Ann H. S. Nicholson - Corning, Inc. Wendell P. Weeks - Corning, Inc. R. Tony Tripeny - Corning, Inc..

Vijay Bhagavath - Deutsche Bank Securities, Inc. Joseph Wolf - Barclays Capital, Inc. Mehdi Hosseini - Susquehanna International Group Patrick Michael Newton - Stifel, Nicolaus & Co., Inc. Wamsi Mohan - Bank of America Merrill Lynch Steven Fox - Cross Research LLC George C. Notter - Jefferies LLC Robert Cihra - Guggenheim Securities LLC.

Welcome to the Corning Incorporated Third Quarter 2017 Earnings Results. Is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations..

Thank you, Greg, and good morning. Welcome to Corning's third 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 measures 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.com. Slides are being shown live on our webcast to accompany our formal comments, and we encourage you to follow along. They'll also be available on our website for downloading.

And now I'll turn the call over to Wendell..

Thank you, Ann. Good morning, everyone. This morning we reported another excellent quarter. Sales and EPS exceeded expectations and progress on our growth initiatives continues to be outstanding. Third quarter sales increased 6% year-over-year.

Sales in all of our business segments exceeded our expectations, highlighted by 15% year-over-year sales growth in Optical Communications and 26% growth in Specialty Materials. Looking ahead, we expect to maintain this momentum and fully achieve our Strategy and Capital Allocation Framework goals.

As we've shared, the Framework outlines our leadership priorities as we continue to focus our portfolio and utilize our financial strength to extend our leadership, drive our growth and reward our shareholders. Under the Framework, we target generating $26 billion to $30 billion in cash through 2019.

We are returning more than $12.5 billion to our shareholders through repurchases and dividends, and we are investing $10 billion to sustain our leadership and deliver growth. We have made outstanding progress against those goals since the Framework was announced in October of 2015.

Our cash generation is on target, and we have returned $8.5 billion through share repurchases and dividends. Repurchases have reduced outstanding shares by about 29%. We increased the dividend 14.8% in February and 12.5% last year for a combined increase of 29%. We expect to increase the dividend by at least 10% annually in 2018 and again in 2019.

In addition to articulating our capital allocation goals, the Framework outlines how we utilize our focused and cohesive portfolio to generate value for our shareholders and to delight our customers. 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 capabilities in at least two of these three categories. By pursuing our focused strategy, we believe our likelihood of success increases, our cost of innovation decreases, and we create higher and more sustainable competitive barriers.

To advance our innovation initiatives, strengthen our product leadership in low-cost positions, and ultimately outperform our competitors, we are investing in research and development, enhancing our manufacturing capabilities and making bolt-on acquisitions.

Our growth investments since the introduction of the Framework have been consistent with program needs. Our progress has been terrific and multiple projects are moving into the next phase of development.

So we've begun to accelerate investments in line with our four-year plan to invest $10 billion, and you can see the impact of these investments in our financial statements. Tony is going to talk more about the investments, but first let me review the progress starting with Optical Communications. We celebrated a major milestone in September.

We produced our 1 billionth kilometer of fiber. That's one-third of the optical fiber ever produced in the history of the world. It's also enough to go to the sun and back 3.5 times. But think about it this way, it takes light about 10th of a second to go around the circumference of the earth. It takes light 56 minutes to go 1 billion kilometers.

The milestone is a terrific measure of the success we've had over 40 years in leveraging our core technologies and manufacturing and engineering platforms.

Our dedicated employees have helped us become the world's largest manufacturer of optical fiber, the world's lowest-cost provider, and the home to some of the most precise manufacturing operations of any kind anywhere in the world.

As a result, we're the world leader in Optical Communications and the only true end-to-end supplier of optical solutions. We believe that the opportunities ahead of us are much greater than those that are behind us. To capture these opportunities, we're investing to expand capacity, to innovate, and to increase our market access.

Corning's unique co-innovation approach and technical capabilities position us to continue delighting our customers through distinctive innovation to manufacturing leadership. These investments are paying off.

We are growing at more than twice the rate of the telecommunications industry with global leaders like Verizon turning to us in support of their vision. We're well on our way to more than 15% sales growth for 2017, which keeps us on track to achieve $5 billion in optical sales by 2020.

