Day 2 of Citi’s TMT Conference, Asiya Merchant here. I lead the Tech Hardware and Tech Supply Chain research here at Citi. Great to have all of you here with us today. On the stage here with me is Corning's EVP and CFO, Ed Schlesinger. We also have members of Corning's management here in the audience. I am going to kick it off. I am going to turn it over to Ed. He has some prepared remarks, and then we are going to go into Q&A. I will leave some time for investors to ask questions as well towards the end. Please do raise your hand so we can bring the mic to you. Ed?
Thanks, Asiya, and thank you all for attending. Thanks for having us today. I just want to make a couple of comments. First, I may make some forward-looking statements. I suggest that you review our filings and our website for potential reasons why actual results may differ materially from anything that I say today. Secondly, I wanted to just note that we had a customer announcement yesterday with Verizon. Hopefully, you have seen that announcement. It is a multi-year, multi-billion-dollar deal to help Verizon build out a new long-haul network that will support both their broadband part of the business as well as data center interconnect. For us, it is really a great relationship with Verizon. We have actually been a supplier to Verizon, had a relationship with them for 30 years, and here we are today helping them build out the AI data center interconnect network of the future.
I think that is great. It is one of the reasons why we like these long-term relationships, and I am sure we will talk a little bit about some others as well today. The other thing I would mention is we have previously shared that the data center interconnect opportunity for us was about a $1 billion opportunity, $1 billion a year by the end of the decade. Well, clearly, with the extension of our Lumen agreement and agreement we signed with Zayo and announced a while ago and this Verizon deal, we are going to get to that number much sooner than the end of the decade, and I think the opportunity is bigger than that. We will come back at some point, and we will talk a little bit about what that means. I think that is good news.
I want to mention in the context of our long-term financial plan that we call Springboard, we had shared with investors that we expected to hit a $20 billion run rate by the end of this year, $30 billion by the end of 2028, and $40 billion by the end of 2030. Deals like this really underpin our success and our ability to deliver those numbers. They give us more confidence in our ability to do that. We are not going to upgrade the $30 billion or the $40 billion today, but we will certainly come back and share our views on how those things are playing out over time. We do expect to deliver the $20 billion a quarter earlier here in the third quarter.
If you take that math and you compare it to the guidance we gave back in July, it means we're at the high end or slightly better than the sales guidance that we gave back in July. The third quarter is running really well, and we expect the fourth quarter to be bigger than the third quarter. So we expect sequential growth. If you take the year-over-year growth rate that we've been seeing in the second quarter and the third quarter, we're in the high teens, and we expect that to continue as we go into the fourth quarter and into next year. So a lot of momentum at Corning, and we're glad to be here today, so I'll turn it back over to Asiya.
Great. Ed, that was a great segue into the questions because the first one was, you guys are doing high teens, like you said, year-on-year growth, EPS growing even faster than that. As you think about the Springboard plan that you provided the 2030, $40 billion, back in May, how are you thinking about end markets? Maybe you could just dig in a little bit, where demand has been stronger for you guys, underpins better confidence in this Springboard plan that you're talking about. Just help investors think about that. Where's demand much stronger? Maybe demand's not a little bit stronger in some of those end markets.
Yeah. So, if I start with optical, clearly the demand is very strong. We had an investor event in May where we laid out our Springboard plan, and we felt really good about the optical space, the enterprise space, as we call it, our data center, in AI data center space, and we continue to see really strong momentum there. Orders continue to pick up. We're continuing to sign agreements, and we feel really good about visibility going out the next several years. So that's all strong, and I'm sure we'll spend some time talking about that as well. When I think about a customer like Verizon, that moves into the carrier space and optical, and demand is also really good in the carrier space for us as well. In the solar space, I think the market conditions continue to get better. The demand for solar energy is strong.
There's also been continued regulatory announcements. There was a Section 232 ruling that helps pricing in the solar space. So that's another space where I think the market is really good, and we have work to do to build out our capacity to continue to take advantage of that, but I think the market environment is very conducive for success for us there. In our Glass Innovations segment, we really have a number of markets. We have the display TV market, which remains solid. Continued good performance. The panel makers continue to run at relatively high utilization rates. We continue to see screen size growth, so in the display space, we feel pretty good. I think you all know that in the handheld space or consumer electronics, the markets are actually down. We're expecting them to be down year-over-year, primarily because of the price and shortage of memory.
