Corning Inc (GLW) — Q1 2017 Earnings Call Transcript

Thank you and good morning. Welcome to Corning's first quarter conference call. With me today is Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Senior Vice President and Chief Financial Officer; and Jeff Evenson, Senior Vice President and Chief Strategy Officer. Before we begin our formal comments, 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 remarks involve a number of 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 will be discussing our results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP used by management to analyze the business. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at Corning. Slides are being shown live on our webcast to accompany our formal comments, and we encourage you to follow along. It will also be available on our website for downloading. And now, I'll turn the call over to Wendell.

Thank you, Ann. Good morning, everyone. In January, we told you that we expected the momentum we built over the course of 2016 to continue into 2017, and it has. This morning, we reported another excellent quarter. First quarter sales were up 14% over last year, with growth in all businesses. EPS was $0.39, up 39% year-over-year. For the second quarter, we expect to sustain our momentum with year-over-year sales and EPS growth once again. Tony will cover our financial performance and outlook in greater detail in a few minutes. Our strong operating results and solid progress on value-creation initiatives put us on track to deliver on our Strategy and Capital Allocation Framework goals. The Framework outlines our leadership priorities and articulates the opportunities we see across our businesses. As we've shared with you, we've designed the Framework to create significant value for shareholders by focusing our portfolio and leveraging our financial strength. We think that the strategic and financial benefits of our Framework are becoming even more apparent as we enter its second year. As you know, under our Framework, we target generating $26 billion to $30 billion in cash through 2019 and plan to return more than $12.5 billion to our shareholders through repurchases and dividends. We have made great progress against our goals. Since October 2015, we have returned more than $6.5 billion. Repurchases have reduced outstanding shares by approximately 24%. We increased the dividend 14.8% in February, and 12.5% last year. Additionally, the Framework calls for increasing the dividend by at least 10% in 2018 and 2019. Also, we plan to invest $10 billion to sustain our leadership and deliver growth over the long term. We are best in the world in three core technologies, four manufacturing and engineering platforms, and five market-access platforms. We focus 80% of our resources on opportunities that use existing capabilities in at least two of these three categories. We are investing in research and development, capital expansion, and acquisitions to advance our innovation initiatives, strengthen our leadership in low-cost positions, and ultimately outperform our competitors. By pursuing our focused strategy, we believe that our likelihood of success increases, our cost of innovation decreases, and we create higher and more sustainable competitive barriers. Our focus in leadership also attracts some of the world's leading companies to collaborate with Corning because they see how our expertise and unique combination of capabilities can help them address some of their toughest challenges. Verizon's announcement last week is a great example. The agreement commits Verizon to purchase a minimum of $1 billion of our optical solutions over the next three years as they reinvent their network to support 5G and new services. We will supply them with up to 20 million kilometers of optical fiber annually. Stepping back, all of our customers have the opportunity to benefit from our unique set of capabilities in Optical Communications. We are engaged in deep dialogue with major telecom players across the globe as they anticipate transformations in communications, education, healthcare, transportation, and ultimately the way that we all live. Corning's Optical Communications market-access platform is central to realizing their vision because of our ability to economically expand capacity and deliver innovative solutions. Consequently, we expect to grow significantly faster than the optical markets we serve, and we've seen just that over the last three quarters. Another great example of how some of the world's largest companies come to us for solutions can be seen in our automotive market-access platform. We are leveraging our position in this market by adding a significant new business for gas particulate filters, or GPFs, as well as by building a gorilla-sized automotive glass business. Consistent with OEM announcements, we believe the GPFs will be the preferred approach to meet new regulations for particulate emissions from gasoline direct injection engines. GDI engines offer both higher performance and better fuel economy; and, as a result, have grown to