Our Mobile Consumer Electronics platform is much younger than our Optical Communications platform, but it also reached an important milestone this year; the 10th anniversary of Corning Gorilla Glass.

Over the decade, we innovated to make Gorilla thinner, tougher, and more damage resistant than ever with Gorilla Glass 5 showing dramatically-improved drop performance over alternatives. We've developed specialized processes to reduce glare, improve aesthetics, and enhance scratch resistance.

Today, Gorilla Glass is seeing broader adoption than ever before. Over the past few months, leading smartphone manufacturers adopted our glass on their new devices. Advanced Glass offers several benefits over other materials like metal or plastic. Along with improved wireless charging, Advanced Glass on the back also enables improved reception.

It allows for new levels of design and customization. We're also realizing more value per device through our innovations. For example, Acer's new wearable Leap Ware is using Gorilla Glass SR+, our scratch resistant glass composite.

And we continue to see increased sales of Vibrant, our photorealistic parts on notebooks and computers, with growing interest in the handheld space. Walmart recently introduced a new line of screen protectors under the name Blackweb, which uses our accessory glass.

And we continue to win at smartphone OEMs in emerging regions including new devices at Positivo in Brazil, LAVA in India and Polytron in Indonesia. For the first nine months of 2017, Specialty Materials segment sales grew 28% over last year, which clearly illustrates the power of our approach.

Our close customer relationships enable us to innovate jointly and we're on track to double sales in mobile consumer electronics over the next several years. In our Automotive market access platform, we are helping customers build cleaner, safer and more connected vehicles. The gas particulate filter business is starting right now.

As the year began, we needed to win platforms and we were waiting for regulations to be fully adopted. Let's fast forward to today. European regulations are in place with China expected to follow soon. Most European and many Chinese OEMs have now declared platform awards and we won the majority.

In the third quarter, we had our first commercial sales and we expect sales to ramp going forward. The exclusive global supply agreement we announced in August for Groupe PSA's PureTech Engine Platform is a great example of our success. PureTech engines power Groupe PSA's latest models in its Peugeot and Citroën brands.

All PureTech gasoline direct injection engine models in Europe and in China will be equipped with Corning GPFs beginning this month. And we continue collaborating with OEMs globally on Gorilla Glass for auto. We're making solid progress with Gorilla Glass on more than 25 auto platforms globally.

On the exteriors of cars, Gorilla Glass laminates are lighter and tougher than conventional auto glass, plus its superior optical quality allows larger, clearer head-up displays. For interiors, Gorilla Glass makes cars more connected and durable with sophisticated capabilities you've come to expect from your smartphones.

The Renault SYMBIOZ Concept car unveiled at the Frankfurt Motor Show in September demonstrates this value proposition. The SYMBIOZ reimagines the car as an interactive personal space. At home the car's design and electric power system make it another room. On the road, full autonomy allows passengers to relax or focus on activities other than driving.

Everywhere, Corning Gorilla Glass for auto interiors provides access to the digital world. In our Life Sciences vessels platform, we're building a long-term multibillion-dollar franchise. At our joint announcement with Merck and Pfizer in July, we unveiled Corning Valor Glass, a revolutionary breakthrough in pharmaceutical glass packaging.

It helps protect patients and improve pharmaceutical manufacturing by dramatically reducing particle contamination, breaks and cracks, while significantly increasing throughput. Valor results from a combination of capabilities unique to Corning and demonstrates our focused and cohesive portfolio in action.

Although this industry moves at a deliberate pace, we believe Valor has the potential to power Corning's growth for the next decade and beyond. The industry is excited about our innovation and announcement and we continue to make strong progress.

We're also in the process of finalizing plans for manufacturing capacity and we'll be announcing more details in the coming months. The good news is that the regulatory environment de-risks our investments by providing clear advance notice of demand and by creating stable sales that will occur over many years.

We continue to believe that Valor is an outstanding opportunity. In Display, our priority is to maintain stable returns and win in new display categories. Our strategy focuses on lowest-cost manufacturing, stable share and supply/demand balance. The benefits of this strategy continue to be encouraging.

