Color Kinetics' income disappoints, despite revenue increase

May 5, 2006
Stock options paid to managers had a significant impact of Color Kinetics' income, which sent its stock price down.
Despite record revenues of $14.7 million for the first quarter of 2006, shares in Color Kinetics fell from a high of $23.60 to below $20 when the company announced its income was only $0.01 per share, versus $0.04 predicted by analysts.

The company's revenue of $14.7 million was an increase of 27% from the $11.5 million reported in the first quarter of 2005, and a slight rise compared with $14.5 million reported for the last quarter of 2005.

Net income for the first quarter was $729,000 or $0.04 per fully diluted share. However, this was prior to charges of $541,000 associated with stock-based compensation. After including these stock option charges, GAAP net income was $188,000 or $0.01 per share, compared with $672,000, or $0.03 per share, for the first quarter of 2005.

As Rich Duprey of The Motley Fool, a financial website, wrote, "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."

Duprey also pointed out that the company's 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 way to go before it reports positive cash flow," said Duprey. "Rewarding management with outsized grants of stock options does not help a company achieve such goals."

Otherwise, Color Kinetics showed good performance, increasing its gross margin to 54.7% and adding to its patent portfolio. "We are pleased to start the year with strong operational results, driven by excellent performance in North American Lighting Systems sales, increased contributions from APAC and Europe, and continued gains in overall gross margins," said Bill Sims, President and CEO.

"Our expanding pipelines and rate of new installations suggest that LED lighting is increasingly displacing conventional sources in certain markets," continued Sims. "We intend to foster even broader adoption with increased focus on OEM and licensing and a product development strategy that takes LEDs from sophisticated, high-end applications to more simple mainstream uses, including general illumination."

For the second quarter of 2006, the company currently targets revenue within the range of $14.8 million to $16.0 million, with net income of $0.03 to $0.06 per fully diluted share prior to any stock-based compensation expense. Net income including stock compensation is expected to be between $0.00 and $0.03 per fully diluted share.