The dim light of LED profits: Philips CEO issues financial warning

One day, 'LED lightbulbs' will simply be 'lightbulbs.' No prefix. But for now, 'LED' might as well stand for 'less eating dinner,' because that's one way to afford them. We're not buying.
Written by Mark Halper, Contributor
Philips CEO Frans van Houten cites 'pricing' issues in the consumer lighting business as part of his 4th quarter warning. Photo from Philips via Flickr.

One day, LED lightbulbs will simply be "lightbulbs."  No prefix necessary, and stories like the one I'm telling here - and have told before - will be history.

But for now, "LED" might as well stand for "less eating dinner", because that's what many of us will have to do if we're to spend $40 or so buying lightbulbs made with energy saving light emitting diodes. That, in turn, is undermining industry profits, as many consumers balk at giving up two twenty-dollar bills for a newfangled bulb that, in its traditional incandescent form can sometimes costs less than a buck.

Dutch giant Royal Philips Electronics knows all about those difficulties. CEO Frans van Houten issued a fourth quarter profit warning this week, citing, among other factors, "pricing in our Consumer Lighting business." LEDs form a substantial portion of that operation.

The warning applied across many of Philips' business sectors, including healthcare and consumer lifestyle, which van Houten said is beginning to show "early" improvement amid a raft of company-wide raft of cost-cutting measures including layoffs.

Of course, the ruinous economy has a lot do with the lighting struggles, which are not new. As we noted a quarter ago, Philips' Q3 lighting profits tumbled by nearly 50 percent, even as sales rose by 32 percent. Philips sells products and services across the LED value chain, including the diode that serves as the light source for bulbs. It also sells bulbs and lamps for indoors and outdoors, as well as controls and services to operate them.

In its profits warning this week, Philips said that its lighting sector will have "mid single-digit" sales growth in the fourth quarter, when EBITA (earnings before interest tax and amortization) will be a mere 2 percent of sales.

"Continued operational issues in Consumer Luminaires, Lumileds and macroeconomic factors, which impacted pricing in Philips' Consumer Lighting businesses, have impacted the Lighting results," the company said in a press release. "In addtion, incidental charges, primarily relating to the disposal of slow moving inventories, as well as adjustments in production volumes further affected the bottom line."

It's hard to tell from the warning exactly how poorly diodes fared versus bulbs, lamps and other lighting products. The company will report full fourth quarter and year-end results on Jan. 30, when I hope to get a more precise breakdown. One implication is that perhaps profits are eroding as Philips cuts bulb prices in an effort to lure customers. Prices do seem to be creeping downwards. A quick check of the Home Depot website shows a 12-watt Philips LED bulb (60-watt incandescent equivalent) listing for $24.97, and a 17-watt version (75-watt equivalent) for $39.97.

In the third quarter, Philips blamed much of the profits hit on diode sales. The industry has been clearing out a glut of diode inventory as demand drops, particularly in the flat screen TV market. Philips third quarter report also faulted  decline in lamp sales, and cited  "internal" and "operational" issue.

The LED industry argues that expensive bulbs save consumers a lot of money over time because they require only about 20 percent of the electricity of an incandescent, and thus can slash utility bills - and cut CO2 emissions.

The industry also claims that bulbs last anywhere from 15-to-25 years or more. Notably, though, vendors only offer warranties of a few years. Consumers often report that bulbs fail within a year or so - not necessarily on Philips branded bulbs, as quality can range across brands. Although the diode that serves as the light source can last a long time, other components in an LED bulb can fail - bulbs typically have electronics that convert AC electricity to DC, and that knock voltage way down from 220 or 110 volts to between 5 and 12 volts. The bulb's performance can also deteriorate over time, even if it lasts 25 years.

Pricing, longevity and reliability aside, some people object to the light tone of LEDs, which is harsher than traditional incandescent bulbs.

Company-wide, Philips said that sales across all its business sectors compared to the year-earlier fourth quarter will grow by single digits, that operating profits will fall to around 7 percent of sales from 9.1 percent, and that free cash flow would shrink to around $1.28 billion, from $1.53 billion.

"Our expected fourth quarter financial results have been affected by the weakness in Europe, which has impacted our Healthcare business, as well as pricing in our Consumer Lighting business," CEO van Houten said in the press release.

Stay tuned for more details after Philips announces the results on Jan. 30. The saga of the LED era is just in its early chapters. LEDs have many attributes other than energy saving. Operators can be easily control and tune them for brightness and color, which augurs all sorts of benefits across agricultural, medical, architectural and public safety purposes.

But for now, they remain a tough business.

More illumination on LEDs:

This post was originally published on Smartplanet.com

Editorial standards