Corning Inc

NYSE:GLW

Earnings Call Analysis

Strong Q3 Performance with Optimistic Guidance Ahead

In Q3, the company achieved impressive results, with sales up 8% to $3.73 billion and EPS increasing by 20% to $0.54, driven largely by a 55% surge in its Enterprise segment due to strong demand for AI-related products. The operating margin expanded to 18.3%, a 160 basis point improvement. For Q4, the company anticipates further momentum, guiding for 15% sales growth to approximately $3.75 billion and EPS between $0.53 and $0.57, reflecting a 40% increase. The Springboard plan aims for over $3 billion in annualized sales by 2026 and a 20% operating margin within the same timeframe.

Strong Performance in Q3 2024

In Q3 2024, Corning Incorporated reported a solid overall performance with sales reaching $3.73 billion, reflecting an 8% year-over-year increase. Their earnings per share (EPS) grew 20% to $0.54. This robust performance was largely driven by the Optical Communications segment, where sales surged 36% year-over-year, and the Enterprise business saw a remarkable 55% growth. This reflects the increasing demand for Corning’s optical connectivity solutions tailored for generative AI applications.

Positive Outlook for Q4 and Beyond

Management is optimistic about ongoing momentum, anticipating that Q4 will see accelerated year-on-year sales growth of approximately 15%, targeting sales of around $3.75 billion. They project EPS to continue its strong performance with a growth estimate of about 40%, leading to an EPS range of $0.53 to $0.57. This positions Corning well for sustained growth through 2025 and beyond.

Strategic Springboard Plan

Corning's $3 billion Springboard plan aims to achieve more than $3 billion in annualized sales by the end of 2026, with an operating margin target of 20%. This plan builds on the company's current capacity and technical capabilities, suggesting that profit will grow faster than sales. Their path forward includes targeted innovations and strategic partnerships with key players like AT&T and Lumen, aiming for a future annual sales run rate of $8 billion by the end of 2028.

Optical Communications and Enterprise Growth

The Optical Communications segment reported $1.2 billion in sales, with a net income increase of 92%, indicating solid profit margins supported by high sales volumes. The Enterprise business's growth trajectory is reinforced by the expectation of a compound annual growth rate (CAGR) of 25% from 2023 to 2027 as AI adoption continues to drive demand for network solutions.

Components of Growth in Display Technologies

For the Display Technologies segment, sales remained stable at $1 billion in the third quarter. However, management anticipates a decrease in volume due to panel makers adjusting their operations. Corning reiterated its commitment to raising glass prices and implementing currency-based price adjustments to maintain its profitability in this segment, projecting a net income range of $900 million to $950 million and a net income margin of 25% for the next year.

Challenges and Future Expectations

There are challenges in the Environmental Technologies division, with sales down 11% sequentially due to ongoing weakness in the heavy-duty truck market. The anticipated weakness in this market could persist into the fourth quarter. Conversely, Life Sciences reported 6% year-over-year growth, demonstrating a consistent demand despite overall market headwinds.

Cash Flow and Capital Allocation

Corning generated strong free cash flow of $553 million in Q3, marking the highest level since 2018. This improvement in cash flow reflects the company's focus on converting income to cash without extensive capital expenditure. They have reduced capital spending to roughly $1.1 billion for the year, prioritizing organic growth opportunities while maintaining a strong balance sheet with minimal debt due in the near term.

Investment and Shareholder Return Strategy

Management underscored a commitment to returning excess cash to shareholders, utilizing a share buyback program initiated earlier in the year. Their strategy emphasizes maintaining an efficient balance sheet while investing in growth opportunities, consistent with their long-term vision to enhance shareholder value.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Corning Incorporated Quarter 3 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations. Please go ahead.

[Ann Nicholson, executive]

Thank you, Dilem, and good morning, everybody. Welcome to Corning's Third 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 third quarter, the difference between GAAP and core EPS primarily reflected noncash mark-to-market adjustments associated with the company's translated earnings contracts and Japanese yen-denominated debt, constant currency adjustments and noncash asset write-offs and charges.

