Corning (GLW - Analyst Report) has just reported third-quarter core earnings of 40 cents, slightly ahead of the Zacks Consensus Estimate of 38 cents. But the revenue miss pressured shares in the pre-market.

Revenue

Reported revenue of $2.54 billion, grew 2.3% sequentially, 22.9% year over year, but still missed the Zacks Consensus Estimate by 2.8%.

The Display Technologies segment generated around 40% of total revenue. Segment revenue was up 2.2% sequentially and 55.7% year over year.

Optical Communications (28% of revenue) grew 1.7% sequentially and 7.4% from the year-ago quarter, slightly better than Corning’s guidance of a mid-single-digit increase from the year-ago quarter.   

The Environmental Technologies segment generated around 11% of revenue, down 1.1% sequentially but up 25.3% year over year. This was better than management guidance of a 20-25% year on year increase.

Specialty Materials generated 13% of revenue, up 9.7% sequentially and 0.3% year over year, more or less in line with management expectations of a 10% sequential increase.

The Life Sciences business accounted for around 8% of revenue. The business was down 4.0% sequentially and 0.5% from a year ago.

Margins

The gross margin was 43.1%, up 157 bps sequentially and down 44 bps from last year. gross margin was again short of management’s targeted 46%.  

The operating expenses of $534 million were up 2.9% sequentially and 19.5% year over year. While R&D declined as a percentage of sales from both the previous and year-ago quarters, SG&A increased from both periods.

Specifically, R&D dropped a respective 55 bps and 107 bps from the two periods while SG&A dropped 30 bps and 29 bps, respectively. Expenses were roughly in line with guidance. As a result, the operating margin expanded 146 bps sequentially but a mere 16 bps from the year-ago quarter.

Net Income

Corning’s core net earnings were $549 million, or 21.6% of sales compared to $527 million or 21.2% in the previous quarter and $487 million, or 23.6% in the year-ago quarter. Net income on a GAAP basis was $1.01 billion ($0.72 a share) compared to $169 ($0.12) in the previous quarter and $408 million ($0.33 a share) in the Sep quarter of 2013.

Balance Sheet and Cash Flow

Inventories were down 3.8% during the quarter, with inventory turns going from 4.2X to 4.4X. DSOs went down from 60 to around 58. Corning ended the quarter with $6.10 billion in cash and short term investments, up $218 million during the quarter. However, the company has a huge debt balance. Including long-term liabilities and short-term debt, the net debt position was $178 million at the end of the quarter, which did decline significantly from the net debt balance of $387 million at the beginning of the quarter.

Cash generated from operations was $1.12 billion, with the main uses of cash being $262 million on capex, $224 million on share repurchases and $152 million on dividends.

Recommendation

Corning’s third-quarter earnings were slightly ahead of expectations, despite the fact that revenues disappointed. Our initial look at the results indicates weaker-than-expected revenue in the all-important display business and some gross margin weakness that could be related to lower volumes.

Corning shares carry a Zacks Rank #4 (Sell). Better-ranked technology stocks that may be worth considering instead include Intel Corp (INTC - Analyst Report), Micron (MU - Analyst Report) and Silicon Motion Technology Corp. (SIMO - Snapshot Report), all of which carry a Zacks Rank #2 (Buy).