While there were fewer Color Kinetics (NASDAQ:CLRK) shorts around this month, there were still enough Nervous Nellies to cut this stock's price by 15% after earnings were released. Although I had said this solid-state lighting company was ready to shine, it appears there are a few problems.
While revenues of $14.7 million fell just shy of analyst projections of $15 million, it was the earnings miss -- $0.01 per share versus analysts' projected $0.04 -- that was the catalyst.
Color Kinetics tried to spin the news by saying that it had record revenues (it did), and that without stock options expenses, it actually hit the $0.04 mark. True enough. But that's been the point all along of advocates for expensing stock options: They are a cost that has long been hidden to investors. With Color Kinetics, we see that the cost reduced earnings by 75%! What's worse is that next quarter, these costs might just wipe out profits altogether.
Certainly, companies want to attract and keep competent managers, and stock options, it is argued, are a way to align shareholder and management interests. But when you reduce net income to $188,000 from $729,000 because of stock options, perhaps it's time to rethink your compensation and incentive programs. Moreover, were it not for the interest that Color Kinetics earned on its cash and investments, it would have reported a loss for the quarter.
Helpfully, the company posts a cash flow statement with its earnings release, but it shows that free cash flow -- operating cash flow minus capital expenditures -- is still negative. While the numbers are actually a big improvement over the year before, Color Kinetics has a ways to go before it reports positive cash flow. Rewarding management with outsized grants of stock options does not help a company achieve such goals.
The bright spot in the report is that revenues increased 27% over last year, even though that didn't meet analyst projections of 31% growth, while gross margins grew to nearly 55% from 51% in the same period a year ago. So while it did meet analyst earnings by excluding stock-based compensation, gee, wouldn't it be great if it could just ignore all of its costs and expenses?
The quarter is certainly a foundation on which to build the company's industry-leading position, but hopefully not at the expense of the rest of Color Kinetics' shareholders.
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Fool contributor Rich Duprey owns shares of Color Kinetics. You can see his holdings here. The Motley Fool has a disclosure policy.
