Joseph Terry

http://finance.groups.yahoo.com/group/olevia/
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11 Comments

    • Sat Feb 23rd 10:15 AM | Rating: 0 0
      Commented on:
      Syntax-Brillian Appears Teetering on the Brink of Disaster
      Wow ... the master of the obvious.

      As if any investor couldn't figure that out after seeing yesterday's stock action.

      How about adding a little analysis to your "the sky is falling!!!" routine?
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    • Fri Dec 21st 16:02 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: A Classic Bottom
      Yes ... that is the general perception. However, this point is moot as to the overall picture regarding BRLC.

      Personally, I think your revenue numbers and margin numbers are optimistic, but I'm not going to quibble over them.

      However, I think your SG&A and R&D numbers are way too low ... probably 50% too low, which makes a huge difference in your EPS numbers.

      Also, I disagree with how you characterized the difference between the new model and the old model. In the past, the Chinese revenues accounted for more than half of gross profits and required very little in terms of SG&A expenses. Under the new model, however, monies being received from China will barely cover the proposed R&D expenses. To me, that is HUGE and an investor need only look at what the stock price has done since this new royalty model was announced in early November to see what the market thinks of it.
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    • Fri Dec 21st 15:42 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: A Classic Bottom
      "I was always trained that working capital was current assets less current liabilities." This was the point I was trying to make without getting into the nitty-gritty. I'll concede the point that I should have used current liability and current assets to be clearer. The point still remains that BRLC is vastly underutilizing its working capital. As of the 09-30-07 quarter, Syntax-Brillian has $498M in current assets and $222M in current liabilities or potential working capital of $376M. Again, I'll repeat my point is that BRLC isn't generating nowhere the amount of revenues that could be generated based upon BRLC's working capital.

      "You stated, 'Negative margins results from sales (i.e., revenues) being greater than costs of sales (i.e., COGS).' HUH? Once again I missed something or maybe I skipped class the day that concept was taught. If revenues were larger than the cost of goods sold wouldn't you be measuring GROSS profits?"

      You are again correct, I should have written COGS being greater than sales. This is what happens when I don't take the time to review what I write very carefully.

      However, the end result is still the same. Actually, I did some double checking on my numbers (page 14 of latest 10-Q) and it appears that the COGS for Q1 was $5.0M and not $4.0M, as I initially thought. This means that negative gross profit for LCOS was $4.3M (or $17.2M annually). This would account for all of the savings attributable to the divesting of the LCoS division. Page 14 of the 10-Q includes a little discussion about what goes into "Selling, Distribution, and Marketing Expenses" and "General and Administrative Expenses." Only expenses related to LCD HDTVs and Vivitar were discussed. As such, based upon the information that Syntax-Brillian has provided, it does not look like the new Chinese royalty model or the divesting of LCoS will materially help BRLC SG&A costs, which were $21.1M last quarter, which is considerably higher than your estimated $10.6M/quarter for CY2008.

      For someone valuing BRLC, particularly since it is working with low margins, having a good handle on SG&A expenses is critical. If you underestimate SG&A expenses (which I believe you are to a very large degree), you will overvalue the company.

      As far as the "cosmetic" difference that could effect valuation, it is quite simple. Shifting an expense that is best counted as COGS to SG&A will increase margins. The general belief is that COGS (as a percentage of revenue) will likely remain steady as volume increases. However, there is a greater chance that SG&A expenses (as a percentage of revenues) will decrease at a greater rate than COGS because SG&A expenses are considered more fixed whereas COGS are considered variable. You have to note that these statements are generalizations and not absolutes. Anyway, the general expectation is that with higher margins, a particular company can become more profitable with increased revenues than a similarly situated company with lower margins.

      This is why expenses are broken up between COGS and other expenses (such as SG&A and R&D). In the end, all these expenses are equally subtracted from revenues to obtain net profits, which is the most important number. However, being able to distinguish a COGS expenses from a more fixed expenses can help someone better analyze the operations of the company.
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    • Fri Dec 21st 14:13 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: A Classic Bottom
      Equity, as you know, is simply Assets-Liabilities. For a company with very little fixed assets, its relevance is that it gives some indication as how much working capital (beyond a line of credit) is available based upon the value of the company.

      You missed my point about growth getting squeezed. We all know that it is harder to grow the same percentage as the base line number gets bigger and bigger. My point was that BRLC isn't showing the type of growth that the working capital available to BRLC makes possible -- not by a long shot.

      Negative margins results from sales (i.e., revenues) being greater than costs of sales (i.e., COGS). To be clear, COGS includes both external costs (e.g., the cost of a panel) and internal costs (i.e., the salaries of people making the product). Last quarter there were $0.7M in LCoS revenues, the cost of those revenues were $4.0M, which resulted in $-3.3M in gross profit. The question over whether to characterize a particular expense as a cost of sale (which affects both margins and gross profit or as an SG&A expense (which doesn't affect margins and gross profit) is constantly being asked by accountants in every company. In the end, it doesn't effect net margins, but it is a cosmetic difference that could change how a company is evaluated.