We are the lowest cost producer by a wide margin, and our pricing has become consistently more favorable over the past three years. And our new plant in Hefei, China is on schedule to start shipping the world's first Gen 10.5 glass, another demonstration of our market leadership. So that's the summary of progress across the company.

We're very happy with how 2017 is playing out. We're outperforming on sales, seeing the first returns on near-term growth investment and making great progress on our longer-term growth initiatives. Now, let me turn the call over to Tony for a review of our results and details on our outlook..

First, because of the investment in the start-up of our Gen 10.5 facility in Hefei; and, second, we're running a handful of tanks outside their optimal range for a few quarters to meet strong demand for our fusion assets across the company.

As a reminder, we used our fusion assets for Display glass, Gorilla, Iris and Automotive so when aggregate demand is high we have less flexibility to optimize our tank fleet. For the fourth quarter, we expect the LCD glass market and Corning volume to be consistent with Q3.

Sequential glass price decline should remain moderate and similar to the third quarter's sequential decline. And for the reasons I just noted, we expect fourth quarter cost to be similar to Q3.

For the full year, we continue to expect that the retail market, as measured in square feet of glass, will be up mid-single digits, driven by increasing screen size. We expect our glass demand will also be up mid-single digits in line with the overall market, and we continue to see progress towards a more favorable pricing environment.

Our price declines in 2015 were smaller than in 2014, and in 2016 they improved further. This pattern is continuing this year. For example, year-over-year price declines in the second half are on track to be less than 10%. So we've entered single-digit year-on-year decline territory. We expect this to continue and pricing to improve over time.

Now, three factors drive our view of the more favorable pricing. First, we expect glass supply to be balanced or even tight. We will align our capacity to our demand even as we ramp up new capacity. Publicly-available information indicates competitors are aligning their capacity to their demand.

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, LCD glass manufacturing requires ongoing investments in current and new capacity.

To generate acceptable returns on new investments, glass pricing will need to improve even further. In summary, we remain very pleased with the current dynamics in our Display business and our progress in maintaining stable returns. Let's move to Optical Communications, where we had a very strong quarter.

Third quarter sales were up 15% and core earnings up 13% year-over-year. Sales grew in both our enterprise and carrier businesses, with especially strong demand for our carrier products. Capacity expansions and other growth investments account for the difference between sales and profit growth.

Without these investments, earnings will have grown much faster than sales. Our growth stands out as we look across the telecom industry.

Our outstanding performance results from our choice to focus our portfolio on tacit optical solutions that are replacing legacy copper and incremental growth as we deliver unique solutions for next-generation networks.

We expect fourth quarter sales to be up high single-digits over last year, and we're increasing our view of full-year sales growth to more than 15%. We're on track to achieve our $5 billion annual sales goal for Optical Communications by 2020. Turning to our Environmental business, third quarter sales were $277 million, up 5% year-over-year.

Notably, these include our first commercial GPF sales. Core earnings were $34 million, consistent with last year. Investments in our new gas particulate filter business partially offset the benefits of increasing sales. Third quarter year-over-year automotive sales were driven by worldwide market growth and from share gains.

As anticipated, the North America heavy-duty diesel market returned to year-over-year growth and is showing signs of a steady upturn. Our new gas particulate filter business delivered its first commercial sales as the first phase of Euro VI regulations went into effect.

We also delivered additional platform wins in the quarter, extending our majority position of platforms awarded to-date. Once regulations are fully implemented in Europe next year and China in early 2020, we estimate the GPF opportunity will exceed $0.5 billion of annual sales for Corning and offer margins and ROIC similar to our existing businesses.

In total for the fourth quarter, we expect low-teens year-over-year sales growth driven by improvement in heavy-duty diesel and the successful launch of GPFs. So for the full year, we now expect Environmental sales to be up mid-single digits over last year.

Let's move to Specialty Materials where third quarter sales rose 26% over last year and core earnings were up 61% year-over-year. Both were ahead of our expectations, driven by strong shipments of Gorilla Glass in support of new phone launches. We're clearly seeing the financial benefits of our focused and cohesive portfolio.