As a reminder, the 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, and we encourage you to follow along.

Now I'll turn the call over to Wendell.

[Wendell Weeks, executive]

Thank you, Ann, and good morning, everyone.

Today, we announced strong third quarter 2024 results. Year-over-year, sales grew 8% to $3.73 billion, and EPS grew 20% to $0.54. Our quarter 3 outperformance was led by Optical Communications, where continued strong adoption of our new optical connectivity products for generative AI drove 55% and year-over-year growth in the Enterprise portion of the segment. Our momentum continues as we close out the year. In the fourth quarter, we expect year-over-year sales growth to accelerate and EPS to continue growing faster than sales. And Ed will elaborate more on that in a moment.

Overall, our results and outlook show we're making strong progress on our Springboard plan to add more than $3 billion in annualized sales with powerful incremental profit and cash flow and to achieve an operating margin of 20% by the end of 2026.

So before Ed and I get into the details, let me just briefly recap the primary elements of Springboard. First, this chart reflects our internal nonrisk-adjusted Springboard plan. This is what our business operators are focused on delivering. There's a lot to take away from this slide. 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.

Now remember, this is our internal plan. When we say it's not risk-adjusted, what we mean is the projections are based on a number of assumptions including: markets recovering 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.

But what we wanted to do was take our $8 billion opportunity and translate it into a high confidence plan for our shareholders. To do that, first, we focused on a 3-year time period. 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 as well as the potential that some of our markets may go through down cycles.

And this is how we come to the high confidence Springboard plan, to add more than $3 billion in annualized sales and achieved operating margin of 20% by the end of 2026. 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 will not be a straight line. But we're also not dealing with a hockey stick. When we built the plan, we expected to see strong growth this year. And that's exactly what you're seeing in our results.

So I'd like to take a moment to share two important observations about our performance. First, we're significantly improving our return profile. In the third quarter, we again drove sales growth while demonstrating our ability to deliver the powerful incrementals embedded in Springboard. In the third quarter, sales grew 8% year-over-year. EPS grew more than twice as fast as sales. Operating margin expanded 160 basis points year-over-year to 18.3%. And gross margin expanded 220 basis points to 39.2%. We also generated strong free cash flow of $553 million, and we continued buying back shares in the third quarter.

Second, we're reaching key strategic milestones that underscore the significant progress we've made against our high confidence plan. Let me just briefly summarize the recent milestones in Display and in Optical. In Display, our Springboard plan is centered on maintaining stable U.S. dollar net income. To achieve this, we are raising glass prices. Our price actions, in combination with the hedges we have in place through 2026, will deliver consistent profitability in the segment. We expect to deliver net income of $900 million to $950 million next year and to deliver net income margin of 25%, consistent with the last 5 years.

Simply put, our price increases offset the weaker yen in our hedges, and we expect to maintain the same profitability. Most importantly, we will continue to be the low-cost technology and market leader in Display. Overall, we're providing a strong base in Display for our Springboard growth.

In Optical Communications, our Springboard plan is about revenue growth as cyclical and secular trends converge to drive demand for our unique capabilities. When we introduced our gen AI products in June, we said we expected to grow our Enterprise business at a 25% compound annual growth rate over the next 4 years. Looking back to the second quarter, strong demand for our new gen AI products drove outperformance, and our Enterprise business grew by 42% year-over-year.

As I noted, our performance continues. Enterprise grew by 55% in the third quarter versus last year. That growth reflects the gen AI opportunity inside the data center.

We've also introduced a set of innovations to help our customers build a new network to interconnect AI-enabled data centers. As part of an agreement with Lumen Technologies, which reserves 10% of our global fiber capacity for each of the next 2 years, we recently launched the first outside plant deployment of Corning's new gen AI fiber and cable system that enables Lumen to fit anywhere from 2 to 4x the amount of fiber into their existing conduit. This is an exciting new space and we expect to capture other large opportunities.