We don't really see a change in that from how we've been thinking about it, but we'll continue to outperform those markets as we sell content into the handheld space. We'll sell more dollars per device. We'll do better than the underlying market. We also supply the semiconductor market in our advanced optics business, and that actually is a pretty strong market, and I expect that to be a grower for us over the next several years. I think our glass innovation business will grow despite maybe the handheld market not being that strong. Automotive remains muted. No change in our view there. Heavy duty, maybe slight recovery. We're starting to see that in North America, but we're not expecting a significant change there.
Again, we'll outperform the market as we sell more content into the market with respect to emissions as well as glass into the automotive space. That's probably the view. Definitely overall, on average, a little better, but mixed certainly across the board.
Okay. I know we'll jump into the DCI and optical in a bit here, but at the event back in May, you guys have the Springboard plan 2030, $40 billion, but then you also layer in a high confidence plan and internal plan. Just help investors understand what needs to happen for that gap to narrow. Clearly, 2026 is here ending very soon, but when we look into 2028 and 2030, what needs to happen for that gap to sort of narrow between your high confidence plan and the internal plan?
Yeah, I think signing deals like we did with Verizon and have done with other customers, and have others in the works, that certainly gives us more confidence that we can get to that, the upper bound and maybe beyond those numbers that we shared. I think the largest variable, especially as you go out to the end of the decade, is CPO or photonics. What happens with adoption of those types of products? We are planning to build out a $10 billion business where today we have no sales, by the end of the decade, selling products into NPO and CPO applications, so inside of a server tray. I think the timing of that and the adoption rate of that will have an impact on our ability to close that gap. I think the good news is we're starting to see a lot of activity.
We are starting to build out our supply chain, and hopefully next year we will start to see some sales there, and we will have a little bit of a better sense for how that plays out over this next several years.
Okay, great. I have been asking all the companies that are presenting here that I am hosting about the AI demand, and clearly it is a big driver for you guys, especially in your optical segment. You just talked about the deal with Verizon. As you think about it was a strong driver for you guys in 2Q as well. What gives you the confidence that this AI has durability to it? It is not just a short-term capacity push because everybody is obviously constrained for capacity, including fiber.
Yeah. I think there are a lot of vectors or ways we try to triangulate around the certainty of demand. First, our orders are going up, so our customers are telling us they want to buy more to build out their data centers. I think that is a good data point, and it gives us good visibility into certainly the next two- to three- year period. Our customers are also signing up for long-term agreements. They are giving us cash in some cases to build capacity and reserve that capacity, so that is also a good sign. I think if I think about it from a market perspective, token usage is going up quite significantly. The companies that are generating revenue from AI, they are doing really well. So there seems to be adoption and the potential opportunity continues to increase.
I think a lot of folks who predict the spending into the space are continuing to raise their targets for whether it is how many XPUs or accelerators will be deployed or how much data center capacity will be deployed. Those numbers continue to go up. So I think that is also important for us. Now, we are realistic and we want to risk against potential slowdowns, so we do things to ensure that we are prepared for that. But we want to also be able to supply upside, to the extent that it is bigger than what we have in our plan. So we are managing that as we add capacity, and we are trying to stay close to how we think the infrastructure gets built out.
Mm-hmm. Before we jump into enterprise AI, we can talk a little bit about DCI first, because that is the major agreement that you guys signed yesterday. You talked a little bit about that $1 billion opportunity could be sooner. Just help investors understand the difference when we think about DCI versus traditional carrier fiber to the home demand that is part of this Verizon deal. How should we think about the ratio between that? What is more beneficial for Corning, as you guys are deploying, both on the carrier side, both on the broadband, as well as on the DCI side?
