Corning Q2 2024 Earnings Call Transcript

Participants

Corporate Executives

• Ann Nicholson, Vice President of Investor Relations
• Wendell Weeks, Chairman and Chief Executive Officer
• Ed Schlesinger, Executive Vice President and Chief Financial Officer

Analysts

• Asiya Merchant, Smith Barney Citigroup
• Samik Chatterjee, J.P. Morgan
• Steven Fox, Fox Advisors
• Martin Yang, Oppenheimer Holdings Inc.
• Ruplu Bhattacharya, Bank of America Co.
• Mehdi Hosseini, Susquehanna International Group
• James Cannon, UBS Group AG
• Meta Marshall, Morgan Stanley
• Tim Long, Barclays PLC
• George Notter, Jefferies Financial Group Inc.

Presentation

[Operator]

Welcome to the Corning Incorporated Quarter-Two 2024 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Thank you and good morning, everybody. Welcome to Corning's second-quarter 2024 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; and Ed Schlesinger, Executive Vice President and Chief Financial 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. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business.

For the second quarter, the difference between GAAP and core EPS primarily reflected constant-currency adjustments, translated earnings contract gains, and translation gains on Japanese yen denominated debt, as well as restructuring and primarily non-cash asset write-off charges. As a reminder, GAAP mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the interactive Analyst Center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They're also available on our website for downloading.

And now, I'll turn the call over to Wendell.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Thank you, Ann. And good morning, everyone. Today we announced strong second-quarter 2024 results. We returned to year-over-year growth, and we exceeded the sales and EPS guidance we shared going into the quarter in April. The outperformance was driven primarily by the strong adoption of our new optical connectivity products for generative AI. So why don't we start today with a quick explanation of why this application provides a great growth opportunity for our shareholders. A traditional data centers contain a network of interconnected switches and CPUs. Gen AI requires a second network within data centers to connect every GPU to every other GPU in the cluster, creating a neural network.

Now, because GPUs have more processing capacity than CPUs, they need higher bandwidth links connecting them. The result is about 10 times the number of fiber connections in this new network versus a traditional data center. Now this not only provides volume, which is great, but also the opportunity to innovate with the major players in this space. So over the past four years, we've helped key customers design the optical links needed for this second network in their next-generation AI data centers. We invented new-to-the-world fibers, cables, connectors, and custom integrated solutions. These new products dramatically reduce installation time and onsite labor, save space, and lower embodied carbon, all while reducing installed cost and increasing the overall reliability of the network.

As I noted, strong adoption of these Gen AI products primarily drove our outperformance in the second quarter. In fact, it drove record sales in the Enterprise portion of our Optical business, which grew more than 40% year-over-year. I've been talking about the Gen AI opportunity inside the data center. Gen AI also increases bandwidth requirements between data centers. We've reached an agreement with Lumen Technologies that reserves 10% of our global fiber capacity for each of the next two years to facilitate Lumen's build of a new network to interconnect AI-enabled data centers. This will be the first outside plant deployment of Corning's new Gen AI fiber and cable system that will enable Lumen to fit anywhere from two to four times the amount of fiber into their existing conduit.

Now, Gen AI is just one of the many growth opportunities we've included in the plan we call Springboard, which adds more than $3 billion in annualized sales with strong incremental profit and cash flow within the next three years. We've been sharing some of the key points on Springboard for the last few quarters, but today I want to outline our plan in a more comprehensive way. We've built a tremendous opportunity for our shareholders, and we want to help you understand how we think about Springboard. Let's start with the core components. First, we previously shared with you that the first quarter would be the low quarter for the year. And as our results show, we've begun our march up.

Sales grew 11% sequentially to $3.6 billion in the second quarter, and we returned to year-over-year growth. And the third-quarter guidance we provided in our release this morning shows that we expect to continue growing in the third quarter with sales of approximately $3.7 billion. Second, we expect to add more than $3 billion in annualized sales within the next three years, as cyclical factors and secular trends converge and drive demand for our capabilities. Our market positions are strong and we're seeing encouraging signs of markets improving, and we continue to innovate new product sets tied to secular trends to drive growth above market levels. Third, as we capture this growth, we expect to deliver powerful, incremental profit and cash flow.