Optical is also marking important developments with other important carrier customers, Verizon and AT&T. At the Broadband Strategy Event last week, Verizon highlighted their partnership with Corning and said we're delivering technologies to make it easier for them to reach their deployment goals. They plan to significantly expand their fiber footprint from 25 million fiber passings to more than 30 million fiber passings by 2028.

We also just announced a multiyear purchase agreement with AT&T to provide next-generation fiber, cable and connectivity solutions to support the expansion of AT&T's fiber network and help bring high-speed Internet to more Americans. The agreement, valued at more than $1 billion, builds on a decades-long collaboration between our companies. AT&T is expanding its network to bring world-class fiber to more people and places across the country.

By using Corning's newest preconnectorized solutions, AT&T can accelerate its network expansion and enhance network performance while minimizing deployment cost. They'll leverage our latest additions to our portfolio of connectivity solutions, which are fully compliant with the Build America, Buy America provisions of the Broadband Equity, Access and Deployment program. The program, known as BEAD, is part of the government's efforts to bring high-speed Internet to rural communities.

Stepping back. As you can see, we're 3 quarters into our 3-year Springboard plan and we're making significant progress. Our third quarter results demonstrate the sales growth and the powerful incremental profit and cash flow we expect to deliver as we improve our return profile and march steadily toward our 20% operating margin target by the end of 2026. And we're marking significant milestones along our Springboard journey.

And we have plenty of milestones ahead. In Optical Communications, we expect carriers to return to buying at deployment rates and for their deployment rates to increase and drive growth in 2025. And we expect the BEAD program to gather momentum starting in the second half of 2025. We have a triple-digit automotive glass business today, and we expect sales in that business to almost triple by 2026. We expect recently announced U.S. EPA regulations to force gas particulate filter adoption and drive hundreds of millions of dollars of growth for us in the U.S. alone with sales starting in 2026. Finally, we plan to launch a new solar market access platform.

Overall, we positioned our businesses to benefit from a convergence of cyclical and secular trends to drive growth across the company through 2026 and beyond. We'll continue to update you as we hit significant milestones.

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

[Edward Schlesinger, executive]

Thank you, Wendell. Good morning, everyone. As you just heard, we had an outstanding quarter. Year-over-year, Q3 sales grew 8% to $3.73 billion, and EPS grew 20%, more than twice the rate of sales to $0.54 with operating margin expanding 160 basis points to 18.3%. We also generated free cash flow of $553 million. Our outperformance was led by Optical Communications. Sales grew 36% year-over-year and sales in the Enterprise business grew 55%, driven by continued strong adoption of our new optical connectivity products for generative AI.

We expect our momentum to continue. In the fourth quarter, we anticipate year-over-year sales growth to accelerate and EPS to again grow faster than sales, with sales up about 15% to approximately $3.75 billion and EPS up approximately 40% in the range of $0.53 to $0.57.

Today, I'll provide more detail on our Q3 results and Q4 outlook as well as put them into the context of our overall Springboard plan. As a reminder, a key component of our plan is to deliver powerful incrementals. We have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026 with minimal cash investment, and the cost and capital are already reflected in our financials. This means that we expect to grow profit significantly faster than sales, and that's exactly what we're seeing in our third quarter results.

So let's dive in. In Optical Communications, Sales for the third quarter were $1.2 billion, up 36% year-over-year, and net income for the quarter was $175 million, up 92% year-over-year as we delivered strong incremental profit on the higher volume. In our Enterprise business, sales were up 55% year-over-year driven by continued strong adoption of AI-related connectivity solutions. This marks another record quarter in this business and adds to our confidence in our plan to grow Enterprise at a 25% compound annual growth rate from 2023 to 2027.