Yeah. First for us, Corning is a technology company at its heart. We innovate, we introduce new products. We tend to lead in the industry or in the space, in the market that we serve. So we have very dense fiber cables. We introduce those inside the data center. We are selling those to Lumen for their DCI interconnect. So it allows them to have a lot more fibers packed into the same diameter cable, and that is one of the reasons why we think we are successful in the DCI space. Now, if I think about Verizon, they are going to do both broadband and Gen AI, so they want a lot of fiber. So they want to do their deployment and get the maximum out of that, and I think that is one of the reasons why our innovations are successful and we are able to take that business.
I do not know that I would say DCI or fiber to the home, one is necessarily more beneficial. We like to sell a solution, so a fiber to the home solution is a good outcome for us, and both Verizon and AT&T have talked a lot about passing more homes by the end of the decade. So we expect to continue to see growth in the broadband space that we like. If to the extent we can sell full connectorized solutions to someone like Verizon for fiber to the home, that is great outcome for Corning. Data center interconnect is really important because if we can connect data centers and allow the hyperscalers and others to continue to build that out, also really important for us. So I do not know that I would say one is necessarily better than.
Okay. You have talked a lot about enterprise optical. Obviously, you have provided some interesting stats at your investor day. You could see that market growing 1.3x to 1.5x GPU growth. You talked about large clusters, bandwidth growth. Which one of those drivers do you see as the biggest, most favorable development that is going on since maybe the Investor Day? Is it bandwidth clusters? Is it, sorry, bandwidth growth, clusters, scale-up optical? How are you thinking about the growth drivers there?
Yeah, I think longer term, certainly from now to the end of the decade and beyond, scale-up photonics are going to be the largest driver, the growth driver. It adds to our TAM significantly. If I think about what we sell today, the TAM we will have in the future as optics begin to replace copper inside the data center, that TAM is a multiple of what we have today. That is the largest driver. I would say what is driving our sales today, 2025, 2026 into 2027, is scale-out of the network. Larger data centers, more GPUs. Those GPUs need to be connected to each other, so much more fiber is being sold.
As you get into the larger cluster size, which we expect to see, 130,000 is a good barometer, you add another layer to the network, so you add more fiber, even just in the scale-out part of the network. That is definitely happening, and that is driving our growth now, and we expect that to continue certainly in the short term. I would expect scale-up of the network to begin as you get into the end of next year, into 2028 through 2030. Then, as I mentioned earlier, photonics is a huge driver, and we will learn more quarter- over- quarter, and we will be able to share our perspective. You should certainly listen to what a lot of the large players, NVIDIA, Broadcom, et cetera, are saying when they talk about deploying their product sets.
Okay. I know Wendell often talks about, "If I could sell more, they would buy more." You guys have talked about increasing fiber capacity, even connector capacity. I think you said connectivity capacity by 10x, fiber production by 50%. What are the timelines for these ramps to happen for these production to catch up to demand?
Yeah. We have been adding capacity, certainly the last several quarters, maybe almost a year now, quarter- over- quarter, we have been bringing on capacity. It is primarily been cable and connectivity. As Asiya mentioned, we are committed now to significantly increase our fiber capacity. We are doing that here in the U.S., where the world's largest, lowest-cost fiber factory is. I think that actually sets us up really well to supply that $40 billion opportunity and beyond. That fiber capacity will start to come online in the not that distant future and certainly continue out over the next several years. We are not fiber constrained today. We expect to be, and that is why we are bringing on that capacity. It is tied to our customer agreements.
We are also adding cable capacity and connectivity capacity. As you mentioned, we are significantly increasing our connectivity capacity as we expect scale-up to drive a lot of growth, and that is where we expect to really be constrained relative to what our capacity is today. Another thing that I would mention is a lot of our long-term agreements, and just in general, require us to continue to do technology work and advance the types of connectivity that will be required. If I think about moving inside of a switch tray or a server tray, you are going to need different connectors, you are going to need different optical components, and we are innovating to bring those things to market. We expect to be a leader in that, and I think that is part of our capacity add as you go out towards the end gate.
When you think about the development of all these various productions and whether it is connectors, whether it is on the fiber side, are there things in your supply chain that need to catch up as well so that the demand is fulfilled as you see your own supply coming online?