Overall, we're thrilled with our performance in Specialty Materials and expect sales in the fourth quarter to be up low to mid-teens over a very strong 2016 fourth quarter. As Wendell covered, we expect strong demand to continue as we make progress on all three of our approaches to grow sales.

At the beginning of the year, we said we will grow in 2017. Exactly how much would depend on the timing and extent of customers adopting our innovations. We can now say the extent and timing has been outstanding, and we expect 2017 sales growth to exceed 20%.

We are well on our way to our goal of doubling sales for mobile consumer electronics over the next several years. In Life Sciences, third quarter sales were $223 million and core earnings were $21 million. For the fourth quarter, we expect mid-single digit sales growth year-over-year.

As a reminder, our new pharmaceutical packaging business continues to be reported in our Other reporting segment, along with other new product lines and development projects. We group our emerging opportunities in Other to better manage their goals and objectives, independent from a fully commercialized business. Shifting to the full company P&L.

For the fourth quarter, we expect gross margin as a percent of sales to be consistent with the third quarter or about 42%. As I said earlier, our growth investments are also affecting our operating expenses. SG&A and RD&E should be a bit above 14% and 8% of sales respectively.

We expect other income, other expense to be a net expense of approximately $45 million to $55 million, and fourth quarter total gross equity earnings are expected to be approximately $110 million to $120 million, predominantly from Hemlock Semiconductor, implying full year gross equity earnings to be in the $200 million to $210 million range.

This is higher than we expected, driven by slightly higher volume and better business performance at Hemlock. We expect our effective tax rate for the fourth quarter to be approximately 19% and for the full year 2017 to be approximately 18.5%. Our U.S. income is up from 2016, which raises our effective tax rate.

Finally, let me update you on our plan to return at least $12.5 billion to shareholders under our Framework. During the end of the third quarter, we have returned $8.5 billion. In the third quarter, we returned $1.1 billion, bringing the year-to-date total to $2.5 billion.

As you may recall, in February, the board increased the cash dividend per share by 14.8%. Let me close by saying that we are very pleased with our continued positive momentum. We're focused on closing out a very strong 2017 and keeping that momentum heading into next year.

We remain on track to deliver the overall goals of our strategy and capital allocation framework and are excited about the rich set of opportunities ahead of us. With that, let's move to Q&A.

Ann?.

Thank you, Tony. Hey, Greg, we can open the line for questions..

Okay. And one moment please for your first question. Your first question comes from the line of Vijay Bhagavath with Deutsche Bank. Please go ahead..

Yeah. Hey. Yeah. Good morning. Yeah, it would be helpful to get color, Wendell, Tony, in terms of order strength in the optical fiber business. Where I'm coming from is, is the demand primarily driven at hyperscale clouds? And are you seeing any timing delays at any of the major service providers for fiber-to-the-home or metro optical buildouts? Thanks..

We're seeing very – thanks, Vijay. We're seeing really very, very strong demand. And we're feeling the most strength out of our carrier business, but we're also seeing good strength in enterprise. We're really tight, which is why you heard from Tony about our investments in capacity.

We expect that tightness to continue for the foreseeable future until we're able to get that capacity up and running. So right now, the market seems very, very strong to us, sir..

Perfect. Thank you..

Your next question comes from the line of Joseph Wolf from Barclays. Please go ahead..

Thank you. Good morning. I had a question about the Gorilla Glass business and just if you could give us a little bit more detail about the mix.

If we look at the growth of new customers' adoption rates for the first time, which you talked about on a couple of countries, the mix of versions 3, 4, and 5, and how good 5 – how well 5 is doing right now, and then how much of the growth that you're seeing is coming from the double-sided opportunity and how widespread do you think that will go down the cost curve of the handset vendors?.

So we tend not to break out our mix by generation, but let me try to be responsive to your question, Joseph. GG 5 is the most successful Gorilla Glass launch we've had since the beginning. It has been exceeding our expectations in terms of penetration, and we expect that to continue.

Its performance is much, much better than any of the alternatives, and that performance is what is leading to not only its rapid adoption versus GG 4 and GG 3, but also putting glass in new places like the back of the phone.

