Cash Flow Issues Force Syntax-Brillian to Discontinue LCoS Product Line

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Syntax-Brillian Corporation (BRLC) announced yesterday that the company has decided to shut down or sell its liquid crystal on silicon (LCoS) product line by the end of 2007. The decision is expected to result in a one-time expense of up to $40 million. The company's net income for the year ended June 2007 was only $30 million.

Although LCoS has been losing money for Syntax-Brillian, it actually offers an excellent opportunity for growth alongside LCD in the future. The company's CEO, James Li, acknowledged in their press release that, "while the LCoS technology shows considerable longer-term promise, we believe we are at a strategic inflection point in the growth of the worldwide market for LCD televisions."

Back in April of 2006, Syntax-Brillian signed a joint venture with China South Industries Group Corporation, a state-owned enterprise under the administration of China's Central Government, to form Sino-Brillian Display Technology Corporation to assemble and sell LCoS based light engines. When the ventured was formed, Nie Xiao Fu, vice chairman of China South, said, "There are 340 million households in China who want HDTV. With this joint venture China South will be able to provide the single best HDTV technology, LCoS, at an affordable price to many of these homes."

The vision of selling affordable LCoS HDTVs to 340 million households seem to be over for Syntax-Brillian now. The President of China, Hu JinTao, actually visited Sino-Brillian in April of 2007 and commented on the quality of the technology. Many Chinese officials were talking about making LCoS an official technology of China. With the 2008 Olympics in Beijing coming up, it would have presented as an excellent opportunity for the exposure of LCoS in China.

LCoS also had potential in the near-eye wearable headsets. It currently produces the chips used in Headplay. Just a little more then a year ago, Vincent Sollitto, current chairman and former CEO of Syntax-Brillian, was talking about all the great opportunities he sees in the area, as seen in this video. In addition, Sony has enjoyed great success with their own proprietary variation of LCoS, XSRD. The technology offers excellent image quality and large screen sizes at a very affordable price.

However, with tightening of credit in Asia and the cash flow issues, Syntax-Brillian decided to discontinue to LCoS and focus on LCD instead. Even with its potential, Syntax-Brillian cannot afford to continue to develop the LCoS line given the company has generated negative cash flows from operations of $194 million the last four quarters and is also still looking for additional financing for its LCD line.

It is apparent that James Li does not share the same vision for LCoS as Vincent Sollitto. After all, before the merger of Syntax Group and Brillian Corp., James Li was CEO of Syntax, which only produced LCD TVs. Sollito on the other hadn, was running Brillian, which only produced LCoS. Now that James Li is in control, he decided to scrap LCoS and focus solely on LCD televisions. While discontinuing LCoS may increase profitability in the short term, the company might also sacrifice an excellent opportunity for growth in the long term.

Only time well time how well Li's decision will fare. Meanwhile, it appears the company will also face some legal battles ahead with Funai, the 10th largest LCD TV maker in the world. Funai is suing Syntax-Brillian for patent infringement and requested the International Trade Commission ban Syntax-Brillian's Olevia televisions in the US.

Disclosure: Author has a short position in BRLC