Yeah, I think the biggest thing that investors should watch is the build-out of the CPO supply chain. I think that is the largest build-out, certainly in the passive optical space, that needs to happen. Some of that is us, some of that is componentry that we may purchase, we may ultimately make ourselves. That sort of doesn't exist today. Certainly, the scale that is required does not exist. I think that is the largest build. We are in the midst of doing that. I don't see anything that seems like a showstopper.
But certainly, there is a lot of work that has to happen for that to occur to be able to hit that $10 billion run rate we talk about or to hit the levels of growth that you will hear NVIDIA talk about, things like that.
Now, some of your peers, whether it's Prysmian, Sterlite, for example, they have also beefed up domestic fiber production capacity, fiber and cable, I would say. When you think about your own fiber and cable production coming online, how do you think about the supply-demand? How are you making sure Corning's managing that risk so we are not over-supplied by, let's say, fiber and cable?
Yeah. We're fully integrated. We're really the only fully integrated supplier. We make fiber, we make cable, we connectorize it. Most of our competitors either make only fiber or fiber and cable, or they make connectivity and they purchase their fiber. That's sort of the way the industry is set up. There are some Japanese competitors that are integrated, but they're much smaller or much lower scale than us. For us, the primary thing is we plan to consume the fiber we make into connectivity solutions, which are tied to these long-term agreements. I think we're in a good place. We're managing our capacity relative to what we expect our demand. I think it's okay that others are adding capacity into the system, but I don't think of their risk profile necessarily as the same as ours.
Okay. When we talk about AI and build-outs of data centers and consuming cables or consuming connectors, there is a lot of lumpiness, broadly speaking. On the server side, on the compute side, people will talk about customer readiness and delays. How does Corning think about managing the build-outs of these large data centers? Clearly, they tend to be working capital-intensive as well. I know you're very focused on free cash flow generation.
Yeah. A lot of the long-term agreements we sign have many tenants to them. One is a risk management tenant. We want our customers to have skin in the game, so oftentimes they give us cash to pay for the capacity build-out. They can earn that cash back over time by purchasing from us, which is a good outcome for both of us. We also typically have some technology sharing arrangement where we get a view of their technology roadmap, and it allows us to see what they need in the future so we can determine how best to solve their problems. I think that is one way to do that. Another way is to sort of bring on the capacity in chunks or modularize a little bit of how we do that, versus you're bringing on an entire factory at a time.
That also allows us to manage risk to some extent.
Okay. A little bit about the hyperscaler agreements. You guys have publicly announced already a few. Again, when we think about concentration risk around these three agreements that you have announced, potentially some more that are coming, how do you think about that? You have these structured long-term agreements, but there is concentration risk around some very big players that are participating in this optical on the enterprise side.
Yeah. We actually like to flip that a little bit, the way we think about large customers. They have actually served us [inaudible]. We have built these sort of franchise businesses with customers in other industries, and we are looking to do that in the optical space. I think Apple is a great example. BOE, which is the world's largest panel maker, is a great example. Verizon, who we announced a deal with yesterday, is another good example, where you sign a large arrangement, you have this working relationship that goes beyond the supplier and customer relationship. You help them create a lot of value by solving their problems and allowing them to do the things they do. It also creates a lot of value for us, a lot of value for investors. Over a 30-year period, you have sort of this terminal value relationship with a customer.
We think of that as like a franchise business for us. With the hyperscalers, with NVIDIA, with Broadcom, we look to do the same thing. Although, yes, you create a big customer set, if you do it across the industry, you are where you want to be. I do not think the concentration risk is necessarily a bad thing. I actually think a good thing. Now, that said, in the data center space, we are also selling to the neoclouds and tier two hyperscalers, if you will. So we have a relatively diverse set of customers beyond the primary players that you all might think.
Okay. Photonics, and you talked about it's a $10 billion opportunity through 2030 that you guys have talked about. You said there's timing around adoption of that. Just if you could click down one more level, what specifically should investors be watching out for? The $10 billion, any kind of drivers there that we should think about? How you came up with that TAM, if you could share a little bit more.