We have the required capacity and technical capabilities in place to service that $3 billion in the three-year window, and the cost and capital are already reflected in our financials. Our second-quarter results and third-quarter guidance serve as a strong proof point of our powerful incrementals. We grew EPS 24% sequentially, more than double our sales growth rate. And as you can see in our guidance, we expect EPS to grow about three times faster than sales in the third quarter. Gross margin improved sequentially and year-over-year by 110 basis points and 170 basis points respectively. Operating margin expanded 190 basis points versus quarter one. We also generated strong free cash flow, and with the success of Springboard, we expect to be able to accelerate the return of cash to shareholders.

In fact, due to our growing confidence in the plan, we began buying back shares in the second quarter and will do so in the third quarter. So I've just walked through the core components of Springboard. Now I want to provide more context on our sales opportunity because this is an extraordinary time for the company. I've had the chance to talk with many of you recently, and you've probably heard me say material science is really slow until it gets wicked fast. You hit these moments of inflection. For example, I just noted our new product suite for Gen AI. To do all that, we had a dedicated team that I've been part of for the last four years, capitalizing on our deep insight and customer relationships to develop these products long before they become a seemingly overnight success.

Some strategies take even longer to come to fruition. Meaningful innovation takes time. And then you hit these critical milestones and everything starts happening in quick succession. We are at one of these moments. Over the next several quarters, we expect to share a number of customer announcements. You'll see more commercialized innovations and a steady march up in our quarterly performance. So I want to give you a structure to help you put those coming milestones into the context of our total Springboard plan as they happen. I'm going to use this chart to explain our incremental sales opportunity. We introduced Springboard in quarter-three last year, using our quarter-four projected sales of $3.25 billion as the starting point. Which put us at a $13 billion annualized run rate.

The Y-axis represents incremental sales above our quarter-four 2023 run rate, and the X-axis simply represents time for the following five years. Now let's fill in some numbers. Here's our internal non-risk-adjusted plan. Now there's a lot to take away from this slide. The first is we have a significant sales opportunity. We're looking at potential growth of $8 billion in annualized sales run rate by the end of 2028, with $5 billion by the end of 2026. We expect growth across all our market-access platforms, driven by a combination of upward cyclical and secular trends. Ed will provide insight behind the springs or drivers of that growth. Now, this is our internal plan. When we say it's not risk-adjusted, what we mean is that the projections are based on a number of assumptions, including markets recovering back to historical trend lines with continued growth thereafter. Successful adoption of new innovations across a number of markets and platforms, and successful execution of all our operational milestones for productivity and for price.

That said, we've taken this opportunity and translated it into a high-confidence plan to help inform investors. To do that, first we focused on the next three years. Second, we probabilistically adjusted for different potential outcomes in each of our market-access platforms, including market dynamics, timing of secular trends, successful adoption of our innovations, as well as volume, pricing, and market share across all our businesses, and the potential that some of our markets may go through downcycles. And this is how we come to the high-confidence Springboard plan for our shareholders to help inform their investment decisions. It's also important to note that we purposely drew this as a wedge. We weren't trying to guide every quarter for the next 12 quarters. It obviously won't be a straight line. But we are also not dealing with a hockey stick.

When we built the plan, we expected to see strong growth this year. So how are we doing so far? We are off to a terrific start. Let me explain the $1.3 billion dot point you see on the chart here. Our quarter-two 2024 sales were $3.6 billion. Our quarter-four 2023 sales were $3.27 billion. The difference is $330 million, and when you annualize that, you get to $1.3 billion. And that trend continues into quarter three. The additional sequential growth increases our run rate in the third quarter by $1.7 billion. As you can see, we are running well ahead of our Springboard plan run rate. That being said, please remember, we're only two quarters into a 12-quarter plan. Springboard is a milestone-based plan evolving over the next three years. We have plenty of opportunity ahead of us, a lot of springs yet to activate. We'll update you as we hit significant milestones.

Clearly, we're off to a very strong start, well above the run rates we need to deliver. So as I wrap up this morning, I think you can see why we're energized about Springboard. And we're pleased with our early progress, including, of course, the encouraging response to our Gen AI products. We expect to have a lot more news over the next few months as milestones start to hit, and we're scheduling around those. We're planning another investor event in September, as well as a full Investor Day in early 2025. Also, it is important to note that as we proceed forward with Springboard, we'll continue to seek the guidance of our Board of Directors. To that end, we will be refreshing our Board composition to more closely align the skill set profiles of the Board with our Springboard plan.

Now let me turn it over to Ed for some more detail and perspective on the quarter and on Springboard.

