timing in capital plans.
That being said.
Though it's very hard to call the exact timing by corridor or even by year.
We remain more confident than however that the on demand to the fundamental drivers for the demand of our technology will become increasingly ascendant.
Fiveg is going to take the wireless network for being a fiber poor network to a very fiber rich network.
Our innovations and Hyperscale are going to push that.
Optical signal closer to the edge and use more of our product. So over the long term, we see a set of demand that is higher for glass because densification of networks is occurring that will lead to classification and if we do our job well, we will capture our unfair.
Yes.
Great. Thank you.
Thank you.
Our next question then of course line of loans Wamsi Mohan from Bank of America. Please go ahead.
Yes, thank you or ask the clarification on on display you in your press release, you talked about aligning capacity in display to demand.
When you are you primarily just shifting the timing of maintenance off of last tanks here and if that's the case wouldn't that automatically mean that as you sort of complete the maintenance and bring those tanks up.
You should start to see margins start to recover you know, perhaps as quickly as late this year or early next year.
Well, let's separate the two sort of questions first is what we're going to do around capacity matching to demand both in macro and regionally you're right that our tanks are modular and we always have available to us that ability to manage the timing of when.
Thanks.
Other.
Tools that we bring to bear on managing our capacity as well to better match to particular customer demand in particular regions and we will do that.
Overlaying all that though is just sort of the simple driver which is.
All right now.
Gross margin pressures, primarily being driven by volume.
And as volume comes back as we work through the supply chain, we should see gross margins also come back.
Pad.
Those are interrelated between capacity in demand right because they just helps you on how much leverage you have on that particular number but the core of the piece here is I think if you come to a point of view on when you expect the supply chain correction to be done and when.
We expect volume to come back you will have a good idea the timing of the improvement in gross margins.
Bundle just a follow up on that would you say that are there any dynamics now I mean, we've spoken about this in the past about how Chinese new year for instance, a has changed the seasonality anything that you see that changes the seasonality this year going from Fourq you to one Q yeah.
If we just exclude the supply chain.
They did disruption.
Not really Wamsi I mean, I think that from an overall standpoint, there is a.
A little better seasonality as you go throughout the year, but.
To build for Chinese new year's a lot of that building has to happen in the fourth quarter and so you know I think it's it's really.
There's there's nothing really different I think this year with respect to kind of the in retail market. What is different is you know what's happening in the supply chain and obviously going through a temporary supply chain correction in the back half of this year.
Yes, Thanks Bonnie.
Thank you.
Oh, we have a question one of Steven Fox from Cross Research. Please go ahead.
Thanks, Good morning, two questions. Please first Ah Tony on the gross margin so.
If I understand correctly the difference between originally doing 40% and then doing 39% in the quarter is volumes, but then when we think it had the Q4 can you just wanted to explain the puts and takes to the flat 39% I think you still had some quarter over quarter volume pressures type things a little bit better on LCD and then.
The impact of that capacity shifts and then I had a follow up yeah. Steve you you got it exactly I mean, I think it's that those things and you know we think the back half gross margins going to be around 39% and I think you hit on the things that are tradeoffs in that calculation.
And mixes and net neutral or help or how does that play out.
Right it always.
It's actually a net neutral I mean, you know essentially what you're looking at is is that we are taking actions and died you know each of the businesses have their own dynamics as it comes to the sales numbers, but fundamentally we think we're in the same a place where we work on September 16th which is the back half at 39%.
Yeah.
Okay. Thanks, and then when they'll just on the optical you just made a comment that it's hard to call the timing by quarter even by year.
Understanding obviously that the construct for more demand is there is there any kinda green shoots or anything you would point to that would give us confidence that maybe you've seen the worst of the cuts for optical and that we could sort of build our models off of what we're seeing in second half or is it still that early and too hard to call. Thanks.
That's an excellent.
Questions to tugs.
I think we're still a little early.
I'd like to.
Work our way through.
A little more time here.
And.
Work through some of the changes that we're making to improve our ability.
To get better acuity on these items.
Certainly.
You know, we see a lot of.
Green shoots at Green shoots are taking this form of incredibly strong interest and.
What it is we can do in Fiveg and what it is we can do and hyper scale.
That being said.
We also see this.
As an industry different particular customers sort of working their way through.
Their broad strategy, there brought financial management challenges because at the quarter here is an investment.
Strategy that are pretty significant decisions for them.
So I'd like to get a little more time.
