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Corning's Glass Is Finally Half-Full

Coming out of the economic downturn, many companies are seeing their fortunes improve. But few have experienced a turnaround as dramatic as Corning's. In October, the leading manufacturer of fiber-optic telecom cable announced its first profitable quarter since early 2001. With $33 million in net income on $772 million in sales, Corning exceeded guidance and helped erase the memory of its dismal year-ago results: a $261 million loss on $762 million in revenues.

While Corning's (GLW) aggressive cost-cutting, including laying off thousands of employees, is largely to thank for the improved picture, it doesn't merit all the credit. Corning's telecom-cable business, much hurt by the falloff in information-technology spending, has stabilized, points out Vice-Chairman and Chief Financial Officer James Flaws. Meanwhile, its other businesses are rebounding. Indeed, much of Corning's future growth -- and, it hopes, consistent profitability -- won't come from cable, but from sales of glass for flat-panel, liquid-crystal displays (LCDs) for computer monitors and TVs.

Such a switch in product emphasis is nothing new for Corning, whose name was once synonymous with decorative, ovenproof casserole dishes. The key, says Flaws, is making whatever is in demand. And it seems investors like what they see in Corning's latest incarnation. The stock price has more than tripled since the beginning of the year, recently reaching its 52-week high of $12.34 (it closed at $11.10 on Nov. 17).

Flaws recently spoke to BusinessWeek Online's Olga Kharif about Corning's latest -- but likely not last -- rebirth. Edited excerpts of the conversation follow:

Q: How do you hope to achieve sustained profitability?

A: What we believe will allow us not only to sustain but enhance profitability will be continued growth in the LCD business, which is having a great year, and we think will next year, too. Our environmental catalytic converter business is also doing very well. Because of these two businesses, we think we won't have to look back in terms of profitability.

Q: Are you now at the point where you don't need to continue cutting costs?

A: We don't feel we have a need for any significant companywide restructuring. We've reduced our debt from $5 billion at the beginning of 2002 to $2.7 billion. We should be cash-flow-positive next year, so the focus has shifted from financial health to growth.

Q: In the third quarter, your LCD sales grew 7% sequentially, to $117 million. What's behind this growth in demand?

A: One thing that has driven this business to date is growing demand for notebooks, which all have LCD screens. The second driver has been free-standing LCD monitors. This year, about 40% of all monitors sold will be LCDs, up from 28% last year. People are also buying larger monitors, 17-inch ones instead of 15-inches.

And [the big growth due to] LCD television is still to come. That may start to build next year, and the high growth rate could extend for several more years.

Q: What are your expectations for LCD TVs?

A: We expect market share for LCD TVs to reach into the teens worldwide. Some of our customers think it will be higher. It will depend on whether people are willing to pay the price and whether they like the thinness, the low heat, the low energy usage, the brightness of it.

People voted with their pocketbooks on LCD monitors. The question is, will they do that with TVs? From the signs we're seeing, the answer is yes. Consumer electronics giant Sony (SNE) announced in October that they're closing a lot of their conventional TV factories. And they've done a joint venture with rival Samsung to make LCD TVs. That's a very important symbolic move. So we're very optimistic -- but we'll have to wait and see what turns up.

Q: Computer makers Gateway (GTW) and Dell (DELL) recently began selling flat-panel TVs, competing with traditional electronics retailers. What do you think the impact of that will be?

A: Pricing has to continue to fall. And actually, what's driving that is new factories that can make multiple LCD screens at one time. Still, glass accounts for less than 10% of the total cost of making an LCD screen, as opposed to a conventional TV, where it's half the cost.

Q: So, are you expecting a lot of margins pressure?

A: Margins are very good for us right now, and we expect them to grow a little. But we have to recognize that pricing will be coming down every year. The declines are in the single digits for us, but we hope to offset that with cost reductions of our own.

We're excited about just the absolute growth rate here. Last year the amount of glass used in the industry grew 40%. It'll grow by more than that this year. And we hope that LCD TVs will extend the overall growth rate. A 25-inch TV uses three times the amount of glass of a 14-inch monitor.

Q: You've recently said that you'll need to expand capacity to meet demand. What are your plans?

A: We're reaching a point where we're adding capacity every quarter. The good news is, such expansions don't have a long lead time, so we're able to fine-tune our capacity [after] seeing what our customers are doing and watching the end market.

Q: You're transforming from a company that sells cable to one known for LCD glass. Is that what you'll remain?

A: We think of ourselves as a technology company. Obviously, glass and ceramics are a heritage for us. And during the dot-com bubble, telecom contributed 75% of our revenues. But in the 1970s, our company was mainly known for making dishes and casserole pots. You could interview me in five years, and we could be discussing a product that we're not talking about today.

Q: What do you expect to be talking about in a year?

A: LCD glass, because it's growing so rapidly, it's so profitable, and it's such a big opportunity. But two years from today, we believe that telecommunications will begin to rebound. So there may be more talk about providing fiber to the home or fiber to the premise. And in 2006, people may be talking more about diesel regulations -- and our products in the environmental area.

Q: What do you think will drive further spending in telecom?

A: Regulations postulating that our customers can bring fiber to the premise or to the home, and knowing that they don't have to share it with their competitors.

Broadband capability is something telcos can make money on. They're already watching cable-TV companies do that today. People are willing to spend $35 a month on a cable modem. The churn rate is low -- people sign up and stick with the provider. That's a big revenue opportunity.

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