about a quarter of passenger car sales worldwide, with units growing in the high-teens annually. We have won the majority of GPF platforms awarded, including several new ones in the first quarter. So far, our filters will be used on 50 gas direct injection models from 20 automakers in Europe and China. European Union 6c regulations introduced new real-world emissions tests starting in September of 2017. All new cars will need to comply with the rules starting in September of 2018. In December, China also finalized belated regulations due to take effect in 2020. We expect gas particulate filters to become a significant business for Corning. GPFs offer the potential to increase our sales opportunity per vehicle by a factor of three to four, with profitability similar to our current business. Our investment in GPF is ramping to support customer commitments, and you will start to see sales in the second half of the year. We are also seeing progress towards commercialization of Gorilla Glass for Auto. Interest in interiors is accelerating, and we continue down the path to additional wins for exteriors. To tap this opportunity, we are reapplying our core technologies, and we're using our manufacturing assets to provide advantaged glass that can make cars cleaner, safer, and more connected. Our decades-long relationships with auto manufacturers have assisted in gaining collaboration of testing and development. The new relevance of our glass expertise reinforces Corning as a key innovation partner for auto OEMs. Looking ahead, we will showcase our full spectrum of automotive solutions at the Society of Information Displays spring show. Turning to our mobile consumer electronics market-access platform. Our goal is to double sales despite flattening smartphone unit growth. Our approach here has three elements. First, we will capture more value per device by continuing to lead the market by providing our customers with best-in-class products. Gorilla Glass 5 leads the market for drop performance, and we are seeing that superior performance translate into meaningful price and share gains that increase our revenue and profit per phone. Superior performance also enables us to sell more glass per device. Given handset antenna requirements and the desire for wireless charging, glass is becoming a preferred material for phone backs which, at least conceptually, doubles our addressable market. Since the start of the year, we have seen Gorilla Glass 5 highlighted on the flagship models of several top brands. The list includes several leading phones for the China market, plus the recently launched Samsung Galaxy S8, which uses Gorilla Glass 5 on both the front and the back. And we're innovating to make glass even more attractive for glass backs. For example, our Vibrant technology puts photo-realistic images on the backs of devices for handhelds and notebooks. We've also launched a glass optimized for screen protectors for those who want added protection on their device. Our second lever to double sales is to gain share in the value segment. In February, we announced a collaboration with Micromax, India's leading device manufacturer, to bring Gorilla Glass to their video smartphones designed for the value-segment customer. We're thrilled that Micromax opted to give their customers' phones the protection that Gorilla Glass offers. Third, we can win in new device categories. For example, Gorilla Glass SR+ offers outstanding scratch performance and impact resistance on wearables, such as the Gear 3 from Samsung. In all cases, our close relationships with customers enable us to work jointly with them on compelling new mobile consumer products. Our results for the first quarter, with sales up 32% year-over-year, demonstrate the traction that we are getting in this market-access platform. And, briefly, I wanted to highlight the very positive state of affairs in our Display business, where our long-term objective is to stabilize returns. As Tony will elaborate, the glass price decline in the first quarter was moderate, and equal to the best first quarter decline we have seen in the past six years. We are seeing a more favorable LCD glass pricing environment today than we've seen in many years, and believe the full-year 2017 price decline should be less than last year. Specifically, we expect a price decline of about 10%, or possibly even better. And the Display business offers excellent cash flow to Corning while also presenting us with the potential for additional revenue streams as we work with customers on innovations that help them advance state-of-the-art displays. These examples are also a great indication of how we're investing $10 billion to grow sales and sustain our industry leadership. In summary, we are on track to deliver our 2017 objectives and overall Framework goals. As I noted, the strategic and financial benefits of Corning's cohesive and focused portfolio are becoming even more apparent as we enter the second year under our Framework. Let me turn the call over to Tony for a review of our results and details on our outlook for 2017.