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Thank you, Wendell. Good morning, everyone. We're off to a great start. We believe our second-quarter results are a strong proof point of both the sales and the incremental profit and cash flow opportunity in our Springboard plan. So before I dive into the results, I'd like to share some of the major growth drivers we see across our market-access platforms. Wendell shared with you our internal non-risk-adjusted plan, which is $8 billion in incremental sales by the end of 2028, and $5 billion by the end of 2026. I'm going to share some of the cyclical and secular drivers of this growth while focusing in on the three-year window. Let's start with Optical Communications.

The Gen AI opportunity Wendell spoke about, adds a significant amount of growth. We expect our Enterprise business to grow at a 25% compound annual growth rate from 2023 to 2027, driven by the adoption of our connectivity solutions for generative AI, and this is already underway. We delivered record sales in Enterprise in the second quarter, which grew more than 40% year-over-year. In our Carrier business, customers are reaching the end of their inventory drawdowns and beginning to order closer to their current deployment levels. Additionally, government efforts to bring highspeed Internet to rural communities through the broadband equity, access, and deployment program will contribute to growth beginning in 2025 and add significant sales over the next several years.

In Display, we're not counting on TV unit growth. Instead, we expect to capitalize on the trend of larger screens, with about an inch of screen size growth per year to add low to mid-single-digit volume growth. Additionally, as we've previously explained, we're currently undertaking currency-based price adjustments to maintain appropriate returns in our Display business. In automotive, we have a triple-digit automotive glass business today, and we expect sales in that business to almost triple by 2026. Recently announced U.S. EPA regulations will require the adoption of GPFs in the U.S., starting with model year 2027. This adoption offers hundreds of millions of dollars of growth for us in the U.S. alone, even in the face of BEV adoption. We expect sales to start in 2026. And finally, we expect to build an entirely new map as we leverage the Inflation Reduction Act to support the buildout of a U.S. solar supply chain.

These are just some of the growth drivers in our $5 billion opportunity. As Wendell shared, we probabilistically adjusted this opportunity to the $3 billion high-confidence Springboard plan we've been sharing with you since the third quarter of 2023. We expect to have strong incremental profit and cash flow as we capture the growth, and we're starting from a strong operating base. Our productivity ratios are at best demonstrated levels, and we've raised price to more appropriately share inflation with our customers. Our improvement in gross margin is a great proof point. In the second quarter of 2024, gross margin was 37.9%, up 430 basis points from 33.6% in the fourth quarter of 2022 on the same level of sales. With that, let me share some highlights from our second-quarter results.

Sales grew 11% sequentially, reaching $3.6 billion in the quarter, returning us to year-over-year growth. The outperformance versus our April guidance of $3.4 billion was primarily driven by the strong adoption of our new optical connectivity products for Gen AI. EPS grew 24% sequentially, more than twice as fast as sales, coming in at $0.47, also above our April guidance range. Gross margin improved sequentially and year-over-year by 110 basis points and 170 basis points respectively. Operating margin expanded 190 basis points versus the first quarter, and we generated strong free cash flow of $353 million. In Optical -- Next, let me turn to our segment results.

In Optical Communications, sales for the second quarter were $1.1 billion, up 20% sequentially, reflecting a return to growth for the segment. Year-over-year, sales increased 4%. Enterprise network sales were up 42%, driven by AI-related connectivity solutions. Carrier sales were actually down 10%, as customers continued to draw down their inventory. Encouragingly -- encouragingly though, carrier network sales grew sequentially, as customers began to order closer to their current deployment levels. We delivered strong incremental profit in Optical, with net income for the quarter at $143 million, up 43% sequentially on the 20% sales growth.

Moving to Display Technologies, second-quarter sales were $1 billion, up 16% sequentially, as panel makers ran at higher utilization rates in the second quarter to support mid-year promotions. Glass price was consistent with the first quarter. Net income was $258 million, up 28% sequentially. Year-over-year, sales were up 9% and net income was up 24%, driven by higher volume and price. Now, let me spend a minute on our approach to Display price going forward. As we've said before, we plan to make currency-based price adjustments to maintain appropriate returns in our Display business. We're in the midst of doing just that, and we will update you on our progress at an appropriate time.

With respect to the yen, we have hedges in place for 2025 and beyond. They're not at the 2024 core rate of 107, but they're much better than the current spot rate. We expect the combination of our currency-based price adjustments and our hedges to deliver an appropriate level of profitability for the display business. For your modeling purposes, you can think about appropriate profitability as being the average of the last five years of net income margin from our segment reports. Turning to Specialty Materials, sales in the second quarter were $501 million, up 18% year-over-year, driven by continued strong demand for premium glasses for mobile devices and semiconductor-related products. Net income was $63 million, up 91% year-over-year, reflecting volumes and manufacturing improvements.

