Investor's Business Daily, May 23rd, 2007
A month ago, two companies installed test lights to illuminate the exterior of the Empire State Building. There were solid patterns, vibrant stripes, strobe effects and other sequences called Fourth of July, New Year's Eve and fireworks.
Color Kinetics CLRK is one of the companies vying for a $5 million contract to bathe New York City's tallest skyscraper in intelligent lighting.
It makes computer-controlled, light-emitting diodes. LEDs, as they're called, are capable of producing an array of colors and infinite patterns.
For decades, only nine colors were available to light the Empire State building and crews had to replace the bulbs by hand. But new color LEDs changes that.
Color Kinetics' Chief Executive William Sims said there are several advantages to intelligent lighting. LEDs give off less heat, last longer -- up to 50,000 hours -- and are energy efficient.
He also said LEDs keeps costs low because they are more durable than traditional bulbs. The use of a semiconductor chip vs. the standard filament or gas makes them resistant to shock and vibrations.
Life Span
"LEDs have an incredible life span and are more or less maintenance- free," Sims said. "Crews won't have to change LED bulbs nearly as often."
The Boston, Mass.-based company has most of its sales in packaged, finished products, sold as fixtures or as complete systems. Sims said an LED is a semiconductor, so it is an inherently smart product.
He said LED's smart chip and efficiency will help push the company into new markets.
Analyst Brion Tanous said the company's forte has been its color LED business. He said the technology has been adopted by the architectural and entertainment markets.
Since going public in 2004, Color Kinetics has grown sales by 20% or more each quarter. The past quarter was no different.
The company raised first quarter sales 28% to $18.8 million. Nearly 90% of sales are derived from lighting systems. It more than doubled first-quarter profit to 10 cents a share, in line with Street views.
Color Kinetics was founded only 10 years ago, but its impact already has been felt around the world.
Sims said the firm has lit up landmarks from one country to the next. London's Millennium Wheel, Los Angeles International Airport, the Wynn WYNN casino in Macau, China, and the Senayan City tower in Jakarta, Indonesia, are just a few brightened by Color Kinetics.
"We're about transforming environments and we are aggressively pursuing opportunities in Asia and the Middle East," Sims said. "But our best opportunity lies in the white light market."
Color Kinetics' white LEDs offer a programmable array of white light tints and hues. The system can sense and adjust to changing conditions, such as temperature control. Sims said high-end retailers would be a prime customer.
Analyst Michael Burton of ThinkEquity Partners said the white light market could be the Holy Grail for Color Kinetics. But it will face challenges. ThinkEquity does investment banking for the company.
Phillips Lighting and Osram Sylvania, both privately held, as well as General Electric's GE lighting unit are the giants Color Kinetics is up against in the white light market.
"The company will enter this space through the retail sector," Burton said. "But it will have a tougher go at penetrating this market than it did in color LEDs."
In 2004, Color Kinetics rolled out its first white light products. But in the last quarter, white lights made up just 5% of total sales.
Tanous said the white light market is massive with potential sales over $100 billion. As halogens and incandescents are phased out, it will open up big opportunities for LEDs.
The high price of LEDs still remains a barrier into many markets. Sims said growth should continue as the technology improves and the price points come down.
Color Kinetics has ironed out earlier technical wrinkles, such as heat buildup and low-level light output.
The company's bread and butter has been its color LEDs, but growth in its license business has exploded, albeit from a small base.
OEM and licensing sales soared 88% to $1.8 million in the first quarter. The company has been awarded 67 patents and has 180 more pending.
"Color Kinetics is a leader in IP (intellectual property) and technology advancement for solid-state lighting. This is just the beginning of a long period of licensee signings," Burton said.
Sims said the company picked up 20 new licensees since January 1, 2006, and only five have contributed to sales so far this year. He expects further license growth.
Many competitors pay royalties to Color Kinetics, but sometimes the company has to fight to protect its patents. In 2005, it won a long-running court case with Super Vision, now Nexxus Lighting NEXS.
The global warming buzz has sparked demand for LEDs as well, said analyst Jonathan Dorsheimer of Canaccord Adams. The firm does investment banking for Color Kinetics.
With the world's energy consumption out of control, he said, LEDs should be the answer to better conservation.
Efficiency
A typical low voltage system can experience a 38% loss in electrical output from the wall to a lighting system.
Sims said its patented Powercore system cuts that inefficiency. Color Kinetics' LEDs lose only 20%.
Also, LEDs do not contain hazardous materials, such as mercury. Dorsheimer said federal and state legislation could ban incandescents and open up the LED market.
"LED technology has the potential to ultimately leapfrog conventional sources as the energy-efficient choice of the future," Sims said.
Analyst James Ricchiuti of Needham & Co. said it is inevitable that halogens and incandescent bulbs will be phased out. But LEDs still have to compete with compact fluorescent bulbs.
"If Color Kinetics can get reduce the price of LEDs it will rule out the need for fluorescents," Ricchiuti said. "But its push into the consumer market is still years away."