Thank you, Wendell, and good morning. As we noted in today's release, our first quarter core results reflect the strong year-over-year improvement we expected, and we are very pleased with our operating performance. First quarter sales and earnings per share were up significantly, and we expect both to rise again year-over-year in Q2. Before I get into the details of our performance and results, I wanted to briefly note that the primary difference between our GAAP and core results for the first quarter is again a non-cash mark-to-market adjustment. As we have discussed previously, GAAP accounting requires earnings translation hedge contracts settling in future periods to be marked-to-market and recorded at their current value in the current quarter, even though those contracts will not be settled in the current quarter. During the first quarter, the yen strengthened reducing the value of our hedge contracts, which resulted in a GAAP loss of $326 million when we marked the contracts to market as required by GAAP. To be clear, this mark-to-market accounting has no impact on our cash flow. We remain very pleased with the results of our hedging program and the economic certainty it delivers. Since its inception, we have received cash totaling $1.4 billion under our hedge contracts. These proceeds offset much of the yen-related fluctuations in Display's earnings. Hedging our earnings and cash flows through 2022 substantially mitigates risks from a weakening yen. And for investors who have additional questions on the mechanics of these contracts, please refer to the tutorial on FX hedge accounting on the Digital Media Disclosures section of our Investor Relations website. And as always, Ann and her team are available after the call. Turning to first quarter core results, sales rose 14% year-over-year, reflecting growth across all businesses. Net income was $407 million, up 20% year-over-year. Adjusting for the silicones business equity earnings, which were included in our results prior to the Dow Corning realignment last June, net income would have grown 42% year-over-year. First quarter EPS was $0.39, up 39%. Of these positive year-over-year results were due primarily to sales growth and higher profitability in Optical Communications, continued rapid adoption of Gorilla Glass 5 coupled with strong Gorilla Glass volume, and strong LCD glass volume growth in a sustained moderate pricing environment. Gross margins were 42.3%, in the range we expected, up 150 basis points from last year, driven by growth in Display, Optical and Specialty. SG&A was 13% of sales at $332 million. RD&E was 8% of sales at $200 million. Total gross equity earnings were $8 million. As a reminder, June 1, 2016 equity earnings included $58 million from Dow Corning silicones business. Adjusting for that, equity earnings would have been up on a year-over-year basis. And our effective tax rate for the quarter was 18%. Turning briefly to the balance sheet, we ended the quarter with $4.9 billion of cash, approximately 35% of which is in the U.S. Adjusted operating cash flow for the quarter was $341 million, up from last year and on track to deliver to our four-year capital allocation plan. Now, let's look at detailed segment results and outlook beginning with Display Technologies. The first quarter display market and our results were strong as we expected. Sales were $846 million and net income was $256 million. Volume and pricing were in line with expectations. The glass market and our volume were up mid-teens over last year's first quarter. Sequential LCD glass price declined moderately, equaling the best first quarter decline of the past six years. Note that we believe supply chain inventory exited the quarter at a healthy level and panel maker inventories remained lean. We continue to expect that the full-year 2017 retail market as measured in square feet of glass will be up mid-single digits, driven primarily by demand for larger screen size TVs. For the year, we also expect our glass demand to be up mid-single digits, in line with the overall market. We continue to believe the full-year 2017 pricing environment will be favorable and better than last year, with our glass prices declining about 10% or even possibly better. We believe this favorable pricing environment is driven by several factors. First, we monitor utilization, value chain inventory and other market factors very closely, and we align capacity to market demand. Our current view is that glass supply is tight. If the situation changes, we will take steps necessary to align our capacity with market demand by reapplying tanks for other applications or by idling tanks. Second, our competitors continue to face profitability challenges at current pricing levels. Therefore, we expect their price declines will slow further as they try to remain profitable. And third, glass price declines would need to moderate even further or perhaps flatten or even increase for glassmakers to generate returns on new investments, given the high cost of building and running new capacity. For the second quarter, we expect the LCD glass market and Corning volume to be up low-single digits sequentially, which is the equivalent of up mid-single digits year-over-year. Sequential price declines should be substantially less than in the first quarter. We continue to expect supply chain inventory at year-end 2017 will be similar to the lean level at the end of 2016. Over the course of Q2 and Q3, supply chain inventory should expand in preparation for fourth quarter retail demand, which will then draw inventory down. In summary, we are very pleased with the current dynamics in our Display business and our progress in stabilizing returns. We will continue to monitor and keep you posted. Let's move to Optical