Syntax-Brillian: "It's the Overhead, Stupid"

Are Syntax-Brillian’s (BRLC) margins "robust", "average", "thin" or "razor thin"? The bears are right that the LCD sector has many players with “thin margins.” But of importance to BRLC investors is to determine where “our” margins sit in comparison to the others, and more importantly, just what will become of the players with thin to "razor thin margins"?

Ideally you would use at least three comparables in the same sector to get a solid comp that one could make a definitive opinion upon. In the crowded LCD sector of public and newly formed private companies this is not an easy task, given the known public companies are conglomerates selling everything from toasters to medical equipment. Attempting to weed out their overhead cost and in most cases excessive salaries, commissions, advertising costs and payroll expenses is not only an arduous task but also a subjective one.

So what are Syntax-Brillian’s margins compared within the LCD sector? Perhaps it is best to let each reader draw their own conclusion, Vizio's margins are found in article titled "Falt Panels, Thin Margins."

Vizio has a mere 55 full-time employees, but saw sales of $700 million last year. The private company claims its overhead costs are just 7% of sales, compared with 10% to 20% for big, diversified electronics conglomerates, and that it gets by on profit margins of just 2%.

Would it be fair to say Vizio’s margin appears to be a “razor thin margin” within the LCD sector?

The article goes on to say:

Vizio says it has enough orders from retailers to sell nearly 3 million TVs this year, which would triple its revenues. If Vizio accomplishes that, it could rank among the top three brands in the U.S. Some in the industry take such forecasts with a grain of salt. "Sustaining that kind of growth will be difficult," says Rosemary Abowd, an analyst with market watcher Pacific Media Associates.

Compared to Syntax-Brillian’s projected net profit margins of 10% at years end, on 20% gross margins, and given Olevia’s superior quality, faster growing brand name recognition, more competitive pricing, and Consumer Best Buy Rating, should Olevia and Vizio ever square off, and given Vizio’s more costly supply chain, and razor thin margins, leaving little if any flexibility for Vizio, I wonder how many of those projected 3 million TV sets might not wind up in Olevia’s revenue stream?

In regards to margin development (4th Q 2006): “At Consumer Electronics for Royal Philips Electronics NV (NYSE:PHG) Philips already said that operating margin before interest and taxes, or EBIT margin, at its Consumer Electronics unit is expected to come in "slightly shy" of the previous guidance of 4% to 4.5%.” It would appear again that Syntax Brillian margin guidance is considerably higher in at least this limited snap shot.

On Dec o5, 2006 Philips repeats its earlier stated guidance that the company expects the operating [EBIT] margin in Consumer Electronics in 2006 to be slightly shy of 4%. “After 8 consecutive quarters of profitability, I believe we’ve shown our asset-light business model is the right strategy for succeeding in the highly-competitive consumer electronics market,” Rudy Provoost, CEO of Philips Consumer Electronics, said.

My third comparable, amusingly comes from our very own helpful bears in a November 2006 article.

“(BRLC) Improved overall gross margins to 18.13%. I found this to be of particular interest. At a time when margins on LCD products are in rapid decline, they were able to improve them to over 18%. Compare this to Sharp, a leading maker of LCD’s whose margins are at 5.5% according to a recent Morgan Stanley report. How are the margins so high?”

Amusing to find the Bears taking a short position and “knowing” that BRLC’s margins would follow Tier 1 conglomerates, and then to imagine them there, scratching their heads and asking themselves why BRLC margins are so high? For the same Bears to be so chagrined at the discovery that BRLC’s margins were in fact so high. Then ask why? In an almost pleading manner as they slip in to a near paranoid assertion that BRLC must be “cheating” adds to the amusement as all they really needed to do, was to take a look at why Sharp (OTCPK:SHCAY) has such low margins. If they had done that, there would be no reason for me to steal James Carville’s line “It’s The Overhead, Stupid”

IF BRLC had 14% overhead versus the lean and slim 6.5%, 2nd quarter overhead cost would have been 34 million versus 15.7 million, placing BRLC margins on par with Tier 1 conglomerates. Bears either have not come to the conclusion that OLEVIA is not yet a Tier 1 player, or missed out on some very standard accounting practices. Perhaps having been absent from those classes (Bears do tend to hibernate) the Bears lack of understanding prompted the cry in a paraphrase “BRLC is carrying on accounting shenanigans.” No, dear bears, once again in James Carville’s phrase “It’s The Overhead, Stupid”

Compared to the aforementioned margins, BRLC’s margins not only appear three times as high! But three times as high for obvious and significant cost savings, unlike the conglomerates, you will not find private Lear jets, multi million dollar salaries among other excessive packages in BRLC’s slim, no nonsense overhead.