We also grew year-over-year in our carrier business in the third quarter. We're encouraged by new customer agreements, including our recent announcements with AT&T and Lumen. Overall, we expect both cyclical and secular drivers in Optical Communications to sustain growth in 2025 and beyond.

Moving to Display Technologies. Third quarter sales were $1 billion, consistent with the second quarter. Net income was $285 million, up 10% sequentially. Our third quarter volume was down sequentially as panel makers began to lower their utilization rates in the quarter. We expect panel makers to continue managing their operations to maintain healthy inventory levels. As a result, we expect the glass market and our volume to decline sequentially in the fourth quarter. Longer term, we expect the display glass market to grow at a low single-digit rate, supported by stable TV unit sales and average screen size growing about 1 inch per year.

As we shared with you at our September investor event, we are raising glass prices to ensure we can maintain stable U.S. dollar net income. Specifically, we implemented currency-based price increases in Q3. Overall, our customers are experiencing a double-digit price increase in the second half of 2024. In total, our price increases offset the weaker yen in our hedges, and therefore, we expect to maintain the same profitability. As a result, when we move to our new yen core rate in 2025, we do not plan to recast our 2024 financials.

As a reminder, we have the majority of our yen exposure hedged for 2025 and 2026, and we also have hedges in place beyond 2026. Our hedges are not at the 2024 core rate of 107, but they're much better than the current spot rate. We expect to deliver net income of $900 million to $950 million next year and net income margin of 25%, consistent with the last 5 years.

Turning to Specialty Materials. Sales in the third quarter were $548 million, up 9% sequentially, primarily driven by premium glass for mobile devices. Net income was $72 million, up 14% sequentially, reflecting higher volume.

In Environmental Technologies, third quarter sales were $382 million, down 11% sequentially reflecting the continued impact of the Class 8 truck down cycle in North America, as anticipated. Net income of $75 million was down sequentially, reflecting lower volume. We expect the heavy-duty market weakness to continue and sales in environmental to remain muted in the fourth quarter.

In Life Sciences, sales in the quarter were $244 million, up 6% year-over-year. Net income was $15 million, up 15% year-over-year.

Turning to Hemlock and Emerging Growth Businesses. Sales in the third quarter were $298 million, consistent sequentially.

Finally, I'd like to touch on operating expenses. As we've told you in the past, our pay is tied directly to our financial performance. As our performance has accelerated this year, we have increased our variable compensation accruals accordingly. This leads to temporarily higher operating expenses in the back half of 2024.

With that, I'd like to shift gears and put our third quarter results and Q4 guidance in context of Springboard and update you on how we are tracking against the plan. This chart shows both our nonrisk-adjusted $5 billion sales plan and our $3 billion high confidence sales plan. So how are we doing? Let me first explain the $1.84 billion dot point you see on the chart. Our Q3 2024 sales were $3.73 billion. Our Q4 2023 sales, which is our Springboard starting point, were $3.27 billion. So our sales were $460 million higher in Q3 2024 than in Q4 of 2023.

And when you annualize that, you get to $1.84 billion. Therefore, we're currently tracking at a $1.84 billion incremental annual sales run rate against our $3 billion-plus target. And that trend continues into quarter 4. The additional sequential growth implied in our Q4 guidance increases our run rate in the fourth quarter to $1.9 billion.

As we shared in September, our Springboard plan includes an operating margin target of 20% by the end of 2026. This target leads to an improving return profile with profitability growing significantly faster than sales. You can see this in our third quarter results, where EPS grew 20% year-over-year, more than twice as fast as the sales growth rate. Additionally, our operating margin was 18.3%. This represents a 200 basis point improvement from our starting point of 16.3% in Q4 2023.

Stepping back, we've made great progress against our sales and operating margin targets to date. But please remember, we're only 3 quarters into a 12-quarter plan. Springboard is a milestone-based plan evolving through 2026. And finally, we expect to generate significant cash flow over the Springboard time frame because we already have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026. For the year, we've reduced our capital expenditures to approximately $1.1 billion.

