Steve Smith

Syntax-Brillian: A Classic Bottom

Your analysis, while detailed, falls down in several respects.

In November, Syntax-Brillian provided estimates for FY2008 (ending June 30, 2008) including Vivitar global sales and excluding sales made through the royalty program of $650M-$685M. Based upon FY2008 Q1 revenue numbers ($150M) and estimated revenues for the current quarter ($155-$165), this means that Syntax-Brillian is estimating revenues for the 1st half of CY2008 to be $345M-$370M. This means that your estimates for the 2nd half CY2008 is that BRLC will have $500M in revenues. Although this number isn't unreachable, it is very optimistic and not based upon guidance provided by Syntax-Brillian.

Your estimates for SG&A expenses are VERY optimistic. For the last 4 quarters, Syntax-Brillian's SG&A expenses were $66M. By comparison, you are estimating SG&A costs for the next 4 quarters to be $42.5M. Although Syntax-Brillian will realize some reduction in SG&A expenses from the elimination of the LCoS unit and China sales, these reductions will not be as great as you apparently believe. SCHOT handled all the sales/marketing work for the China sales. As such, Syntax-Brillian will gain very little, in terms of SG&A, based upon the new royalty model. Regarding LCoS, one could expect perhaps $10M/year savings for that unit, which added to, at best, a $5M/year savings for China, gets a savings of $15M/year. However, the $66M in SG&A expenses for Syntax-Brillian's last 4 quarters doesn't recognize that BRLC was at a $76M/year pace the last 2 quarters. If Syntax-Brillian is to maintain the Olevia brand and if U.S. sales are to continue to increase, they will need to continue their marketing campaign in the U.S., which further increase SG&A numbers. I think you are grossly unrealistic to believe SG&A expenses are going to drop to less $11M/quarter. If Syntax-Brillian achieves the revenue growth you are expecting for CY2008, the SG&A numbers are likely to be double what you anticipate.

Regarding R&D, your numbers are pegging R&D at 0.5% of revenues. However, in November, Syntax-Brillian announced the goal of getting R&D to 3.0% of revenues. As such, your estimated R&D expenses are, again, unrealistic. Put another way, BRLC's increased R&D expenditures all but gobbles up the royalty stream from China.

Working with SG&A numbers of $85M and a R&D budget of 2%, while using your optimistic revenue and margin numbers, your EPS number goes from $0.48/share to $0.16/share. Knock revenues and margins down just a little bit, and BRLC will struggle to break even in CY2008.

BTW: You need to explain your "Non-cash (added back)" a bit more clearly.

Your statement that "BRLC's new model eliminates Chinese revenue and its 6 1/2% net margins, and replaces those profits with a 3% royalty." is EXTREMELY misleading and is comparing apples to oranges. Assuming a $100M/quarter of revenues from China, the royalty model drops $3M to taxable income. By comparison, the old model conservatively drops $16M ($20M gross profit - $2M expenses - $2M interest) to taxable income. This is one of the biggest reasons why Wall Street is down on the company. Assuming $500M/year in China revenues, the new royalty model drops $15M to taxable income whereas the old model would have conservatively dropped $80M to taxable income.

Regarding the Chinese royalty model, what I find interesting is that many current longs expect a company with little history (i.e., "Olevia Far East), which will be the distributor in China and from whom Syntax-Brillian will receive the royalty payments, to be able to finance all the Chinese growth without any problems.

Another of the other reasons that Wall Street is down on Syntax-Brillian, is the very low EPS estimates going forward. Current consensus analyst estimates for FY2009 are $0.26/share. 30 days ago that number was $0.51/share. 60 days ago, that number was $0.92/share. 90 days ago, that number was $1.26/share.

There is a good reason why Syntax-Brillian's stock price is down at the levels where it is at. Just 4 months ago, management presented a business model that many expected (based upon this model and management's revenues estimates) to produce an EPS of $1/share for FY2008. After the change to the royalty model, the estimated number for FY2008 now sits at $-0.09/share.