In Environmental Technologies, second-quarter sales were $431 million, down 6% year-over-year, reflecting the impact of the Class 8 truck downcycle in North America as anticipated. Net income was $97 million, down 9% year-over-year on decreased volume. We expect the heavy-duty market weakness to continue in the second half of this year, and sales in Environmental to be down sequentially in the third quarter. In Life Sciences, sales in the second quarter were $249 million, up 8% year-over-year. Net income was $17 million, up 55% year-over-year. Turning to Hemlock and Emerging Growth Businesses, sales in the quarter were $296 million, down 21% year-over-year, primarily reflecting lower pricing for solar-grade polysilicon.

Now let me turn to our outlook. For the third quarter, we expect sales to grow to approximately $3.7 billion, driven primarily by our Optical Communications business, including the continued adoption of our new optical connectivity solutions for Gen AI products, which we expect will more than offset the expected slowdown in the US Class 8 truck market. We expect EPS in the range of $0.50 to $0.54, with EPS growing three times the rate of sales. As pre -- as we previously shared, our sales are running well ahead of our Springboard plan, and our incrementals are strong. In fact, if you compare our projected Q3 sales and EPS guide to Q4 2023, which is our Springboard base, sales are up approximately 13% and EPS is up approximately 33%. Additionally, in Q3, we anticipate another quarter of strong free cash flow.

As it relates to cash, our capital allocation priorities remain the same. We prioritize investing for organic growth opportunities. We believe this creates the most value for our shareholders over the long-term. As we've shared today, in the mid-term, we have the technical capabilities and capacity in place to add more than $3 billion in annualized sales with minimal cash investment, and you can see that reflected in our capex expectations for 2024 of $1.2 billion. We also seek to maintain a strong and efficient balance sheet. We're in great shape. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about 23 years, with about only $1 billion in debt coming due over the next five years, and we have no significant debt coming due in any given year. And finally, we expect to continue our strong track record of returning excess cash to shareholders.

Since 2013, we bought back half of our outstanding shares or almost 800 million shares. This generated about $15 billion of value for our shareholders. Because of our growing confidence in Springboard, we started to buy back shares in the second quarter, and we expect to continue share buybacks in the third quarter. In summary, we're off to a great start on our Springboard plan. We're well on track to deliver on our $3 billion-plus sales opportunity. Our second-quarter results and our third-quarter guidance are strong proof points of the incremental profit and cash flow we expect to deliver as we capture the sales growth. I look forward to sharing more in the coming months as we make progress on our Springboard plan and continue to create value for shareholders.

With that, I'll turn it back to Ann.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Thanks, Ed. Okay, we're ready for our first question.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And our first question will come from Asiya Merchant from Citi, your line is open.

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Great. Good morning. Thank you for the opportunity and for the -- congratulations on the strong results. On the Optical side, if I may, especially on the Gen AI, if you could maybe double-click a little bit on this, the customers who are demanding the Gen AI products that you've talked about and the visibility that you have over the next couple of quarters and even as you look into your Springboard plan over the next 12 quarters, what kind of visibility do you have in sustaining this momentum that you have outlined? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Our visibility for strong growth is relatively high, and that is because what we do is we take the wiring diagram for some of these brand new data centers that are getting put in place and we're building that customized system that they'll use to connect. So we've been working on most of these products versus the core components for the last few years directly with those customers from what they'll need. Then we start to actually put it all together, to be dropship at exactly the right day for them. So in a way, we're already beginning to build some of their network needs well ahead of when they will install them, so we have pretty good visibility on that.

So far what's driving the outperformance is that the word of mouth on our product has been very positive. And other folks who we haven't been consistently working with over this time period have come to us to help them solve some of the challenges. And so, as a result, we're picking up new customers for us into this new ecosystem that is building around putting together these backend networks. So, so far what we're seeing is most of our variance has been upside variance, if that helps you at all, Asiya.