So let me spend a minute on capital allocation. Our 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. We also seek to maintain a strong and efficient balance sheet. And we're in great shape here. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about 23 years with only $1 billion in debt coming due over the next 5 years, and we have no significant debt coming due in any given year.

Finally, we expect to continue our strong track record of returning excess cash to shareholders. And because of our growing confidence in Springboard, we started to buy back shares in the second quarter, and we continue to do so in the third quarter.

So as I wrap up today, I'd like to reiterate that we had an outstanding third quarter. We're tracking ahead of our Springboard plan. We expect continued strong performance in Q4 with year-over-year sales growth accelerating and EPS again growing faster than sales, and we expect to sustain our momentum in 2025 and beyond. We look forward to updating you as we continue to make progress.

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

[Ann Nicholson, executive]

Great. Thank you, Ed. We're ready for our first question.

[Operator]

[Operator Instructions] And I show the first question comes from the line of Samik Chatterjee from JPMorgan.

[Samik Chatterjee, analyst]

I guess for the first one, if I can start with the agreement that you signed with AT&T. And Wendell, you spoke about the opportunity there, but if you can just more sort of dive into the details in relation to how much of that is sort of an incremental opportunity that you're seeing related to some of the existing business that you do with AT&T on an ongoing basis.

And sort of a broader question to the fiber opportunities. Is there something that's fundamentally changed? The question we're getting a lot from investors is in terms of fiber utilization. Is there something that's fundamentally changed that is going to drive a significant cycle on the fiber side just because fiber utilization has changed over the last few years? Can you help us think about that more on a longer-term basis as well?

[Wendell Weeks, executive]

And Samik, a question for you on clarification. When you say fiber utilization, you mean?

[Samik Chatterjee, analyst]

In the more telecom networks, but in relation to the investment in fiber over the years. Has something changed in relation to being a lot more congested on fiber? Or very high fiber utilization already and seeing that drive a significant cycle, or are we sort of extrapolating just the amount of announcements, not really looking at the utilization, which is still probably low.

[Wendell Weeks, executive]

Totally understand. Thank you, Samik. I would divide this really into two major sections. The first, let's address the AT&T announcement. That's really our carrier segment, and it's part of the cyclical upward trend that we identified as part of our Springboard plan, that we're viewing this to be very much in line with Springboard and an encouraging sign for us that we can expect the carrier spring to activate sometime here in the near future. We're not calling that yet because we'd like to see a couple more quarters of the actual order rate and the actual deployment rates. But it's certainly encouraging. And this is what we mean by one of the cyclical trends in our Springboard plan for Optical. So encouraging, but we're not yet calling the spring activated.

To your next question, one of the things you've seen with a lot of the announcements sort of has to do with gen AI and interconnecting gen AI-enabled data centers. Of that, we are seeing really a different link have to get activated, and therefore, using your terminology of fiber utilization on those links between gen AI data centers are relatively full. And that's what you saw with the Lumen announcement. We'll have to see how gen AI develops and how they end up splitting the very large clusters, but that could develop into a very significant growth driver for us going forward, Samik.

[Operator]

I show our next question comes from the line of Matt Niknam from Deutsche Bank.

[Matthew Niknam, analyst]

Congrats on the quarter. I guess, first, on the 4Q revenue guide, if there's any additional color or context you can share in terms of unpacking expectations across the different segments. And then one follow-up on optical. Can you clarify whether there was any contribution from the Lumen deal in the third quarter, whether that is expected to kick in, in the fourth quarter? Just trying to get a sense of that ramp-up to the run rate.

[Edward Schlesinger, executive]

Yes. Matt, it's Ed. Thanks for the question. So first, on Lumen. No impact in the third quarter and I would say minimal to no impact in the fourth quarter expected. We see that as a 2025-2026 opportunity. And with respect to our guide, as we always do, we factor in a number of potential outcomes across all of our different segments.