Yeah. I think the potential TAM is much larger than that over time. What we tried to do was think about if a specific adoption level of NPO or CPO were to take place, significantly less than 100%, in a window of time, in our case, by the end of the decade, how big of an opportunity could that be? We're thinking, if the entire data center infrastructure went optical inside the box, that TAM is very significant, much larger than the $10 billion opportunity for us. And of course, time, because we're putting out a plan in terms of time. I think what you should look at first and foremost are, what are our customers talking about? In this case, I think it's anyone who is selling an accelerator, so certainly an NVIDIA and a Broadcom, but also custom ASICs.
The hyperscalers themselves will deploy that. How are they talking about the deployment and architectures for their accelerators, and are they using some form of NPO or CPO to do that? I think that is a good indicator of the timing. I think you're going to see an inflection at some point. I believe that inflection happens in the next four or five years. It doesn't happen in 2027 necessarily, but once we start to see that, we'll learn a little bit more about how the adoption works, the cost, and sort of how powerful that optical cycle is, and in what time window.
Mm-hmm. I know you guys are always innovating. I think there were some announcements around GlassBridge. Just maybe for those who may not be aware of that, just how does that kind of factor into that adoption curve that you're talking about?
Yeah. In this window that we are focused on, our $20 billion, $30 billion, $40 billion, our Springboard plan, I think traditional product sets are going to drive the growth in CPO, so polarization-maintaining fiber and FAUs and the types of optical components that exist, but really aren't at scale and aren't fully integrated today. I think in the future, you're going to see new product sets, and those new product sets could be something like a GlassBridge or other products that we're working on that incorporate glass or other optical components. Or maybe even eliminate some of the optical components that exist today, and make the network function better. Again, that is sort of what we do. We really think that is the best opportunity for us in this space. It's less about assembling components that exist today, although we do that well and we will do that.
It's about inventing the next generation that makes the network more efficient, reduces cost, makes it easier to install. All of those things are what we're focused on with a lot of the OEMs. That I think of as more a 2030 plus timeframe opportunity.
Apple is going to be making some announcements today. You guys have had 100% share of the Apple cover glass, and Apple Watch cover glass as well. I think a lot of that's now being produced at your Kentucky facility. I think you've talked about that as well here. What are some of the incremental benefits of that relationship, and how should we think about the fact that Apple is also trying to bring a lot of that production here domestically? How does that kind of factor into that 2030, $40 billion Springboard plan?
Yeah. So certainly tune into Apple's announcements today. I think Apple is probably the best example I can think of a franchise customer for Corning, where we've been able to continue to help them be successful, which increases our TAM on a device. So dollars per device has continued to go up. So even though the smartphone market over the last decade has been relatively flat, low single-digit growth at best, we've been able to grow much faster than that as we continue to add in content and innovate and help them make their devices better. I think we will continue to do that. The relationship we have, we actually just had the one-year anniversary of the announcement we made in Kentucky, and that relationship allows us to continue to innovate with them in conjunction with their next generations of devices.
Certainly tune in and see what they have to say, but I think it's an important aspect of how we think about growing in our Glass Innovations segment with a customer like Apple, but also just other customers in that space. And even in the semiconductor space, where there's going to continue to be the need for glass or glass substrates into semiconductor test equipment, or the semiconductor substrate space, that allows us to continue to grow faster than the underlying.
Right. Is that driving, not just in smartphones, but like you mentioned, semiconductor equipment as well, is that driving more towards domestic production, relationships like Apple?
I would say we have seen really good traction for manufacturing in the U.S. We're a U.S. manufacturer. We make a lot of our products here. We tend to want to be where our customers are and where their supply chains are. And so for fiber and cable, we make a lot of our product sets here. We supply a lot of U.S. customers for their U.S. build-outs, with U.S. product. We're doing that in solar. We've done that in our Glass Innovations business with Apple. We're actually starting to see it a little bit in life sciences and in other parts of our business. And I think the current administration is really promoting, [incentivizing] or [disincentivizing], however you want to look at it, to try to drive U.S. manufacturing. We continue to see that as a positive catalyst for us.
Okay, great. Switching a little bit to profitability. You've talked about EPS growth being much faster than sales growth. I know at the Springboard you talked about operating margin, potential out there. You didn't necessarily specify a target, but obviously EPS growth growing faster than sales growth. If you think about what operational strategies maybe you're putting in place that will enable that EPS growth to kind of outform sales growth.