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Yeah, that's great. And so, is the competitive moat that maybe Corning has in Optical on the Enterprise side much greater in your -- as you think about the opportunity ahead versus, let's say, a couple of quarters ago or even with your prior solution? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

So the competitive moat that we're trying to build here is driven around us doing a new-to-the-world fiber cable and connectivity system, and we're really the only person in the world who can put that all together. And the strength of that moat will reflect directly on these new super high-density systems that we're putting in place where you should think about it almost like Moore's Law, where we're doubling the amount of light guides within the same volume area, same geometric volume area. And while increasing the performance of the componentry. There's very few people who can do this, and the way we're doing it to increase the optical performance is protected intellectual property. So we believe our competitive advantages will increase in this segment.

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Great. Thank you.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Next question, please.

[Operator]

Thank you. Our next question comes from Samik Chatterjee from J.P. Morgan. Your line is open.

[Samik Chatterjee, Analyst at J.P. Morgan]

Hi. Thanks for taking my question. I guess, Wendell, you, in the slide deck you mentioned the $8 billion Springboard opportunity by 2026. Roughly half of that is from Optical. I'm just wondering if you can give us a bit more color on how to sort of split that opportunity between Carrier and Enterprise, and then maybe if you can talk about the magnitude of what this Lumen agreement means in terms of revenue, how to think about the opportunity specifically to Lumen in terms of revenue over the next couple of years? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Well, to your first question, the -- it is both in Carrier and Enterprise. But the majority is coming out of the Enterprise piece, as you see the fundamental change in compute driven by Gen AI and its related networking requirements. And we can come back to that if you want. Lumen, let's just start with sizing. When we say 10% of our global fiber capacity, I think a way you can think about it, it's a -- you won't be far off as you size it if you just take your sort of expected view of what our total revenue will be in Opto, and you take 10% of it and that's going to get you in the zone, Samik. Right? What makes the Lumen transaction so exciting for us is that we've always had a significant business connecting data centers to each other in the network at large. And because that's how data gets in and out of the cloud.

The technical question has been with the advent of a new GPU-based backend network for Gen AI within data centers, will there be a dramatic increase in the need for fiber to connect these Gen AI-enabled data centers to each other and the network? The answer is going to depend on where is the power located and how that interacts with the architecture of the large language model, and how and where both inference and training are accomplished. What's exciting about the Lumen deal is that it is certainly a strong proof point in favor of a bull case for that segment of the network. Does that make sense to you, Samik? Have I been responsive to your question?

[Samik Chatterjee, Analyst at J.P. Morgan]

Yes. And I guess if I just sneak one more part. How -- what do you think about the scope of similar agreements with other carriers as well in terms of just the solidifying the Springboard opportunity with them? Thank you. And I'll wrap, pass it on.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

I don't want to speculate at this time, right. What is great about what Lumen has done is they're going to be the first customer to apply our new tech, sort of double the amount of fiber they can place in their existing conduit, and that is super exciting. I would believe that that is so exciting that it will generate lots of interest.

[Samik Chatterjee, Analyst at J.P. Morgan]

Thank you.

[Ann Nicholson, Vice President of Investor Relations at Corning]

The next question?

[Operator]

Thank you. Our next question will come from Steven Fox from Fox Advisors, LLC. Your line is open.

[Steven Fox, Analyst at Fox Advisors]

Hi. Good morning. Maybe just one more question on Optical from me also. Can you just -- Wendell, you guys mentioned a 25% CAGR for the Enterprise business over the next few years. There's a lot of concern I think that while there's optimism for this type of growth rate, that it could be more bursty in nature, have some puts and takes as you go through the quarters. How do we get comfortable with the idea that you have enough customer diversity, project diversity, that this is sort of a steady type of growth prospect for Gen AI over the next few years? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

It's a great question, Steve. And the way that we have addressed that, since this is far from our first rodeo, right, is, if you think about it, when we put together that $5 billion Springboard plan, right, that is us believing what it is we truly think will happen. Then when we start to probabilistically adjust to drop that $5 billion down to that $3 billion, we're after things exactly like you're talking about, where you can get whenever you're chasing a new tech, right, you can get these pieces where you'll have a bunch of project builds and then it'll slow while as that gets consumed, and then again. And that's how we sought to address that as we start to think through your modeling. Does that make sense to you, Steve?

[Steven Fox, Analyst at Fox Advisors]

Yeah, it does. Maybe just to push that a little bit further, do you see that happening over the next few quarters? Or are we so early stages that there's sort of a consistent route to the growth around Gen AI? Thank you, Wendell.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

For the -- yes, for the next few quarters, like you just saw us do is, Ed, when I think he was together with a number of you, guided for Enterprise to grow at a 25% rate. And then the first quarter, we show up, post providing that guidance, we grew at 40%. Right now, in the near-term, our visibility is pretty high, and we feel really comfortable about the 25% guidance that Ed has given you.