I think the one thing that's maybe a little noteworthy about the fourth quarter guide is typically, we're not seasonally up Q4 versus Q3. We're typically flat to slightly down. So we're seeing a lot of positive momentum in general, in particular, in Optical Communications. But in general, I think that's what's driving us to guide ourselves a little bit above normal seasonality.

[Operator]

Our next question comes from the line of Steven Fox from Fox Advisors LLC.

[Steven Fox, analyst]

Two questions from me, if I could. Real quick on the cash flows. Ed, can you put a little bit of context around the free cash flow you generated in the quarter? I think it was the best I've seen from you guys since 2018 in the third quarter. How do we put that in perspective with future free cash flows? Or was there any onetime things we should think about?

And then from an optical standpoint, just on the cloud side of the business. Can you give us a little more perspective on the relative momentum versus Enterprise and how you think about that momentum into next year?

[Edward Schlesinger, executive]

Steve, let me do the free cash flow one first. So yes, we agree, Q3 was a great free cash flow quarter, very strong. Nice call out on the last time we were at that level. I think if you think about Springboard and the way we've positioned ourselves, we're not adding capacity. So we're not spending capital at a level where you would have seen us potentially do that in the past, And we're converting our income, which is growing into cash. So I don't know that every quarter is going to be at this level of conversion, but I do expect us to continue to generate strong free cash flow as we go forward.

[Wendell Weeks, executive]

Ed. On the cloud, Steve, as you'll recall, when we looked at the gen AI driver, what we said is we would expect that to drive a 25% compound annual growth rate through '27 on that Enterprise portion of our optical segment. Obviously, we are growing a lot faster than that at this time, and our momentum is very strong. We'll be reflecting more on that. And when we get together at the investor event in quarter 1 of next year, we'll update with our latest architectural thoughts and our various modeling to see how we feel about that long-term guidance.

[Operator]

And I show our next question comes from the line of Wamsi Mohan from Bank of America.

[Wamsi Mohan, analyst]

Similar to cash flows, gross margins also were very impressive in the quarter, north of 39%. I'm wondering if you can unpack that a little bit in terms of the drivers there. How much of that was mix versus leverage? Given the strength in optical relative to display, you think that, that would put some mix pressure. But would be helpful to get some context around that and how we should think about that going into fourth quarter. Are we now renormalizing at a higher rate in general for gross margin?

[Edward Schlesinger, executive]

Yes. Thanks, Wamsi. So I think what's really driving it is operating leverage consistent with how we've been sharing our view on Springboard. We have the cost and the capacity in place, technical capabilities to deliver the higher sales. So as our sales go up, we're experiencing a higher gross margin. 39% plus is a great place. I would say my only caution on thinking about it going forward is that not every quarter is necessarily going to be up. But we do think we're -- we can go higher from where we are at these levels.

[Wendell Weeks, executive]

And I would add to that, Wamsi, is this -- we do expect to see a return profile to continue to improve, and that's how we hit our operating margin target of 20% by the end of 2026.

[Operator]

Our next question comes from the line of John Roberts from Mizuho.

[John Ezekiel Roberts, analyst]

Hemlock received a [ chipset ] award during the quarter here. How are you thinking of -- it was all in the semiconductor side, I think. So how are you thinking about semiconductor versus solar in terms of the outlook for Hemlock?

[Edward Schlesinger, executive]

Yes. Thanks, John. So yes, we did receive a CHIPS grant award, and we are looking at what it would take to build out additional semiconductor capacity. I think it's a great opportunity for us to do that. We will figure out sort of the timing. I don't think you should think about it as necessarily having an impact in the Springboard window of time here that we've been talking about through 2026. We've sort of factored in the cost and capacity that we need to support the sales in that window of time. But it's certainly an upside opportunity to that as we go forward.

[Operator]

And I show our next question comes from the line of Asiya Merchant from Citi.

[Asiya Merchant, analyst]

Two, if I may. Just on display, you've put in some pricing actions here. Just if you could help us understand how your customers are responding to that and expectations for further price increases in calendar '25.

