Steve Smith

Syntax-Brillian: A Classic Bottom

James Li's comments notwithstanding, he wasn't clear whether those operating expenses were savings due to no longer having negative margins due to LCOS and/or savings due to SG&A expenses. My read is that the $16M annual savings is from both.

Regarding the old model versus the new model you are both comparing apples to oranges and is based upon bad assumptions. Net margins is AFTER taxes. In case you don't realize this, the $15M in royalties (based upon $500M in revenues) would be taxed, which takes that $15M down to $9M. Also, your calculations assume that an equal share of the SG&A expenses is attributable to China sales as it is to US sales. This is just plain wrong. All of the sales/marketing for China was previous done by SCHOT. As such, those costs were already wrapped up into the gross margins that BRLC got from the China sales.

BRLC has to work much harder (and spend much more in SG&A) to sell in the US than in China. The margins from China are much better because the lack of rebate programs in China that are common in the US. This is why the China royalty deal is so bad for BRLC. BRLC loses the sales with the best margins but doesn't proportionately reduce SG&A expenses.

I don't disagree that the royalty plan will free up capital, yet BRLC's guidance for the 2H of FY2008 shows how much that doesn't help. BRLC did $368M in revenues in 2H of FY2007, yet they are only estimating $345M-$370M in revenues for 2H of FY2008. What is even more troublesome is that, in the last 12 months, BRLC was able to get a $250M financing deal as well as raise $190M in cash in four offerings (3 private and 1 public) and despite the availability of all these new funds they are only predicting about $180M/quarter for the next two quarters.

Just using the amount of working capital BRLC has been able to obtain in the last 12 months and assuming that BRLC is above to turn the working capital over just 1-time/quarter, BRLC should have capacity to have 1.7B in sales over a 12 month period (4x($250M+$190M)). The fact that Syntax-Brillian estimates (and even your estimates) are considerably lower than that number indicates, to me, that BRLC's growth is being squeezed.

At the end of CY2006, there was about $70M in shareholder equity. Since then, BRLC has had positive earnings and added $190M in cash from sales of stock. Combine all this with the $250M line of credit, and BRLC only thinks they can do about $180M/quarter over the next two quarters? There is something seriously wrong here, besides access to working capital, that is curtailing Syntax-Brillian's growth.