Syntax Brillian Longs Are Feeling the Pain

Syntax-Brillian Corp. (BRLC) just announced a rather disappointing quarter after being touted as a "Short Squeeze Long Play of the Year". Revenue came in at $162.9 million while analysts were expecting $167 million. The company themselves gave guidance $160 million to $170 million for this quarter. Revenue even came in at the low end of their own expectations. Earnings also missed analysts’ expectations. The company earned 9 cents per share, 3 cents less then analysts expected.

On top of the disappointing earnings, the company also decided to announce an underwritten public offering for $150 million worth of shares. It also happens that many of the co-managers of the offering - Robert W. Baird & Co., Canaccord Adams, and Brean Murray - currently have analysts rating Syntax-Brillian as a strong buy, with target prices over $15. Could this be simply a coincidence? The $150 million offering is anticipated to be completed by June 30, 2007. Considering the shares are sold at a very generous average price of $7.50, that would result in dilution of 20 millions shares which is more then enough for the 15 million short shares to be covered which many were touting as the reason for a massive short squeeze.

It is very apparent that the company needs cash to finance its operations. In less then 2 months, the company already completed a $15.5 million private stock sale for 2.1 million shares, a $20 million loan from CIT Commercial Services and now they need a $150 million underwritten public offering. Syntax-Brillian also need cash to pay its current debts; one of the listed reasons of the $150 million offering is to “payment of a portion of outstanding indebtedness.”

Growth comes at price for shareholders of Syntax-Brillian - dilution. Syntax-Brillian Corp. has been on the Nasdaq 'Threshold' Securities list for 65 consecutive trading days now and has been heavy shorted for a reason. The shorts are well aware of the company’s cash position and their inevitable need for dilution. As long as constant dilution is necessary for the company to continue their operations and to finance growth, a short squeeze is highly unlikely.

The only positive for the conference call is the forward guidance of Q4 revenue at $190 to $210 million compared with the consensus estimate of $182.18. This, however, was clearly overshadowed by the news of the $150 million offering. The stock traded down as much as 16% after hours following the news. Maybe if the company decided to wait to announce the offering the stock wouldn’t have fallen as hard or might have even gone up.

For now it looks like it is the longs that are feeling the pain rather then the shorts. This is the second quarter that the stock has fallen hard after a run up going into earnings.

Disclosure: Author has a short position in BRLC

BRLC 1-yr chart

Comments

[RC Martin:]

Hey Sammy,

Your next original thought to be your first? Why does your entry read like a collection of materials posted by Sandy Sanmina from the yahoo bulletin boards?

You're a fraud in my opinion. Yes BRLC is a joke and its an over touted house of cards but write your own materials next time cause what you post reads like my materials on Yahoo. Thanks for the flattering imitation.

2007 May 14 10:44 PM