And if I may, just on OpEx. I know you talked a little bit about elevated levels here, variable compensation. How should we think about these OpEx levels to moderate in the fourth quarter? I think the assumption implied -- or the guide implied some moderation here.

[Wendell Weeks, executive]

We remain confident that our customers will experience a double-digit price increase in the second half of this year. Our goal, as we have shared, is for us to deliver consistent profitability in display, a 25% net income margin next year and generate net income of between $900 million and $950 million. As time goes forward, we continue to be quite confident in being able to deliver that.

[Edward Schlesinger, executive]

Yes. And Asiya, on OpEx, I think the only thing that I would note other than what I shared is that when we book our accrual in the third quarter, we did have a catch-up for the first 9 months of the year. So as our performance has accelerated and we've increased our accrual, we've done that in a catch-up. We don't have to book that catch-up in the fourth quarter, but I would expect our OpEx to be temporarily elevated as well in the fourth quarter.

[Operator]

And I show our next question comes from the line of Meta Marshall from Morgan Stanley.

[Meta Marshall, analyst]

Great. Maybe kind of expanding upon on the gross margins. In the past, you guys have talked about 40% being a bogey but then also said that 39%, just given some of the price increases, is kind of a more appropriate new bogey. I know you guys have talked more in terms of operating margin targets and kind of this 20% operating margin target. But just how do you think about kind of gross margin leverage into the next year? Maybe as a first question.

[Edward Schlesinger, executive]

Yes. So I would say 39% is a great place. We're happy. We delivered that in the third quarter. But I think there's opportunity for us to go up from that level. I just would be cautious that it may not be up every single quarter as we go forward. And I think as Wendell pointed out, the 20% operating margin target as we exit the Springboard plan is where we have high confidence, which implies we can do better on gross margin.

[Meta Marshall, analyst]

Got it. And then at the event earlier this quarter, you guys had mentioned a lot of key milestones that may be coming on the Hemlock business, or just how to think about incrementals on the project Springboard. I noted that you guys got the CHIPS Act funding kind of earlier this week. But just anything else or any updates that we should be thinking of in terms of timing there or kind of TBD?

[Wendell Weeks, executive]

We continue to make progress on hitting the milestones we need to, to launch a new solar map for us, and that will add significantly -- to a significant part of our Springboard plan. especially the nonrisk-adjusted portion of it. We would expect to be able to provide you with a relatively detailed explanation of the various pieces. And we would expect to have the major milestones in place by the -- around the timing of our IR event, our investor event in the first quarter next year.

[Operator]

And I show our next question comes from the line of Martin Yang from Oppenheimer.

[Martin Yang, analyst]

One question on CapEx. Can you talk about some of the puts and takes and what led to the slight reduction in CapEx guidance for the year?

[Edward Schlesinger, executive]

I would say we're not necessarily adding much capacity. We have some small capital projects that we're finishing up. I don't think there was anything specific to note in the guidance reduction, mostly just where we're running. So we wanted to make sure people understood that. And we continue to believe we have the capacity in place to support at least the $3 billion in sales. If that changes or we have any other plans, we'll certainly share that.

[Operator]

And I show next question comes from the line of Josh Spector from UBS.

[James Cannon, analyst]

This is James Cannon on for Josh. I just wanted to say congrats as you guys are still tracking well ahead of that $3 billion plan. But I just wanted to ask on -- kind of going along with the CapEx thing. At what point in terms of sales growth would you need to start ramping CapEx back up? If you guys continue on this trajectory, I would -- should we be assuming that you'll have to start ramping up sooner than kind of 2026?

[Wendell Weeks, executive]

So to deliver the Springboard plan, we don't anticipate a significant sort of increase in our capital investments. If, of course, the $8 billion begins to look more and more probable, that could generate some more investment on our part in terms of capacity. What you see in our capital today is much more aimed at continued productivity improvement as well as reconfiguring some of our factories to produce some of our new gen AI product set.