Communications where the first quarter results were strong and sales rose 34%, and impact more than tripled over last year. Even if we exclude the effect of the software implementation issue that constrained sales in last year's first quarter, sales grew mid-teens in both carrier and enterprise. In particular, we benefited from strong growth in the North America fiber-to-the-home market. For the second quarter, we expect sales to increase approximately 10% year-over-year. We are well on our way to delivering low-teen sales growth for the year. We see spending by key industry leaders, among them Verizon, shifting more towards optical solutions. This is an important lever for us to realize our own goal of growing Optical Communications from $3 billion to $5 billion by 2020. To meet this growing demand, we are investing in additional capacity. These investments are factored into our full-year capital spending plan of $6 billion to $7 billion. In Environmental, first quarter sales increased 4% and net income was flat. First quarter automotive sales were again a record of 14% year-over-year, driven by light-duty substrates as auto demand worldwide was strong. The heavy-duty diesel market remained weak, particularly in North America. Our total diesel sales were down year-over-year. For the second quarter, we expect to report sales consistent with Q2 last year, as the auto market remains healthy globally and offsets heavy-duty weakness. As we've previously noted, our platform wins in the emerging GPF market require select capacity and engineering investments. In the near term, you will see both costs on our P&L and capital expenditures. As Wendell mentioned, we are excited about the GPF platform wins we have secured and expect sales to begin during the second half of the year. For 2017 overall, we continue to expect sales to be consistent to up slightly from 2016. Let's move to Specialty Materials where we also are very pleased with our performance. First quarter sales rose 32% over last year, ahead of our expectations, led by strong Gorilla Glass volume. Net income was up 50% year-over-year. We made progress on all three levers to grow in the mobile consumer market that Wendell described. In particular, we saw the benefit of Gorilla Glass 5's price and share gains in the fourth quarter, and those benefits continued in Q1. For example, a number of phones have adopted glass on the backs, including the Samsung Galaxy S8, the LG G6, and the Google Pixel. We expect a positive financial impact from Gorilla Glass 5 adoption throughout 2017. Our growth prospects remain strong in mobile consumer electronics. As Wendell described, our innovative products provide added value for consumers, particularly in terms of durability, and create new opportunities for us to increase sales. We expect sales growth in the second quarter to be in the high teens year-over-year. Exactly how much we will see for the full year continues to be dependent on the timing and extent of customers deploying Gorilla Glass 5 and other Corning innovations. As we move through the year, keep in mind that the supply chain in this market is driven by the timing of new product launches, which can result in significant fluctuations in year-over-year growth rates for individual quarters. And we will certainly keep you posted as the year progresses. In Life Sciences, the first quarter sales and net income were up year-over-year, and a bit ahead of our expectations. For full-year 2017 and the second quarter, we continue to expect low-single-digit sales growth year-over-year. As for our innovation program in pharmaceutical packaging, we continue to make progress and look forward to sharing milestones. Now, shifting to a full company P&L, for the second quarter, we expect year-over-year growth in sales and EPS once again. We expect second quarter gross margin will be in the range of 42% to 43%. SG&A and RD&E spending should be approximately 14% and 8% of sales, respectively. We expect other income/other expense to be a net expense of approximately $25 million to $35 million. And second quarter total gross equity earnings are expected to be approximately $10 million to $20 million. Please recall that the second quarter of 2016 also included the equity earnings from the silicones business. We will lap the strategic realignment of Dow Corning in June. Starting in Q3, year-over-year comparisons of equity earnings will be apples-to-apples. We continue to believe full-year gross equity earnings will be approximately $150 million, predominantly from Hemlock Semiconductors. And we expect our effective tax rate for the second quarter and full-year 2017 to be approximately 17% to 18%, and CapEx to be approximately $1.5 billion for the year. Finally, let me comment on our plan to return at least $12.5 billion to shareholders under our Framework. Through the end of the first quarter, we have returned more than $6.5 billion to shareholders. In 2016, our repurchase activity included $2.5 billion in repurchases to offset the EPS impact from the loss of the silicones equity earnings from Dow Corning. So far this year, we have returned $552 million. As you may recall, in February, the board increased the cash dividend per share by 14.8%. For your modeling purposes, we still plan to repurchase a total of approximately $2 billion over the course of 2017. That's roughly what we repurchased in 2016, excluding the repurchase to offset the loss of silicones equity earnings. Let me close by saying that we are very pleased with our continued positive momentum. We remain on track to deliver our 2017 objectives and the overall goals of our Strategy and Capital Allocation Framework. We feel very good about the rich set of opportunities ahead of that. With that, let's move to Q&A.

