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The Starting Line: Corning reinforces skepticism

Shareholders don't want to hear the company quash any hope that the optical-networking sector will recover this year.

3 min read
Wall Street doesn't mind Corning's manufacturing cuts or its big accounting charges. But shareholders don't want to hear their company quash any hope that the optical-networking sector will recover this year.

This week the fiber-optic giant announced 1,000 job cuts and up to $5.5 billion in one-time charges over two quarters, mostly to reflect the diminished value of acquisitions made last year. That was the headline grabber, but it was hardly important compared with what executives said during their conference call with analysts.

"Our current assumptions are that the general economy is not going to show signs of improvement until at least the end of this year and maybe not until the middle of 2002," said Corning CEO John Loose. "Most of our markets, particularly telecom, will lag the economy in general."

Several analysts said Corning's cost-cutting moves and write-offs are no surprise, but the company's pessimism about the optical markets drove shares of Corning and other optical-networking stocks lower Tuesday. Corning's stock price gave up almost 6.5 percent to $14.12.

And optical stocks could stay down until the future for telecom networking looks better.

"We continue to expect negative news flow from both the components and fiber sectors," wrote Morgan Stanley analysts David Jackson and Jason Yablon, who believe Corning could trade as low as $7 a share.

Wall Street analysts largely glossed over Corning's write-offs and job cuts, other than to describe those moves as prudent and necessary.

That Corning has to write down $4.8 billion in acquired assets indicates a huge failure to judge demand for optical components. But it's in the past, and most analysts could dismiss the charge since it doesn't affect the company's cash hoard, which was more than $1 billion at the end of June.

But some were disturbed by yet another flood of pessimism from Corning about the market in general.

Corning
Stock price from July 2000 to present.  
Source: Prophet Finance
Corning executives now believe the telecom industry won't revive for another year to year and a half. Optical networking has been hit harder than most technology sectors, as communications providers hold off on network expansions and upgrades and struggle with financial problems. The one part of Corning's business that was stronger than expected in the second quarter--optical fiber--grew largely on the strength of cheaper products, rather than that of the company's more advanced LEAF fiber.

Even more worrisome to Wall Street is Corning's decision to stop providing financial projections. "The lack of visibility from our customers, combined with market volatility, gives us less confidence in our forecast reliability," said Jim Flaws, Corning's chief financial officer.

And when the company drops any pretense at gauging the future, investors get especially nervous.

"Corning's sharp lowering of photonics estimates, inability to provide guidance and discontinuation of dividend will cause concern among investors," Goldman Sachs analyst Natarajan Subrahmanyan wrote Tuesday. "We continue to believe there will not be a significant uptick until there is more visibility into the timing of a fundamental rebound in business."

At least one Corning executive said months ago that his customers' expectations might be unrealistic, because telecom companies are chasing the same clients and assuming the same contract wins. Many now believe there is a glut of bandwidth in North America, at least for carrying data across large distances. And this week, Loose said so-called long haul transport remains the biggest concern.

The latest confirmation came Tuesday--not from Corning or another fiber maker, but from the other end of the spectrum.

As the largest online ad delivery agency, DoubleClick consumes more network capacity than most organizations. And during a Tuesday conference call with analysts, DoubleClick executives indicated that bandwidth is plentiful, with prices still falling from already cheap levels.

That's the last thing Corning and its peers need to hear.