So it's cost a lot less for us to tailor our equipment and to upgrade than it does to put in place significant new plant and equipment. So unless we start really moving towards that $8 billion nonrisk-adjusted revenue run rate, but I would say we have an appropriate amount of property, plant and equipment in place and that our capital plans will continue to be relatively modest.

[Operator]

Our next question comes from the line of George Notter from Jefferies LLC.

[George Notter, analyst]

I guess I just wanted to ask about the display price increases. I think as you guys were hedging the business at 107 on the yen, those hedges were in place through the end of this year, yet you're able to institute price increases here in Q3. I thought that was quite impressive. Could you give us a sense for how that conversation went with customers, what kind of leverage you have in the relationship? Anything you can tell us about your ability into price increases even ahead of the hedges running off?

[Wendell Weeks, executive]

Our price increase is aimed at maintaining a stable U.S. dollar net income. And that's exactly what we're doing, and that's what you see with the -- our customers experiencing a double-digit price increase in the back half of this year. And what that is meant to do is that price increase will offset the weaker yen in our hedges for 2025 and 2026, delivering after that move a stable display net income percent of around 25% and the $900 million to $950 million expectation we have for the net income.

Remember, all we're doing here so is more appropriately sharing the benefits that our customers get from buying at that yen rate. So of course, any time you increase prices with customers, it is always challenging. But we've been able to do it successfully, and that's what you see in our guide, if you like.

[George Notter, analyst]

Got it. And then any sense for where the new hedge rate will wind up as we roll into next year?

[Wendell Weeks, executive]

Yes. But we will plan to share that as we turn the year. We just want to make sure everything is in place and all of our commercial agreements before we are too forthcoming on where our hedges are at.

[Operator]

And I share our last question in the queue, comes from the line of Tim Long from Barclays.

[Timothy Long, analyst]

Two-parter, if I could, on optical. First, it looks like obviously a good recovery going on here. On the carrier side, still meaningfully below the levels we saw a few years ago. Could you talk about that piece? Will these new agreements, do you think, gets you back to those 2021-2022 levels for the carrier piece over the next year or two?

And then secondly, can you just talk a little bit about the op margin despite being a little overall base than what we saw in those peak years. Margins are pretty comparable. So is this all mix? And does that mean if we move higher from here, that we could see above historic margins for that optical business going forward as the business scales further from here?

[Wendell Weeks, executive]

Tim, let me start with carrier. I think it's too early -- first, your observation is correct. We are seeing carriers still at a relative cyclical level as we have talked about before. I think it's still a little too early for us to be able to confidently call the turn. But you are quite right in observing that all of these customer announcements show carriers leaning into we have to increase deployments, and they're establishing with their lead technology partner, who is us, the necessary capacity reservations to facilitate those builds. So you're right. It's very encouraging. But we just don't have enough evidence yet, Tim, to reach a conclusion on that spring is activated. And we'll keep you posted as we go forward.

[Edward Schlesinger, executive]

Yes. And Tim, on your margin question, I just want to clarify. You're specifically talking about optical?

[Timothy Long, analyst]

Yes, just in the optical business, correct.

[Edward Schlesinger, executive]

So I think the thing to think about it is it ties a little bit with what you asked in terms of your first question, right? So our sales are starting to get back close to the peak level, but we haven't yet filled all of our capacity, right? We have capacity in place to support a higher level. So I actually think we can improve our margins in optical as we fill that capacity and grow from here, which we expect to do. So I do think our margins accrete up in optical.

[Ann Nicholson, executive]

Thank you, Tim. Thank you, Dilem, and thank you, everybody, for joining us today. Before we close, I wanted to let you know that we are going to attend the UBS Global Technology Conference on December 3, and we'll be scheduling management visits to investor offices in select cities.

Finally, a web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Dilem, that concludes our call, please disconnect all lines.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.