Thanks, Tony. Operator, we're ready for the first question, please.

Thank you. I wanted to just dig in a little bit deeper to the Verizon and the 5G opportunity. In the interview that I watched, there was talk about a very large fiber count, a lot of millions of miles of fiber. And I'm wondering how this fits into – it feels like it's covered in your current CapEx, but how incremental is this to the revenue? And is the architecture that they're talking about with all those fibers, if you could just describe that, something that you'd think is going to be widely deployed by other telecom service providers?

Thanks for the question, Joseph. This is Wendell. I think, with the second part of your question, you are on the key strategic opportunity here. As to the modeling, let's deal with that first, this is inside of our strategy and capital allocation investment plan, the $0.25 billion we're investing in North Carolina to add to the world's lowest-cost, largest fiber optic facility. I think what's important to note is, Verizon's predecessor companies were one of the very first companies to deploy fiber optic cable. And that, of course, became the significant business that you see. Then, they were the first to deploy, on a large scale, fiber-to-the-home, which is a primary driver in our current financials, as the rest of the world has followed that deployment. What you saw with this announcement is a statement of their strong belief, a technology bet, and an architecture to deliver 5G and 4G densification that is largely dependent upon our capabilities. If indeed others follow this technology choice, it will be extremely significant for us over time. Does that answer your question?

Yeah, I just wanted to get into some of the – I mean one of the things that came out was that, if you look at current – or if you looked at your FiOS build, there were 6 to 8 fibers per – I don't know if that's neighborhood or per link or in a metro node, or whatever you want to call the distribution point. And there was talk of, and I think I heard this correctly, a 1,700-fiber pair sort of installation. And that density just sounds very, very significant. I'm wondering how we should think about that in the context of, I guess, the relatively small rollout that's planned for the next two years.

And so, I think the way to think about it is if you compare it to something like a fiber-to-the-home build, this particular architecture will utilize about two to six times more fiber than a fiber-to-the-home build. That range comes from what exact coverage you want, how exactly different neighborhoods are laid out. So, that's very significant. I think timing on the civil works and the way in which they'll roll out is a question best directed to the customer. But I think you are on, I think, the more significant question which is, is this architecture going to become the dominant architecture as major wireless companies seek to prepare for 5G through 4G densification? If it's the case, that would be a very bullish outlook for our capabilities.

Okay. And I'll just round it out, and let other people ask. Would that mean incremental CapEx and capacity requirements for the fiber business, if more than one vendor went here?

So, I think the way you should remember how we work on innovation is – so we've been engaged for a number of years with Verizon on this innovation and strategic deployment, and they just chose to go public recently. But that deep engagement that we have through our Optical Communications market-access platform allows us to get technology insight as well as good insight as to how to plan for our capital allocation. So, although every one of our different forecasts and planning cycles has different probability, by and large, you should think about this as being included in our $10 billion of investment in growth and sustained leadership. It's possible that things could reflect a little more through a higher demand case than what we're currently planning on. But I think the best way to think about it is probabilistically and that is encapsulated within our $10 billion.

Excellent. Thank you, Wendell.

Hi, guys. Thanks for taking my question, and congrats on a nice quarter. I also had a couple questions on the Optical business. And to start, maybe how come we shouldn't expect better than low-teens growth for the year given the outperformance in Q1? And I was hoping you could help us understand the OpEx component of your fiber expansion plans and to what extent the profitability of the Optical business might be impacted as you invest in more capacity this year.

Hey, yeah, this is Tony. Why don't I take those two questions? Some of that growth that we experienced in the first quarter, of course, was not repeating the software implementation issue that we had a year ago. But even in spite of that, we were up about 15%, and our guidance for the full year is low teens. So, from our standpoint, that's very good significant growth. It's certainly better than what the industry average is, capital spending in the Optical arena, and it's well on track to get us to the $5 billion of sales which is our objective by 2020. So, I think overall, we feel very good about the Optical growth. In terms of the capacity expansions, I mean the thing to remember the power of our Framework is that that we already have a lot of capacity in Optical Communications. And so, while we are adding some capacity there and it does have a negative impact in us on the short term, it's not significant. And you see it a little bit with slightly lower gross margins as we ramp up some of the production. But it's well within our guidance of 42% to 43% for the year. So, I don't think it's going have a big significant impact.