[Steven Fox, Analyst at Fox Advisors]

Great. Thank you very much.

[Operator]

Thank you. [Operator Instructions] And our next question will come from Martin Yang from Opp Co. Your line is open.

[Martin Yang, Analyst at Oppenheimer]

Hi, thanks for taking the question. Just a quick confirmation on the 3Q guidance. Is it right to assume there's no price increase assumed for Display in 3Q?

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, Martin, so thanks for that question. In general, as we always do with our guidance, we sort of have a number of potential outcomes that drive where we guide you to, and we've provided a range on EPS, and approximately, $3.7 billion in our mind also has a range encapsulated around that. Well, so we're not specifically guiding anything in Display price at this time because we're in the midst of speaking with our customers about a currency-based price adjustment, but that doesn't mean there won't be an impact in Q3.

[Martin Yang, Analyst at Oppenheimer]

Got it. Thank you, Ed.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Great. Next question.

[Operator]

Thank you. Our next question will be from Ruplu Bhattacharya, your line is open.

[Ruplu Bhattacharya, Analyst at Bank of America]

Hi. Thanks for taking my questions. I'm filling in for Wamsi today. Ed, you saw strong growth both sequentially and year-on-year in gross margins this quarter. How should we think about gross margin trend over the next few quarters and what are the drivers for margin growth? And I have a follow-up.

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, thanks. Great question. I think in general, the drivers for us on gross margin are we have the capacity and the technical capabilities in place to support a higher level of sales. So, in general, we're not having to add fixed cost as our sales go up, so that is really what's going to drive both gross margin and operating margin for us as we go forward. And I do think there is room for our gross margin to continue to go up as sales go up. I think our guide implies that for Q3.

[Ruplu Bhattacharya, Analyst at Bank of America]

Thanks for that. And if I can ask a follow-up on the Display segment. What is your expectation for panel maker utilization rates in calendar 3Q? And as you're implementing these currency-based price adjustments, do you see any impact of that on your glass market share? And -- and when should we expect a reset of the core yen rate? Thank you.

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yes. So I'll take those sort of one at a time. So I think, on utilization, when we spoke about Q2, we expected it to increase significantly from Q1. It did that. It actually was even better than our expectations. They ran a little hot. I think as we think about Q3, they're likely to run at that level or a little lower to sort of average out for the year. We think they're running more or less in line to meet expected retail demand.

And with respect to the core rate, right now we have hedges in place for 2025 and beyond. We're in the middle of a currency-based price adjustment with our customers. We're going to come back when all that's complete and we'll share our thoughts on how all that will work, but I think the most important thing is that when you think about our profitability going forward, our goal is to get the combination of the price adjustments and our hedges to get a net income margin or net income percent of sales that averages out at about the last five years. And Ruplu, I apologize if you had -- Did I miss any of your components of your question?

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

I think just share. And our intention would be to hold our share as a result of our overall approach to this industry and our currency-based upward price adjustment.

[Ruplu Bhattacharya, Analyst at Bank of America]

Okay. Thank you for all the details. Appreciate it.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Next question?

[Operator]

Thank you. Our next question will come from Mehdi Hosseini from Susquehanna International Group. Your line is open.

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Yes. Thanks for taking my question. This is for the team. And I want to go back to Optical and try to better understand the profitability of this business. I understand the secular growth and AI and everything that brings, but when I think about profitability, net income margin is more than -- is less than half of what it is for Display. So how should I think about the revenue growth that will be sufficient to meet dollars of net income comparable to Display, assuming that the Display is just going to go sideways from here? Hopefully, that's clear.

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, thanks, Mehdi. So I think stepping back, if you think about our sales group -- growing 11% and EPS growing 21% in the second quarter, and then our guide implying a sales growth rate in the low-single digits and EPS growing three times faster than that, I think we can continue to have EPS growth outpacing sales, regardless of where that growth comes from. Primarily because we have the cost, the technical capabilities, the capacity in place to support the growth. I also think that the margins are quite attractive in the Optical business, and especially in the data center space and the AI data center space where we expect to see growth.

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Let me be kind of more concise and clear. Would you be able to significantly up your full Optical margin net income? In the past, it has averaged about 13%. So looking forward, could it significantly be above 13%?

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

I think it can be above 13%.

