Your humble editor spent some time over the holidays with Govi Rao, CEO and Chairman of the Board for Lighting Science Group Corporation (“LSG”). I did not know what to expect. As I have been tracking the company’s stock price from $10 to $2 to $0.70 to $.036 I expected to see a company in trouble -- I saw the opposite.
As I waited for Govi to finish a conference call, Ken Chakravarti, VP Global Sourcing, Alliances & Partnerships gave me a tour of the new LSG facility in Westampton, New Jersey. The facility was formerly a Lamina Lighting facility. LSG now utilizes it as its main office as well as for research, development, testing, and manufacturing.
After the tour, I sat down with Govi Rao, Chairman of the Board and Chief Executive Officer of Lighting Science Group. Prior to joining LSG, he served as Vice President and General Manager for Philips Solid State Lighting from January 2006 through June 2007. He is also is a founding member of the advisory board at the institute for Sustainable Enterprise at Farleigh Dickinson University, and he also serves as an advisor on the U.S.-China Center for Sustainability.
Ed: After seeing all of the
people, the scientists, the laboratory, and the equipment, it is clear that
to be in the LED lighting business requires a lot of overhead. How do you
balance these long term strategic costs with short term quarterly returns?
Govi: At the present time, quarterly results are secondary to the Company’s strategic plan. We are working on an emerging technology which has the potential to disrupt the current value chain and the business model. All of the indicators such as the renewed emphasis on energy efficiency, life cycle cost, the regulatory environment, and the most recent economic slowdown point to the making of ‘the perfect storm’, which I believe is getting us closer to the tipping point for LED lighting to emerge much more significantly than it has already. We know it will happen. Several of our managers and other professionals left large successful traditional lighting companies to join LSG so that they could more freely and aggressively pursue what they perceived to be the imminent LED lighting opportunities.
Ed: You say that you don’t
run the company based on the quarterly results.
Some investors may agree that you do not care given the stock price
has been cut in half in the last week…
Govi: Let’s discuss the stock. As you know, a majority interest is held by a private equity firm and they have not sold any stock. Thus, the stock price changes presently reflect the activities of only about twenty percent of the outstanding shares in the company. It appears that an initial drop in our stock price was related to the news of the Philips litigation. After that, my sense is that the stock price dropped in concert with the overall market-wide drop in stock prices and reflects investors unwilling or unable for any number of reasons to hold onto LSG stock. So, while I am concerned about the stock price and our quarterly results, I am confident in our strategy, and I am focused on further developing our execution capability to meet the coming avalanche of demand for LED lighting.
Ed: Is anyone making money
on LED lighting? I don’t know
of many luminaire manufacturers that are profitable in LED lighting.
Maybe Al Ruud?
Govi: I can’t speak about how others are faring. It is clear that there are a number of challenges for commercialization of LED lighting and for any early stage company, as many are. However, there are several products that are profitable today and LSG has such products in its portfolio, and LSG is well positioned to be profitable.
Ed: Can you explain your
acquisition strategy?
Govi: We have digested four acquisitions in the last year -- I don’t think any other LED lighting company has done that. The acquisition strategy enables LSG to cover a wide range of LED products and solutions, to vertically integrate to some degree, and to share technology amongst the light engine, retrofit lamps, luminaire and custom solutions business platforms. This enables us to do things like the 100 LPW LED lamp.
What used to be LED Effects is now the core of our Customs Solutions business.
What was Lighting Science Group before the reverse acquisition with LED Holdings, is now the core of our retrofit lamp and luminaire business.
The acquisition of Lighting Partner gave us better access to the European market and brought in fantastic fixture designs.
The acquisition of the assets of Lamina Lighting provides the core of our LED light engine business and provides research and development capacity to support the retrofit lamp and luminaire business.
These operations are in the initial stages of working together and in coordination. The acquisitions also, and perhaps most importantly, resulted in a group of smart, talented people with a passion for LED lighting joining LSG.
Ed: I find it fascinating
how the LED companies compete and work together. You buy CREE LEDs, yet late
last year the EdisonReport reported that CREE introduced a 2 x 2 troffer. So
if you compete against them why do you buy from them?
Govi: With respect to chips and packages, a company making LED luminaires and retrofit lamps must be free to make use of the most appropriate LEDs available taking into account performance, price and availability.