We still have a lot more innovation to do to solve the core problem, which is to develop a transparent material that when you drop your phone, it doesn't break, no matter what innovative new way you have found to drop your phone. And we have many generations ahead of us.

But what you see in the financial performance and why you're seeing that really strong net income performance together with the sales performance is the increased richness of GG 5 and its very rapid adoption. I think it's too early yet to opine on how rapidly the total glass enclosure penetration will grow.

It's obviously off to an encouraging start, which you can tell from watching the news.

I think in the end, it will depend on how much we can continue to improve the glass to make sure that the customer's ultimate experience of this product has all the great benefits of glass, wireless charging, improved receptions, improved aesthetics, but at the same time to have the type of durability you'd see from more opaque materials.

Is that responsive, Joseph? Does that get at you want to, sir?.

Yeah. It's going on the right direction. Just a follow-up related to the investment. On the capital allocation plan, the pace on the cash give-back is, if you take it at just a – if you straight-line the four or five – four-year plan, it would be ahead of plan.

If we think about the $10 billion in investment – and Tony went through a couple areas where the investment is going, but how do we think about that $10 billion in terms of the pace up to the 2019 plan and where you are in dollar-wise?.

Sure. I think as you think going forward, as we continue to have greater success, we will increase that investment. If you think about capital spending, for example, in the first year we just spent $1.2 billion.

We're going to spend more than $1.5 billion this year because of the success that we're having with the capacity expansions that are required right now.

I think the second thing to keep in mind is, is that from an RD&E standpoint, we're consistently investing there, but there will be opportunities to continue to grow that a little bit as we continue to have success. The other thing to remember is, is that that is no more than 10% from a gross standpoint.

Some of that comes from M&A, and that M&A depends on just when those opportunities actually make themselves available.

But clearly we spent in the first half a little bit less than what you'd expect, and so it's likely we'll spend a little bit more in the second half of the four-year plans, mostly as long as those opportunities are there and it makes a lot of sense to invest in them..

Yeah. I think stepping back from this, the key thing to keep an eye on is we don't expect to invest more than $10 billion. We think the $10 billion in the capital allocation plan, when we put it together, we had all these things in mind.

Now, it is true that the exact timing of the different innovations and the exact timing of when you need capacity is really hard to call within any given six-month time period. But also I think the plan is, we're going to invest $10 billion, we don't see the need to invest more, and how the timing works out is going to follow the flow of programs.

And probably its predictability isn't worth spending a ton of time on because the total capital allocation flow is going to be what we described..

Perfect. Thank you..

Your next question comes from the line of Mehdi Hosseini from SIG. Please go ahead..

Yes. Thanks for taking my questions. Two follow-ups. Historically, panel prices have correlated very closely to Corning's display revenue. But this time is different, especially you've done relatively well compared to panel price decline.

Other than competitors' balance sheet, the constraint, what else is out there that makes historical correlation no longer valid? And then I have a follow-up for Tony.

Can you just remind me of the capital – of the overall capital return program budget for $2.5 billion? Where are you now? Can you give us an update on how much accumulatively you have already spent?.

glass supply/demand, which we expect to remain balanced or even tight; our competitor profitability; and then finally, the need for glassmakers to generate acceptable returns on manufacturing investments. And so those are the reasons that we think on a going forward basis we're going to continue see even more moderate glass pricing as we go forward.

In terms of the capital allocation plan, what we have said all along that we would return more than $12.5 billion over the four-year period, and what we returned through the end of this quarter was about $8.5 billion of that..

Does that suggest that you would end up increasing given the pace that you're returning the cash to investors? Or would you hit that $12.5 billion sooner than later?.

I think that we've always said it's greater than $12.5 billion. And certainly at the pace we've been at, I suspect that we will hit it sooner than later.

But the reason that we've been going at the pace we have is that we don't believe that investors really have all the growth prospects in our stock, and we've found very opportunistic to be able to do share buybacks. And in fact of the share buybacks we've done, the average price has been a little over $22, and we feel pretty good about that..

Okay. Thank you..

Your next question comes from the line of Patrick Newton from Stifel. Please go ahead..