Before.
Updates you on that point.
If you don't want Sir.
No I appreciate all the color. Thank you.
Thank you.
We have a question from line of Samik Chatterjee from JP Morgan. Please go ahead.
Hi, Thanks for taking my question, Oh, I wouldn't draw straight up to be grain trade between 23 plan and you mentioned, you're feeling comfortable still about the sixth street boosting revenue growth target, but do you should <unk> dot and seamless sturdy just wanted to ask more relative to the investment plan. So about playing doing all in the plan of late.
And your 12 million of investments in growth as well as the took eight to 10 billion for dawns up should we now think of those being a bit more backend loaded in dumps of that time horizon or are you still feeling very comfortable in terms of the capex could you prefer an example of six to eat or should we think of them being towards the lower end up that Oh horizon.
All that well have that dong guidance and then if I can just follow up on the gross Oh gosh grew as well can we get some visibility into the gosh feel for the fourth quarter given that looks like for the first nine months your load on the operating cash flow by 900 million from last year last year or there's some offsets here on the lower capex, but.
How should we think about kind of free cash flow outlook for the year.
In terms of the cash flow, let me start with that question you know as I talked about in though in the.
July call, our operating cash flow is seasonal I mean, it is lower in the first half of the earn is stronger in the back half of the year and Ah you know what we talked about was the working capital build that we did in the first half of the year and the expectations that both.
Operating cash flow and improving the third quarter and.
Inventory would come down hard working capital would come down and that's exactly what happened on and that caused us to be positive from a free cash flow standpoint in the third quarter.
And we expect that improvement to continue into the fourth quarters. We have further improvements in working capital. So I think from a full year standpoint, we expect to be positive from a free cash flow standpoint.
In terms of the investments in is the way to think about that over a period of time of course, a lot of those investments as you know Jeff described a on IR day.
Really depend on the customer commitments and the timing from a customer commitments standpoint.
You know, but you know that being said, we're not giving guidance on 2020, but you know I think given the environment. We're in today, you know capital spending probably isn't going to be is high in 2020, but as you go out over time. It really has driven a lot by you know what happens from a customer commitment standpoint.
Thank you.
Thank you.
We have a question one of George Notter from Jefferies. Please go ahead.
Hi, Thanks, guys I wanted to ask about the FDA approval with Valerie glass I guess I'm curious about when do you think that might start to generate revenues for you and then.
Certainly I'm curious about how many other drugs or Ah.
Manufactures you guys have in the pipeline marching towards that FDA approval at this point, so any color there would be great. Thanks.
So as exciting as this approval is and is necessary.
We are still in the beginning.
[noise] of an industry that moves.
Very thoughtfully for very good reason.
So.
I would say, we should keep our expectations low.
As for the near term on it having any significant impact on us.
It is very confirmatory.
For a long term revenue opportunities.
Our ability.
To really bring life changing innovation to market, but from a financial modeling standpoint.
I will continue to caution and say exercise great straight.
Such time.
As we believe it becomes important to start modeling this and we will articulate that.
[noise] Shama got time for one more question.
Thank you that our final question is going to come from one of Tallahassee Punkish from U.S. Please go ahead.
Thank you this status when could test can you talk to the hyper scale spending trends youre seeing the enterprise portion of optical which includes hyperscale appears to have decent rated after growing 30% plus in the first half. So just curious what you're seeing in the second half. Thank you.
I think we're seeing a consistent with some of those with those external the various external benchmarks.
That's you're looking at our particular dynamics.
All depend on what you compare to.
Right. So if I look delta to last year right. We can have a different sort of answer than the total market because it goes so much faster than the total market.
So we can have dynamics that in the near term at any given quarter can be a little different than that market, but over the sweep of time I think the right way to think about it is those signals in the external market that you're looking at they impact us too and over the sweep of.
Time, we should too bad her.
And the overall markets just do the ascendancy about allergy.
Does that answer your question Sir It does thank you so much wider.
Okay. Thank you take us and thank you everybody for joining us today before we close I want to let you know that we'll be at the Barclays Global Technology Media and Telecommunications conference on December 12.
And the city 2020, Global Technology Media and Telecommunications West Coast Conference West Conference on January eight finally, a replay of today's call will be available on our site. Starting later this morning. Once again, thank you for joining us and Sean that concludes our call. Please disconnect. Your lines. Thank you that does conclude the conference for today take your participation.
You may now disconnect.
Yeah.