And then, if I could just ask a quick follow-up on Verizon, I was just hoping you could confirm to what degree the contract will increase your run rate with the carrier or if this is just the continuation of the 2017 run rate into 2018, 2019, and 2020. Thanks.

No. It's obviously a significant increase for this particular customer.

Thanks. Good morning. Sorry, another fiber question. But maybe just stepping back, Wendell, you mentioned that your engagements for a while with some of the service providers and there's different probabilities to what they may need. But how does that influence the enterprise customers, especially some of the large data center players that you've been dealing with more recently? Could we see similar agreements there? And in general, how would you describe just the availability of your products and the industry's products into the second half of the year, given all of this?

So, I think that your observation that there is also significant network architecture evolution going on on the enterprise side is quite accurate, Steve. And so, more to come in that space as our customers decide how open they want to be about that. For many of them, they are not subject to the same degree of public filings that the major public carriers are. So, as a result, they tend to keep quite quiet their architectures because it's a – they view it as a key component of competitive advantage in these very large scale data centers, and it is indeed. So – but there is significant change going on there. Once again, it is a change in the direction of our capability set. So, more to come there, though we may not be able to be too public. So, how do we view the demand for our products set? We view capacity to be quite short, and that's why you see the capacity expansion announcement that you have. Because of our superior cost position, we are able to economically expand our capacity where many others have not. And so, this sets up a very interesting strategic dynamic that should play itself out over the next number of years. And our Optical Communications team, I think, is generally on top of it, and will take the appropriate steps to both delight our customers and our shareholders with their set of notes.

Great. That's very helpful. And then, if I could just sneak in a Gorilla Glass question. So, Gorilla Glass 5, you're indicating increases as a percentage of your shipments further throughout the year. Can you give us a sense for either how that helps profitability or where the mix ends in the year? I know the timing is tough to call, but if we went from here to end of calendar 2017, what's the general impact of Gorilla Glass 5? And where is it in terms of your mix? Thanks.

I think from an overall standpoint, the adoption of Gorilla Glass 5 has been very rapid and continued to be rapid. And of course, we get a nice both price and share premium from that. It's had a positive impact on our financials the last couple of quarters. And you expect to see that same sort of impact continue the next couple of quarters.

Yeah, good morning, guys. Thanks for taking the questions. I just have a couple. I guess I wanted to start with Optical. The seasonality there was a little bit different than we anticipated, so the Q2 guide is a little below what we were expecting. But then, Q1 was better. I wonder if you guys could comment on the seasonal movement there between Q1 and Q2. And also, just comment on whether you're supply or you're capacity constrained there in Q2. And then, second, I wanted to ask about Specialty. To what extent does the strong guidance in Q2 include unannounced products? Or are you just guiding for what you already know? And then, the third question is on Display. So, you commented, I think, Tony, you said positive pricing is even possible. I mean by when would we potentially see that? Is that possible this year you think? Or when might pricing actually move as a positive, as incredible as that might sound? Thanks.

Yeah, I think that the comment that I made there was in respect to the people who are going to be reinvesting in capacity. One of the challenges is the returns that are required from those reinvestments, and so that if you're going to see the necessity of reinvesting capacity, either price declines have to continue to moderate or maybe even go positive. But that wasn't a comment about this year. Relative to this year, we think pricing will be down about 10% or it could be a little better than that. Back to Optical Communications, Rod, you have to remember these are big civil works projects that are hard to predict in any given quarter. We don't see anything unusual out there. We think for the full year we'll be up in the low teens, and our actuals in Q1 and our guidance in Q2 reflects that from a full-year standpoint. So, we don't think there's anything to read into that. And then, relative to Specialty Materials, I mean that...

We're not going to answer that question, Rod, but thank you for that valiant attempt.

Okay. Thanks, Wendell. On Optical, Tony, could you just confirm you're not – so, you're not capacity constrained? It's just the flow of projects and project nature of the build that's...

No. I think what Wendell said to the earlier question, I mean things are very tight in Optical Communications right now.

If we had more, we could sell more. If that answers your question.