Yeah. Good morning, Wendell and Tony. I guess, first, I wanted to focus on Gorilla Glass. Clearly, you've seen some improved demand trends there from new launches and also glass on both sides of multiple products from multiple OEMs.

I guess my question is how comfortable are you with the current supply/demand dynamics for Gorilla Glass given the product has a history of having unexpected supply swings on one side? And then there's also some well-documented manufacturing challenges associated with a large new customer product ramp?.

So, Patrick, I think you're right to note that the exact predictability of the mobile consumer electronics supply chain can be problematic. Now given that, let me sort of express the way we're feeling right now and how we're experiencing that supply chain. Right now, we continue to see very, very strong pull as we look forward to this quarter.

So that's the way we're experiencing it. We're not experiencing a slowdown, and you see that in our own way in which we're operating tank fleets, right? We're actually having to run a little bit longer than maybe we would've liked, and a little bit less than on an optimum utilization base, and it's really because of that strength.

This doesn't mean that all of a sudden the supply chain in mobile consumer electronics has become highly predictable. It has not. But I hope it helps that you get a sense for how we're experiencing at least our piece of that supply chain at this time..

That's helpful. I guess, Tony, I wanted to shift to a question on your margin profile. Great results, great guidance, especially on the top line side. But if I wanted to nitpick on something, it'd be on the gross margin, which was a little bit disappointing.

I'm curious if we take an intermediate-term view, how should investors over the next several years think about the balance of accelerating the growth from Optical, Environmental, Life Sciences, et cetera, which I believe are margin dilutive relative to a display business, which should decline as a percentage of revenues.

So, I guess, is it reasonable to think that gross margin is relatively sticky around current levels, while op margin could see some pressure in the near-term from both mix and investments but then an eventual expansion from scale?.

Yeah. I think the issue always is with our gross margin is, to your point, it really is a mix of our different businesses. And how they are going to grow and contribute is hard to know. For certainty we see a lot of growth that's going on right now in Optical Communications, a lot of that growth.

And you're right that's a little bit below the corporate average. On the other hand, Specialty Materials is above the corporate average. The way that we always look at it is how is each of those businesses performing relative to their competition.

Are they the low-cost producer? Are they doing better than the competition? And that's clearly what's happening. I think from a near-term standpoint, still our gross margin was 42%, a little bit less than it was in Q2, but our cost, that's really driven by our cost in display being up slightly sequentially. They were down on a year-over-year basis.

That was a combination of the startup of our Gen 10.5 factory. And then, as I mentioned, we're running a handful of tanks outside of our optimal range for the quarter. But I think it's important to note that even though our gross margin percent was impacted, because we got more sales in Display and Gorilla than we expected, we did make more money.

So while it was a little bit less on the percentage, it was better on the bottom line, and that's of course what we always consider to be the most important thing..

I think as we think about gross margin long term, if that's your core question, because I think in the medium term or in the near term I think Tony is right on that, a) what we're trying to do is just make more money for our shareholders and we pay a lot more attention to that and to win in all the various markets, and so then that becomes really a mix question.

But as you think longer term, our businesses that are capital intense, we're going to generate extremely high gross margins on. And some of the businesses we talk about mix being a little bit of less gross margin percent in, right, like Opto (46:09), tend to be a lot more capital light.

And so what's really driving us is how do we generate that really powerful return on invested capital to the capital that we deploy.

And in certain businesses, where to generate that, the gross margin percent must be very, very high, right? And then, for other business that are relatively asset-light, we will tend to have a little less gross margin percent, right, but a lot fast returns.

And so as we work our way through that, I think as you think long-term about the business, we're still going to be pretty capital-intense. So you should expect us to have pretty sticky gross margins sort of in this very high level relative to other companies. That in combination with being the lowest cost producer in the world, certainly helps..

Great. Appreciate the details. Good luck in the quarter..

Thanks..

Your next question comes from the line of Wamsi Mohan from Bank of America. Please go ahead..

Yes. Thank you. Wendell, Tony, you've done a great job at capital return here and you addressed sort of you're two-thirds of the way already to your $12.5 billion-plus target.