      Over 4 quarters, the resulting savings from divesting the LCoS unit, based upon better margins, is 4 x $3.3M or $13.2M. As such, it is possible that most of the expenses that were associated with LCoS were considered part of COGS instead of SG&A. Therefore, the savings to SG&A, based upon the sale of the LCoS unit, could be minimal.
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    • Fri Dec 21st 13:15 PM | Rating: 0 0
      Commented on:
      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.
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    • Fri Dec 21st 10:59 AM | Rating: 0 0
      Commented on:
      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.
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    • Fri Dec 7th 23:10 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: Time to Hit the Snooze Button
      If Sony's SG&A expenses are approximately 25% ... thus Sony (for all their products, on average) needs margins of 25% to cover SG&A. Of course, Sony is a company that has lots of different products and business units so not all products needs to make 25%, but what it does indicate is that the average Sony product needs to make at least 25% to cover SG&A expenses.

      As for SG&A expenses ... I asked what was going to be saved on SG&A, and the answer I got was about $5-6M ... as I have noted in some of my posts, I calculated SG&A of $20M for Q1/Q2 and $15M for Q3/Q4. I kept Q2 as a high number because not everything had been finalized and Q2 is the biggest quarter in terms of sales so that marketing/advertising is probably higher than average.

      "Also for a little perspective, 1% of revenues for BRLC amounts to 7 cents eps" .... wrong. You forgot both taxes and you margins ... 1% of revenue amounts to $0.0065 (i.e., less than 1 cent) of EPS. Moreover, you don't know how much extra it takes in SG&A expenses to get that extra 1% of revenues or how that it will effect margins.

      FYI, I used managements top-end guidance with my estimates as to revenues. Regardless, even if you add $0.10/share

      As for point 2 ... people are saying that the lower end of BRLC's stock price is the net tangible value ... my point is that don't be fooled into thinking that BRLC's breakup value is higher than what it actually is.
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    • Fri Dec 7th 15:51 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: Time to Hit the Snooze Button
      1. R&D is currently less than 1% of revenues ... during the last CC, James said that R&D would be headed to 3% of revenues ... which means that whatever savings are realized from the divesting of LCOS will be lost because of an increased R&D budget.

      2. You apparently don't understand "net tangible value" and the underlying assumptions. Net tangible value is the value of a company !!not!! as a going concern. Thus, you discount any "intangible value." Your valuing of the molds assumes the company will continue to product product with the molds ... which means you aren't valuing the company for net tangible value ... instead you are valuing the company as a going concern. Unless somebody is going to be making Olevia TVs, then the molds are essentially worthless.

      3. I have no idea where you got the crazy idea that Tier-1s have lower margins than BRLC. For example, BRLC buys panels (which are the vast majority of the cost of making a LCD TV) from LG.philips. A 32" LG TV (who presumably also buys panels from LG.philips) sells for $850 at Circuity city, whereas a 32" Olevia TV sells for $550. Are you telling me that Syntax-Brillian has higher margins than LG on this product????

      Tier 1 manufacturer, by virtual of being a Tier-1 manufacturer, can demand higher prices/margins. To say that BRLC has higher margins than these companies is to commit a grave error in your analysis.

      If you looking at the percentage of SG&A costs, as a percentage of Revenue, you'll see that Sony has higher much higher SG&A costs than BRLC's margins. Thus, for Sony to even break even, they have to have higher margins thatn BRLC.
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    • Fri Dec 7th 15:39 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: Time to Hit the Snooze Button
      "Royalty income should be getting added directly to bottom line." Based upon this comment alone ... it is readily apparent that you don't understand some basic financial concepts. Royalty income is simply revenues with 100% margins. More important, royalty income is taxable, which means is doesn't get added directly to the bottom line.

      My suggestion to you is to stick with index funds .... if you cannot figure out an income statement, then you should be staying away from individual stocks.
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    • Thu Dec 6th 16:38 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: Time to Hit the Snooze Button
      Net tangible assets, as it is currently calculated, includes $123M in tooling deposits ... this isn't cash that BRLC can retrieve at any time ... this money has already been invested in tooling. Basically, one way to look at it is that tooling deposits are pre-paid cost of goods sold.

      Anyway, hypothetically, if BRLC was to be liquidated (another way of describing net tangible assets is liquidation value) these tooling deposits would have no real-word value. As such, I believe to consider these tooling deposits as part of the net tangible value is a mistake.

      As such, I believe the true net tangible value is nearly half of what many people think it is.
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    • Thu Dec 6th 16:30 PM | Rating: 0 0
      Commented on:
      Syntax-Brillian: Time to Hit the Snooze Button
      Most of the LCOS savings comes from the gross margins .... last quarter they had -3.3M in gross earnings from LCOS ... as such, not much will come from SG&A. Also, SCHOT already did all the marketing and distribution work for BRLC ... thus, not much savings in SG&A costs there .... when it is all done, you could expect around $5M savings/quarter ... and my SG&A numbers reflect $20M for Q1/Q2 and $15M for Q3/Q4.

      My numbers reflect BRLC's most recent revenue guidance for FY2008 ... if you think that the revenue numbers are light, take it up with them.

      As for China, you don't think that BRLC isn't aware of the China Olympics and have already adjusted their guidance accordingly?

      Capacity is not a problem (period) ... I have this on very high authority .... getting sufficient panels is the problem ... until the panel crouch ends, BRLC's growth will be constrained.

      Remember, BRLC isn't the only one buying panels .... however, BRLC is probably one of the most cash-constrained companies buying panels .... you think that some of the tier-1s would be willing to pay a higher price to prevent BRLC from getting a sufficient supply to prevent BRLC's disruptive pricing? Personally, I have no idea whether this is possible or not ... however, it is a risk factor.

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