Syntax-Brillian: Guidance Slashed, CFO Resigns and Stock Tanks

Syntax-Brillian (BRLC) reported another quarter which severely disappointed investors. The stock fell to 4.65 after hours, a staggering 25% drop from $6.13. Investors certainly didn't feel the same way as Vincent F. Sollitto, Jr., Chairman and CEO of Syntax-Brillian, who said, "We are extremely pleased with the company's performance for fiscal 2007."

The company missed analysts by a penny and slashed forward guidance. Analysts were expecting revenue over $250 million next quarter while the company predicts only $170 million to $180 million. It is very disappointing that revenue for the next quarter will be lower then the current quarter. In addition, the company slashed calendar 2007 revenue guidance down from $1.1 to $1.3 billion to $1.0 billion to $1.1 billion. The company only raised calendar 2007 guidance to $1.1 to $1.3 billion in July. Raising guidance only to reduce it 2 months later certainly isn't a way to please shareholders. The tightening of credit in Asia is also hampering Syntax-Brillian and a reason for the low revenue estimate for next quarter. Syntax-Brillian's believes that the combined credit availability of their supply chain partners has been reduced by over $200 million.

On top of all the other negative news, the company also announced at the same time that thier CFO, Wayne Pratt, decided to resign and pursue opportunities with a start-up company. Syntax-Brillian sure has a knack for bundling other bad news with disappoint earnings results. Just last quarter after missing analyst earnings estimates by 25%, the company also announced a secondary offering of 30 million shares at the same time.

Another concern for investors was that the company made an error of treating dividends and accretion of discount on redeemable, convertible preferred stock as a deductible in Q3 of 2007. In reality, it should have been treated as a tax expense of $5.9 million for Q3. The company had to recognize the expense for Q4. It is interesting that if the expense was accurately recognized in Q3, then net income would have been even lower and would missed analyst estimates by an even greater amount. That would probably have driven the stock even lower as well as the price the company could have received for their secondary.

Cash and accounts receivables still seem to be a major concern with Syntax-Brillian. As of June 30, 2007, Syntax-Brillian only had $28.7 million in cash. That is only 1 month after conducting the secondary offering of $128 million. The account receivables position is still also another distress. As of June 30, accounts receivables totaled $210 million which is only a $13 million decrease from the previous quarter. As I have stated previous times, the 120 day payment terms in China is causing cash flow problems for Syntax-Brillian. Even if margins are higher in China, Syntax-Brillian needs the faster payments in the US given the fact they are cashed strapped. Given their current balance sheet, it appears that another secondary offering later this year or early next year might be necessary if the company wants to deliver on their promised growth even if it already has been reduced.

It appears that the companies realized their mistake and is reducing their focus in Asia and are now concentrating in the US. If the company had focused entirely in the US, they could have enjoyed the enormous success that Vizio had accomplished. However, now that Vizio is the best selling LCD TV maker in North America, Syntax-Brillian's Olevia brand has a lot of catching up to do. Also, it is certainly safe to say that the major Tier 1 LCD TV makers such as Sharp, Samsung and Sony wouldn't sit idly while watching Vizio steal their market share in the US. They'll certainly either slash prices or produce new lower costing models to compete with Vizio and also Olevia.

This is the third quarter in a row that Syntax-Brillian has disappointed investors and resulted in a significant drop in the stock price. Many Syntax-Brillian bulls still seem to be confused as to why the stock is so heavily shorted given the company's growth rate. Some simple answers may be because the company constantly needs financing for their growth, the cash flow statement of the company always appears somewhat negative, management seems to constantly make slight mishaps, or because their always seems to be some bad news bundled with a disappointing conference call. The particular or exact reason isn't significant since it appears that shorts have been right given the stock suffers sharp declines very frequently the last 9 months and is trading less then half of its 52 week high set back in January. Syntax-Brillian might be an excellent stock to trade but by no means does it appear to a great investment to me.

Disclosure: Author has a short position in BRLC