Can you maybe address what sort of levers you have to drive that $12.5 billion higher over the next couple of years? Is it capital? Is there business strength that's going to drive that? Do you think that there is potentially other portfolio changes that are in the works? And then I have a follow-up..

I think it really comes down to something pretty straightforward, Wamsi, which is that in Tony's answer, we said greater than $12.5 billion to start when we put this together. And, really, it just comes down to the cash generation, which we are right on target for.

So if we continue to be right on target for cash generation, you can expect it to be above $12.5 billion, right, and we think we can get done what we need to get done to be able to drive growth over the next decade with our $10 billion. So that's a good way to think about it if you want to think about it analytically.

At such time as we're ready to be able to discuss openly a decision to get a little more specific rather than greater than $12.5 billion, we'll be sure to get back to you. This, of course, is something we have to work through with our board of directors, and I wouldn't expect an announcement relatively rapidly.

We're only part of the way through this, but this is something that is always top of mind with us and you can expect us to give it really crisp and due consideration..

Okay. Thanks, Wendell. Appreciate the color there. And as my follow-up, in Gorilla historically, the supply chain has been quite long and ramps to support new product introductions have happened earlier in the year. Clearly, you guys are seeing some significant uptick.

You're running tanks at lower-than-expected utilization rates, or maybe sub-optimally, not utilization rates. But that would suggest sort of a tighter correlation to product launch timing versus what you're seeing in your Gorilla business.

So I'm wondering, has something really changed in the Gorilla supply chain that is causing the ramp to happen at a later point, or is it just that the volumes that you see maybe further out are quite significant and so the upside that you're seeing now is addressing sort of future volume pick-up but the supply chain has not really changed? Thank you..

I think that's a really astute question. I think we don't have enough data yet to be able to reach a high-confidence conclusion. Very sound question, though.

Working on the mobile consumer electronics supply chain, understanding and clarity and correlation between our shipments and new product launches is something that occupies a good amount of our analytics time. But at this point in time, we just don't have enough data to reach a high-confidence call. But great question..

Thanks, Wendell..

Your next question comes from the line of Steven Fox from Cross Research. Please go ahead..

Thanks. Good morning. Two questions for me.

First off, when you think about the investments that you've highlighted that maybe are putting a little bit of a downtick on gross margins, can you talk about like where you would see maybe a peak level of investments relative to revenue starting to ramp and absorb some of those investments, and maybe excluding the Gorilla Glass seasonality from that? And then secondly, Wendell, you did mention some more momentum around Gorilla Glass for automotive applications.

Is there anything specifically you're thinking about there or is it similar to the progress you talked about at the meeting in June? Thanks..

So let me take the investment question first. Clearly, we've been investing more as the year has gone on this year and we always factor that into our guidance both on gross margin and SG&A and OpEx. And so we invested a little bit more in Q3 than we did in Q2. Investments in Q4 are pretty similar to what we did in Q3, maybe a little bit more.

The good news is, is that, so is the sales growth that's happening there. What you've got is that we're really focused in three primary areas from an investment standpoint. That's our Optical Communications map, that's our mobile consumer electronics map, that's our automotive map.

And if you think back to the areas where we've seen the growth, those are the three areas that we're growing. So we feel pretty good about the alignment between the investments and when the growth is happening, especially in the near-term. Thanks.

And just the question on Gorilla Glass for auto?.

Yeah. We're seeing really nice momentum. Now that being said, this is an industry that moves at a very deliberate pace. So we tend not to try to get overly excited, because you win today for revenue that's in the farther future. But we're feeling really good.

And it's interesting, in any innovation that is pretty disruptive like this one is, then what you tend to try to do is you'll get positive surprises and negative surprises; and when you get the positive surprises, you start to double down on them. I'd say we're getting some really nice positive surprises right now in automotive interiors.

People's vision for what they want to do in the interior of vehicles is quite stirring and is driving them very much into the arms of our material set and our co-innovation approach. So we're actually – been investing an awful lot of time and attention into that, and we're getting really, really nice pull.

So I think that's what you're sort of sensing is the exteriors is going about how we would anticipate with the normal deliberate pacing and we're getting really nice positive surprises that we're doubling down on in interiors.