The nature of the LED lighting industry, at such an early point in commercialization, is that there will likely be odd relationships. Look at Philips as an example. We are in litigation with Philips, yet we have an ongoing commercial relationship with Philips. We use Philips Lumileds LEDs in some of our fixtures and in some of our Customs Solutions projects like the Times Square ball. In addition, we design, manufacture and sell LED luminaires to Philips.
The old lamp-ballast-luminaire-distributor-end user chain is a 100-year old model that is being disrupted by LED technology and the new entrants in the lighting field. LSG is positioning itself as a leader for the new emerging model. Within the next two or so years, the next generation of leaders will be established in the industry. As the value chains start freezing in a new order, we want to be established as one of leaders in that new lighting order. Eighteen months ago, no one knew of Lighting Science Group -- we were at a different stage then. I believe we have come quite far in 18 months.
Ed: Let’s talk about that litigation between you and Philips.
Govi: Sure.
Ed: I understand that Fuzzy Furry had some products in the market in
1993 and CK was not established until 1996.
Govi: Yes, LED Effects had LED color changing products prior to the establishment of Color Kinetics and yes, those products are prior art against some of the Color Kinetics patents being asserted against us by Philips. There is other prior art out there, even some from Philips own patent portfolio. We think that parts of the Color Kinetics patent portfolio are overrated and largely untested. Cases such as the TIR and Supervision, litigated by Color Kinetics prior to the acquisition by Philips, were not litigated to conclusion and they did not, for a variety of reasons, represent a real, substantive challenge to those patents.
Ed: How does a company your
size compete with the larger conglomerates?
Govi: Some large companies have divisions that cannot, or do not, talk to each other -- we don’t have such problems. We were contacted by a large global retailer wanting to replace their F25T5 shelf lights with LED to improve their energy efficiency and remove the toxic mercury from their store. This company talked to all of the large players and chose us. Do you know how long it takes our competitors to design a project? Sometimes it takes seven months. From the time we received the phone call to the time we had a prototype was eight weeks. This large global retailer is now looking to us to supply LED lighting for about forty stores this year. They had a problem with watts per square foot and we solved it, allowing the retailer to open new stores as a result. Without getting the watts per square foot in line, new stores could not be opened because they could not meet California code.
Ed: Is shelf lighting one of
your focus areas?
Govi: It is one of them. We have 120 new projects identified in our pipeline with about eight active at any given time directed primarily at: area lighting and public infrastructure; retail shelf and retail display; commercial and industrial; architainment; and, gaming.
Ed: How do you go to market
with four different companies?
Govi: One company, four different businesses, and one integrated sales force selling components, retrofit lamps, luminaires, and projects. Zach Gibler heads business development and we have dedicated sales people. One thing we do focus on is the specification community -- this is very important to us. We have identified about thirty to thirty-five top specifiers in the world.
Ed: I hear there are about
800 LED companies globally, some think that number will be reduced to 80 in
the next two years.
Govi: I don’t know that there are 800 companies worldwide, that does some high to me. But, there will be a shakeout. The tightening of the economy is already beginning the first round of the shakeup. Survival will become critical for many of these companies. As LED standards develop and the market evolves beyond the early adopters, quality and supply capability will also be metrics for success and failure.
Ed: You were on
Capitol Hill last month…..
Govi: Yes, I had several meetings on the Hill concerning the stimulus package. The stimulus package will likely be geared to creating jobs in the United States in the energy sector. Our company is poised to add jobs here in the United States -- for example, this facility will be adding staff in the first quarter. We are a global company, but our US manufacturing is very strong and will get stronger, especially in Westampton, NJ.
We ended the conversation by discussing a few key people and companies in a rapid fire discussion.
Ed: CREE
Govi: Great company, solid player, narrow niche capability.
Govi: Phenomenal visionary, pragmatist, bi-partisan, charismatic, will drive change.
Govi: Great partner, solid company, willing to work, competitive.
Govi: Name from the past at Philips.
Govi: Phenomenal presence, very keen on making an impact on carbon footprint. I was with him a few months ago.
Govi: Michael Siminovitch, terrific resource, beginning to make forays into assessing LEDs. CLTC is focused on efficiency and design. Great resource for talent pool in that they are training and influencing more people.
Govi: What can I say? I think of the past. CK did a tremendous job advancing LED technology forward into the world. The CK patent portfolio and the manner in which CK attempted to enforce and license it may have, unfortunately, suppressed LED lighting commercialization. It will be interesting to see how that changes with Philips.
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