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Friday, October 27, 2006

Corning Updates LCD Market

By William Trent, CFA of Stock Market Beat

Corning Q3 2006 Earnings Call Transcript - SeekingAlpha
Let me now update you on the supply chain as specifically the panel inventory situation in more detail. As I mentioned earlier, we believe there was an important improvement in the panel inventory levels during Q3. This improvement is a result of seasonal and market demand and strong annual shipments. I will table my comments on the end market just a moment. I’ll start with panel shipments, as a reminder our working assumption was been a substantial portion of the panel inventory in the supply chain, was a time when these panel makers although clearly LPL had also been public about their own inventory levels. Taiwanese panel makers have reported monthly panel shipment data through Q3 and the news has been very encouraging. Many have reported record shipments in July, August and September.Inventory levels have fallen in Q3, the number of day’s inventory and probably Q1. Inventory reduction combined with seasonal demand improved with Q3 as a result of the substantial improvement in materialization rates. We believe the Taiwanese on average increased their fab utilization rates which were in the 55% range in June, 70% in July, 85% in August, and 90% in September.

Although clearly not every company is operating at that level, we believe that the average utilization rate for the Taiwanese panel makers is now equal to where it was in March. Obviously the most encouraging sign has been the strong last volume we experienced in the Q3 and our expectations for Q4 based on customer orders, which I’ll talk about a few minutes.
Now let me walk you though the end market trends in Q3. As always I would like to stress we don’t have perfect information. We use a variety of sources ranging from services that are available to use, such as display research, along with retail tracking vendors, our own discussions with customers as well as our own models. With that in mind you should also note that the following data has been derived from the aggregate of industry sources that are considered at this time to be preliminary estimates. Final data for Q3 will not be available for another month or so. Be clear the data we reference relates to shipments from PC manufacturers, television set makers to the retailers.

In summary the preliminary data indicates that the end market shipments were in line with our expectations for Q3 and on track for all three primary applications, notebooks, monitors and televisions.

Starting with notebooks, about 19.6 million were shipped in Q3, in line with our expectations. This was an 11% increase over the notebook shipments in Q2. We believe the penetration of notebook computers of all computer sold in Q3 was 36% and consistent with Q2.

Moving to LCD monitors, about 32 million were shipped in Q3 compared to 13 million in Q2. We believe the penetration of LCD monitors inched up from 79% in Q2 to 82% in Q3. For LCD televisions about 10 million were shipped in Q3 also in line with our expectations. This represents an 11% increase over Q2 shipments of 9 million. More importantly is that the penetration of LCD television into the color television market was an estimated 21% for Q3. As a reminder these percentages are preliminary at this time. You may recall during our last conference call, we estimated LCD television penetration to be 19% in Q2. After reviewing the final data we conclude the penetration was actually 21%. Based on this trend and the expected strong seasonal demand we believe LCD television penetration may be as high as 25% in Q4, an average of 22% this year.

Frankly, that television penetration is higher than we expected. While that may sound like good news, to us it indicates there is less room for further growth over the long term. At the current rate of capacity expansion the market could mature in a year or two. And given the 20% (or higher) annual price declines, the revenue growth won’t match the penetration gains. The author may hold a position in the securities discussed.

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