And what's interesting is the type of innovations that they want, a very high revenue generation want because of the value add they want from us around optics, around shape. So that revenue opportunity is looking very attractive right now..

Great. That's very helpful. Good luck going forward..

Thank you..

Your next question comes from the line of George Notter from Jefferies. Please go ahead..

Hey. Thanks, guys. I appreciate it. I guess I wanted to ask about the Optical business. As I go back to the end of Q2, I felt like you guys hesitated a bit in terms of the full year guidance for Optical, and I think part of the narrative was just around timing of certain customer projects.

Can you talk about what's changed now versus how you saw things coming out of Q2? Is it just a customer project or two? Is it the Verizon One project? Or is it something more broad-based you're seeing in the industry that's really helping that business? Thanks..

I'm not so sure there's been a tremendous amount of change since the end of Q2. I think what we were trying to communicate in Q2, which we didn't do a good job of because a lot of people thought it was a hesitation. It was just the lumpiness that happens in this business.

And going on a forward basis, there will be a time when this is just going to show up. We just wanted to remind the investors of that. We didn't mean to imply that we thought that was going to show up in Q3 or in Q4 and that's clearly what some investors interpreted it as.

And so from an underlying standpoint, as Wendell said, we've seen strength in carriers, we see strength in the enterprise business, and from an overall standpoint, we think we're going to be up more than 15%. So we feel very good about Optical Communications..

Got it. And then just one last follow-up. I'd love to ask you about the FX rate. Certainly constant currency, I think you guys are talking about adjusting that rate going into 2018. Can you kind of remind us where you are in that process and when you might address that? I assume you would address it for both the constant currency won as well as the yen.

Thanks..

Yeah. That is correct. I mean as we stand right now, we have about 70% of our yen exposure from 2016 to 2022 hedged, and the blended rate of that hedge is about 1.06% (56:44). We're obviously fully hedged in 2017 and we're actually pretty high percentage hedged in 2018 and 2019, the near-term years where we have more confidence in those results.

And what we plan to do in the January call is talk about a new core rate. The core rate today is 99% (57:06).

We'll make an adjustment and when we make that adjustment, we'll go back and recast 2016 and 2017 so it will be easy to make comparisons between based on where the core rate adjustment is and so it'll be easy to understand what our underlying business performance is..

Thanks..

Your next question....

Sorry. We've got time for one more question..

Okay. That question comes from the line of Rob Cihra from Guggenheim. Please go ahead..

Great. Thanks very much. I'll sneak in just a quick one. In Optical, carrier has been the driver, continues to look like the driver, but enterprise has been choppy. It looks like it actually may be stabilized a bit after being choppier the last few quarters.

I mean, are there any trends you're seeing there? Do you think from here, I mean, looking better or worse I guess in enterprise and data center versus the last few quarters? Thanks..

So I think it is quite accurate to make the observation that we're having a lot of strength in carrier and that in enterprise and cloud, the predictability and consistency of that has been a little bit less than carrier. That being said, even though the total actual pacing of how that whole market works can be a little more difficult to predict.

One of the reasons you see what you see in our numbers is growing adoption of more and more of our product set and more and more cloud-based providers.

So I don't know that you can necessarily look at our revenue alone and then conclude what exactly is going on in the total market because you're having a combination of yes, some wind in the total but also we're getting up some more sale area, so people are liking, our customers are liking our product set more and more across a wider footprint, if that make sense to you, sir..

That's great. Thank you..

Great.

Wendell, you have any closing comments that you'd like to make for us?.

Well, first of all, let me thank everyone for joining us today and let me reiterate how pleased we are with our continued positive momentum. Our focus is on closing out 2017 strong and then keeping that momentum headed into next year.

As we've said, we're on track to deliver the overall goals of our strategy and capital allocation framework and we're excited about the rich set of opportunities ahead of us. And we look forward to staying in touch..

Great. I want to thank you too for joining us today and before we close let you know that we will be meeting with investors at the Credit Suisse conference in late November and then a web 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 with details in today's news release. Once again, thank you for joining us. Greg, that concludes our call. Please disconnect all lines..

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..