Over the past few weeks, companies have been reporting their quarterly earnings. The news has been a bit mixed for the overall economy. But, what are the specific signals for LED lighting and perhaps energy efficiency generally?
First, lets look at the macro picture. The bad news: top-line revenue has been flat or only slightly up and there is little sign that the employment picture will improve soon. The good news: profits are up as companies are using fewer resources to drive the top line and cash positions are increasing.
To understand how this affects LED lighting, we need to look at specific verticals and companies, and make some generalizations about the overall market conditions. It is instructive to think of the LED value chain as composed of four primary parts – from the components to the end customers:
- Component and Equipment suppliers. The clearest information comes in this part of the value chain since there are specific names that are close to pure-plays in LED components and equipment (e.g., Cree, Rubicon, Veeco, etc.). When I last wrote about this trio, I noted that they were up a collectively 600% since I joined Digital Lumens at the beginning of 2009. That piece was written at the beginning of the summer and in the intervening months, the trio is off 13% — not surprising given the tear they have been on. What can we learn from earnings? All three continue to surprise on the upside. However, there is growing concern that the equipment revenue is going to flatten as manufacturers bring the capacity online to meet increasing demand and LEDs trend toward commoditization.
- Solution Suppliers. There are no pure-play LED lighting companies so it is difficult to use earnings to get a bead on adoption. In fact most of the lighting market is controlled by large industrial entities that make it difficult to look at traditional lighting, no less LEDs (think GE, Philips, Cooper Industries). And, of course, LEDs still make up only a small portion of their overall revenues – despite the buzz they create. Meanwhile, smaller names like Nexxus and Dialight are reporting results that are probably more indicative of specific company challenges and opportunities rather than broader market trends.
- Channels. This category includes the various avenues for getting LED lights into the hands of consumers, businesses and municipalities, and includes everyone from Home Depot, which just announced a $20 LED bulb for the general consumer, to companies like Lime Energy, as well as the ESCOs (e.g., Ameresco), which generally service municipalities. As with the Solution Suppliers, very few of the channels are exclusively focused on LEDS so it is difficult to see through their earnings how much impact LEDs are having. However, it is worth noting that lighting is a very profitable product category.
- Customers. For consumers, LED education will be the key to adoption. For larger companies, there is a growing drumbeat from the market urging them to turn their cash holdings into capital purchases or jobs. My belief is that capital purchases are going to happen more quickly than new hiring. The reason? There continues to be uncertainty in the recovery, but the ROI/TCO of capital purchases is more tenable than new employees. This should bode well for energy efficiency since many projects have great paybacks with TCOs that drive down operating costs and increase profitability.
Those in the LED market and those who follow it all believe that LEDs are rapidly approaching the tipping point, but the next 12 months will be pivotal. The expected LED education campaign from the U.S. Department of Energy, combined with the massive energy savings opportunity, utility incentive programs, and the broader availability of LED products to consumer should make widespread LED adoption a reality in the near future. That would make for a very rosy picture for all the players in the chain, for sure.