Yeah, good morning, Wendell and Tony. Another Optical question. The announcement provided a max fiber output and minimum revenue opportunity, and if you use those min and max variables, you can calculate an ASP per kilometer of about 1,750, which seems very low. So, I was wondering if you could help us understand the average ASP of fiber per kilometer in bulk purchases. And then, thinking about the max 60 million kilometer shipment, can you help us understand what the revenue upside could be? It would seem that you have the potential to maybe max out at least 60% higher from the announced $1.05 billion level.

So, the way to think about that agreement is that the reason you see two very different numbers, right, is because they are different numbers. You can't take the revenue and divide it into the fiber volume. So, what our agreement with Verizon encompasses at the minimum level includes the full suite of our Optical Communications products set and all of our capabilities. Included in the agreement is the ability for Verizon to call on us for just pure fiber up to 20 million kilometers. The actual low timing and the actual low play of which of our products gets deployed in what order, in what manner, is still to be fully determined. And because of the very close relationship, we're able – and our broad capability set – what we're able to offer our customers is the ability for them to know they can get the most critical componentry, but still fulfill their obligations to us across their entire purchase set. So, I think you read in part B of your question is that, if indeed there is that much fiber deployed, that that would represent a very significant revenue potential for this customer alone, let alone others. I think that observation is analytically correct.

Great, thank you, Wendell. And then, I guess for Tony on Gorilla Glass. Could you just comment whether Gorilla Glass's growth rate was above or below the reported 22% year-over-year Specialty Materials growth? And you did – to an earlier question on the contribution of Gorilla Glass 5 currently, didn't really give us many details. Could you help us just ballpark a generic range of where that sits as a percentage of total Gorilla Glass currently?

Yeah. And so, the first answer to your question is, I think Specialty Materials was actually up 32% year-over-year, and Gorilla Glass was the primary contributor to that. And then, in terms of the adoption rate, I mean it's been very significant. It's been better than what we've seen in other versions of Gorilla Glass that we've introduced, and we feel really good about it.

So, in terms of the 10% customer, we're not going to disclose that.

And on China, it has been relatively widely reported, concerns about a slowdown in China for many of the players. And we still find demand for our product to outpace our ability to serve our Chinese customers.

Okay. We've got time for one quick question.

Great. Thanks for taking my question. A quick one. Any update on when you expect to see revenue from Gorilla Glass for Automotive? You mentioned traction with the interiors of cars. Are design cycles there any different from the exterior?

So, with regards to auto, we'll start seeing revenues quickly, already have some. So, the real question isn't will we penetrate that market, that has happened. The real question is, how big does it get? And I don't think we'll have deep insight on that until we get a little further through the relatively long design platform time cycles of the car companies. But there is no question that both our exterior product as well as our interior product is getting very strong pull. The question we've kind of asked is does it primarily penetrate in the premium segment or does this become an everyday vehicle type of product? We don't have the new deep insight on that question yet, that can sort of only be adjudicated by actual decisions by customers that they then in turn become public about. But we're not only – the reason we're so highly confident about revenues is we're getting them.

And Tejas, just one housekeeping item is to keep in mind that revenues for Gorilla Glass 5 for Automotive show up in what we call our Other segment, not in the Specialty Materials segment.

Okay. Thanks. Wendell, any closing comments?

Thank you to everyone for joining us today. As we've said, we're very pleased with our continued positive momentum. We remain on track to deliver our 2017 objectives, and the overall goals of our Strategy and Capital Allocation Framework. And we really look forward to talking with all of you in June at our Investor Day when we'll have the opportunity to give you a more in-depth update on our progress against the Framework, including a more detailed look at all of our market-access platforms. I do hope you'll take the opportunity to join us in person so that you'll get the chance to interact with leadership and enjoy our always terrific interactive exhibits. Thank you.

Great. Thanks, Wendell. And thank you all for joining us today. Before we close, I wanted to let everyone know that our Annual Shareholder Meeting is this Thursday. Find details in our proxy statements. Looking out to next month, Tony and I will be meeting with investors at the Bernstein conference on June 1. Our Investor Day that Wendell mentioned is scheduled for Friday, June 16 in New York City. And the registration link is live on our website. Finally, the replay of today's call will be available on our site for one year, starting later this morning. There's also a telephone replay available for the next two weeks, and details are in today's news release. Once again, thanks for joining us. Tony, that concludes our call. Please disconnect all lines.