But it is not all doom and gloom for the Bears; they can take heart that if retailers such as Target, and Circuit City are caught with a glut of dust carrying brands of our favorite conglomerates, we will see clearance sales. Sadly once again wrongly painting BRLC in broad brush they will only later be disappointed to see that the retailers “top selling” products such as Olevia receiving preferential treatment.

The Bears can also take heart that if the same favorite conglomerates get caught with a glut of supplies that tomorrow are on sale cheaper these giants might shave another .025% from their margin, and later be disappointed to find BRLC’s unique “Just in Time” manufacturing process avoiding yet again the downfalls restricted to the giants. If one day there is a reduction in margins across the boards that effect all manufactures alike, and given the already “low” margins of the conglomerates, just what % are they wishing for? As you can see, there is not much left there to play with and if their wish ever came to more than wishful thinking, this would most likely eliminate certain companies such as those with “low” to “razor thin” margins?

Are the Bears predicting the demise of the giants such as Sony and Sharp, just as IBM was squeezed out of the PC field they once dominated by a little guy named Michael Dell? If so, they certainly placed the wrong bet, shorting one of the sectors Healthiest Margins, lowest overheads, one of the leanest and most efficient supply chains and one of the very “few” LCD manufactures that could not only withstand such margin squeezes, but profit from it immensely.

In the mean time, it appears the Bears will not get much help from these guys. Dow Jones Newswire's Roger Cheng has written:

“By 2008, the number of televisions with liquid crystal displays sold will equal unit sales of traditional tube TVs, and will take a solid leadership position by 2010, according to Corning Inc. (NYSE:GLW) Chief Operating Officer Peter Volanakis.”


“Chief Executive Wendell Weeks said last year's price decline was an overreaction to a perceived glut in supply”


“Corning expects average prices to fall 1% to 2% in the first quarter. The company also expects volume to be down 10% to 15% sequentially”


“LCD TVs should have a penetration rate of 45%, compared with 46% for tube TVs. Plasma TVs have a rate of 8% in 2008. Two years after, LCD will have a rate of 61%, compared with the tube rate of 30%”


“Corning Sees 30% Compound Annual LCD Glass Demand Growth”

In regards to GLW affecting this price this stability, an analyst from SBHS wrote:

“GLW recently announced a strategy of pursuing glass pricing stability. The key question is whether the company can successfully execute. Digging deeper into the supply-demand dynamics, we are confident that GLW will be able to do so.”

The Bulls can take heart that the “Global Market Place” continues be penetrated by BRLC:

“Syntax-Brillian will be tapped in the second half of 2007 to materialize these plans. Kolin shipped a total of 600,000 LCD TVs in 2006 and the company expects to double shipments to 1.2 million units in 2007. The two companies, Kolin and Syntax-Brillian, plan to penetrate the European market with the 32″ and 42″ LCD TVs through Vivitar, a local brand acquired by Syntax-Brillian. For its up-coming 65″ LCD TV, panels will be sourced from Sharp, which makes Kolin the first Taiwanese LCD TV manufacturer to acquire 65″ LCD panels from Sharp. Source: CENS."

Brean Murray's report "Misguided Perceptions" summed it up rather well. But stubborn Bears will continue to wish that the conglomerates suffering from their own excessive self inflicted out of control overhead “unique and excessive SG&A cost” tied only to the conglomerates will one day magically appear in BRLC’s house. Meanwhile, the Bears that shorted Toyota Motor Corp. (NYSE:TM) two years ago, waiting for the “unique and excessive union salaries and health care cost” tied only to the US Auto manufactures to magically appear at Toyotas house have lost 57 points in that same two year time frame.

In summary, while it is true that “many” in the LCD sector have “thin margins” with Vizio’s "razor thin" margins, Philips “slightly shy” of 4% and Sharps 5.5% readers are free to conclude BRLC’s current 15-17% guidance as they wish within the LCD sector, terms that come to my mind are "above average", "healthy", "robust", "fat", and "overweight". The choice is yours...........

Should Syntax-Brillian hit the 20% guided margin in future quarters, the term “bloated margins” would certainly come to my mind.

Disclosure: Author is long BRLC.

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