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.