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Okay. Thank you.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Next question?

[Operator]

Thank you. Our next question comes from Josh Specter from UBS. Your line is open.

[James Cannon, Analyst at UBS Group]

Hey, guys, this is James Cannon on for Josh. Congrats on the strong quarter of Enterprise sales. I was just wondering if you could frame -- you called out a 10% decline in -- on the Carrier side of that business. If you could just frame how that compares to what you did last quarter and maybe kind of what you're seeing in terms of the trajectory for the third quarter?

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yes. So our Carrier business is increasing sequentially. I think that's the good news. So although we're still down year-over-year, because last year you still had carriers sort of building inventory, and now they're still in the process of drawing down their inventory, that's really causing that year-over-year decline. But the good news is, order rates are going up, sales were up sequentially, and I think we would expect that trend to continue.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Yes. What we're seeing is that our carrier order rates are now starting to approach what we see is their deployment rates. And so that's also encouraging. So we have sort of that upward spring still in front of us when you begin to think of your year-over-year growth rates, James.

[James Cannon, Analyst at UBS Group]

Okay, got it. And then, just as a follow-up, kind of another way to ask the last question, I think. That as Enterprise becomes a bigger piece of the Optical portfolio, can you just frame how the two -- how those two pieces of the business compare margin-wise?

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Enterprise and the --

[James Cannon, Analyst at UBS Group]

Versus Carrier.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Yeah, Enterprise tends to be higher margin than Carrier. Primarily because it uses more of those customized connectivity systems. And so that is as you move up the stack in the degree of sophistication that we offer to our customers, as that helps them reduce their installation cost, we end up sharing a portion of that value we create with those total passive optical systems that we do. Those will have a higher degree of adoption in Enterprise as a share of revenue than they do in Carrier as a share of the total revenue.

[James Cannon, Analyst at UBS Group]

Got it. Thank you.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Great. Next question.

[Operator]

Thank you. Our next question will come from Meta Marshall from Morgan Stanley. Your line is open.

[Meta Marshall, Analyst at Morgan Stanley]

Great. Thanks. Appreciate the commentary on Carrier, that you guys are getting towards better inventory position or that orders are getting more aligned with deployments, but just any latest update in terms of when you expect carriers to kind of be through their inventory or orders to be aligning with deployments?

And then maybe a second question. Just in terms of the price increases on the Display side or those negotiations, is that something you expect to kind of have completed by Q3? And just as we think about that going forward, as you're going through those negotiations, is there any hope of kind of moving that to more USD-based pricing or just do you expect that to be more dynamic with currency going forward? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

So as we complete those currency-based pricing negotiations, we will update you. One of the reasons you see us scheduling a investor session in September would be to update you on our progress on those dialogues with our customers in Display. So I think you should be expecting us to provide you an update at that date. As for moving to U.S. dollar base, we're engaged with our customers as part of this whole dialogue, that exact question. As we seek to find the right way to share appropriately of the relative value of the currency moves relative.

So, of course, the debate is our customers would like an exchange rate closer to our current spot rate, and we would like one closer to the past 30-year average. And this is what God created negotiations for, and we're in the midst of working our way through all that. And we look forward to having a more detailed discussion with you when we get together in September.

[Ed Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, and Meta on Carrier, I think it's, customer by customer, the inventory situations are different. We're not quite there yet on people being completely at their -- buying at their deployment rates. I think we'll make progress on that as we go into the third quarter. We'll keep you updated, but I don't know that will necessarily be through all of it.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

In total, I think as you think about both questions together, the carriers, since it's so -- as Ed points out, it depends on particular carrier strategies, we should wait for them to talk more fully about it, but we'll update on where we are versus deployment rate, and we do expect that to close -- to continue to close relatively quickly. And for Display, what our aim is, is that -- is to make this just be really simple for investors. And we're just going to end up delivering the profitability that you're used to out of Display, sort of no matter where the currency is coming out. Because we're going to price appropriately to reward our shareholders for the investment in risk that they have put in place to develop this terrific business.

[Meta Marshall, Analyst at Morgan Stanley]

Great. Thank you.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Okay, next question.

[Operator]

Thank you. Our next question will come from Tim Long from Barclays. Your line is open.