Yeah. If I go back to the beginning of our Springboard plan, we had an operating margin of around 16%. We set a target for 20%. We delivered that target earlier than we thought we would. What really drove that was we filled capacity, we had excess capacity, we introduced new innovations, we are introducing them at a higher price point. So we are improving our mix as we continue to shift from older- generation products to new generation products, specifically in Optical Communications, but certainly in other places as well. I think those strategies, both of those things, will continue to increase our margins and will allow us to have EPS grow faster than sales.
We have not yet set a new profitability target, but what we have said is that we expect to be above that 20% level, and we have continued over the last several quarters to be there. I would expect us to continue to accrete up profitability as our sales grow and certainly for EPS to grow faster than sales. I think price is an important component of the way we improve our margins. For us, the way we think about it is improving the margin on a new product. Some of that is pricing. It may not be apples-to-apples pricing, but it is certainly pricing for the value we are bringing to the market.
Okay. Then solar. You are within solar. Solar sales are pretty strong. I mean, 90%, I think, year-on-year growth here in 2Q. You raised your solar opportunity as well, but you are still ramping certain on the factory side as well, and you talked a little bit about that. So what does it take for the solar business to reach corporate average profitability, and what is the timeline for that?
Yeah. In solar, we are doing three things. We make polysilicon, which is the base material. We are turning that polysilicon into a wafer, which then has a cell printed on there, and then we also are turning that cell into a module. So we are doing three out of the four steps to make a solar module. As I mentioned earlier, there has been recent legislation that helps sort of put a floor on the price per watt for a module, which is good. It sort of increases the market pricing, so that is actually a positive for us. Certainly will help our profitability. On the polysilicon side, we have got our capacity in place. We are optimizing it, but we are in pretty good shape. We are adding wafer capacity, getting that capacity up to the full potential, and we are adding module capacity, getting that up to the full potential. Two things will happen.
One, our sales will go up. We will be able to make and sell more, and secondly, we will be running efficiently, so we will be able to get rid of the cost drag that we have that happens when you build a big infrastructure business. We continue to improve quarter-over-quarter. We expect that to continue to be the case. I say by the end of 2027, we should be able to get to the profitability level that we expect in this business, and then we should be at or above that corporate average.
Okay. I am going to just turn around and see if investors have any questions. Please do raise your hand. If not, I am going to continue here. You have generated a lot of free cash flow, and I think, Ed, you have continued to say that free cash flow conversion, capital allocation is very important. High teens ROIC is very important. Now that you are doing a lot of build on the optical side, you are ramping solar, the Kentucky facility for the cover glass. I am not sure where we are on that one, but it is a pretty capital-intensive phase part of the Springboard. Yet you are talking about very strong free cash flow conversion. Just help us understand customer prepayments, how that is kind of helping you manage this risk on a capacity as you are going through a capacity build to meet your Springboard targets.
Yeah. First, free cash flow, really important for us. We are also really proud of getting the ROIC into the upper teens. I would like to get it to 20%. I think that is a possibility. I think if we can grow in the high teens and have an ROIC at that level, it is a huge value creation opportunity, and certainly that converts to a lot of cash flow, and we expect our free cash flow to continue to grow, maybe in line with our earnings growth or something along those lines. There will be quarter-to-quarter lumpiness. We might receive a customer deposit in one quarter, and then we might spend capital in a different quarter, so you might see a little bit of lumpiness. But over a year period of time or a multi-year period of time, we expect free cash flow to continue to grow.
We like the customer deposits, as I mentioned earlier. It gives us certainty about our investment. It gives us the ability to continue to sell to that customer. They are sort of tied to us and allows us to innovate. So I feel like despite adding capacity, we will become a little less capital-intensive in the nature of the capacity we are adding. In the optical connectivity space, for example, it is less capital dollars per sales dollar than in other parts of our business. So that is helpful. But also, the customer deposits help sort of smooth out a little bit the free cash flow that we might otherwise generate. But again, cash flow going up year over year, that is how you should think about it.
Great. Well, I am going to thank Ed here. We are up on time. So thank you very much, Ed, and Corning's management team, and look forward to the Springboard update and some margin updates.