[Tim Long, Analyst at Barclays]

Thank you. I was hoping I could get a two-parter on Optical. First part, for this current Gen AI business you're talking about, just curious, I think a lot of the hyperscalers have -- there's some different types of architectures they're using. You know, AOC, EOC, so some electrical, some optical. What you're selling now in this portfolio, is that across any single hyperscaler deployment, or would it fit better into certain architectures? And then, number two, if you could just touch on the other more traditional Enterprise, like inferencing-type market, when do you expect that develop -- to develop and what type of uptick in optical component -- or fiber content would you expect to see when we get to that more traditional Enterprise deployments? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

To the -- let's take your questions in order. To the first part, the revenue that you see us reporting today is basically the fiber optic connections between the switches. Okay? Doesn't work exactly like this, but the way people talk about sort of top of the rack switches that then connect to other switch layers which enable us to connect every GPU to every other GPU. There is work, as you are reflecting, on what will happen then within the server racks, whether those will end up becoming optical connections as well. Historically, they have been copper. And then once the bitrate distance rises above sort of 100 gigabit per meter second, you end up going to optical. So as distance climbs, optical tends to become the tech -- the technology that is the dominant use of the tech. That same dynamic because of density and complexity is now starting to work its way. We're beginning that long-term material sciences slow work, right, on what happens within the server rack, and that tends to get at the architectures you're speaking about more fully.

To the part two of your question, is what happens with inference, there's a bunch of different opinions on how inference architectures will work. It tends to be largely driven by what that particular player's market position is and different arguments around data gravity, right? So I would say it's too early for us to have a point of view on which architectures will become the predominant ones for inference, Tim. As our understanding evolves and we develop a more converged view of how that evolved, we'll be happy to share it with you. Does that address your questions, Tim?

[Tim Long, Analyst at Barclays]

Yes. That's great. Thank you.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Great. I think we can take one more question.

[Operator]

Thank you. And our last question will come from George Notter from Jefferies, LLC. Your line is open.

[George Notter, Analyst at Jefferies Financial Group]

Hi, guys. Thanks a lot for squeezing me in. I guess I wanted to just go back to the question of your competitive differentiation in the Optical business. I guess, for starters, I'm just curious about how much of this Gen AI solution is customized from Corning, curious about how many customers you're doing customization work for? And then also, I know there are other suppliers making smaller diameter fiber cables. I know there's a bunch of work folks are doing on connectors, higher density racks. I guess I'm just hoping to drill down into what's precisely unique to Corning versus some of those other guys? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer at Corning]

Great. So as you know, George, what we do is we participate in all the levels of that value stream. And we will take our new-to-the-world fiber and provide it to other cablers. We'll also design proprietary cables that incorporate our fiber to compete at that level, and then we, of course, do our connectors through USConnect. We will provide those to other players and take our competitive advantages at the component level, but at the same time, we'll then put them together in unique ways at the total system level. So we deliberately provide to other players because that is best for our overall customers, our different componentry for them to put together in their own novel ways.

Now, what makes our fiber so unique is when most people just shrink the diameter of the fiber, actually, the optical performance decreases. The spot size gets smaller, right? The bend resistance drops, right? The attenuation can get a little bit less. What makes our invention so cool is that we ended up reducing the diameter of the fiber while improving, versus standard fiber, all of the optical performance, because we redesigned the actual profile in the way we make the fiber in a proprietary way. And we managed to deliver all of this without any significant increase in our cost. When competitors try to do something at the fiber level, they end up having to increase their cost to meet that performance.

So that is sort of the core of our advantage of fiber. And then we just start multiplying it with our expertise at each level. As far as what share of our revenue going forward will be more customized versus at the componentry level, our desire would be to have the majority of our revenues be driven by delivery of those customized solutions, and the value that we add there on reduced installation time. At the same time, we're in the business of delighting our customers, and if what they would like us to do is to provide some of the component building blocks, at the appropriate price, of course, to our competitors, we will be happy to do that.

[George Notter, Analyst at Jefferies Financial Group]

Great. Thank you very much.

[Ann Nicholson, Vice President of Investor Relations at Corning]

Thank you, George. And thanks, everybody, for joining us today. Before we close, I wanted to let you know that we're going to attend two conferences in the third quarter, the J.P. Morgan Hardware and Semi Management Access Forum on August 14th, and Citi's 2024 Global TMT Conference on September 5th. We also plan to host a visit to our facilities in September. Finally, we'll be scheduling management visits to investor offices in select cities. There'll be a replay of today's call on our website starting later this morning. So once again, thanks for joining us. Operator, that concludes our call. Please disconnect all lines.

[Operator]

[Operator Closing Remarks]