Arohan’s investing life

Syntax-Brillian (BRLC) hosted a conference call today to clarify its changes in the business model with respect to China and provide guidance on business performance

Highlights:

- Revenues for FY08 under the old business model would be between 1.1 to 1.3 B. The street was expecting about 877 million
- In the new business model for China, the revenues were guided to be between 650-685 million for FY08 EXCLUDING China
- Revenues for current quarter estimated to be between 155 to 175 million under the new model compared to the estimate of 303 million. The estimate has not been corrected to the change in business model for China

It is clear that if the guidance is adjusted for the change in business model and if an apples to apples comparison is made, Syntax-Brillian is actually guiding HIGHER

The Business Model Change

Syntax-Brillian is moving to a royalty based model in China from its earlier direct sales model. The direct sales model created a cash flow problem for the company as its accounts receivables were regularly strung out for 120 days or more. With the new model, BRLC’s exclusive distributor will manufacture the TVs directly in China with Syntax-Brillian’s specs under the Olevia brand and will pay Syntax-Brillian royalties. This helps Syntax-Brillian in many ways:

a. It limits the A/R exposure from 100% of the sales to just the amount of the royalties. All royalties go substantially to the bottomline
b. It frees up the working capital (and the associated financing costs), which can be significant as China generally represented 50% of Syntax-Brillian’s sales in the past
c. Associated risks on payables, capital expenses, etc are transferred to the licensed manufacturer, and,
d. It allows Syntax-Brillian to renew its focus on rest of the world including North America

Additionally, since the units sold in China are produced in China, if China were to re-value its currency, this model would limit Syntax-Brillian’s exposure to the currency risk

All in all, this is an extremely positive step for the company

Here is the original Press Release issued by the company

Media reaction

It is interesting and disappointing to watch how the financial media is reporting this guidance. Here are a few examples

a. Syntax-Brillian Dims Outlook
b. Syntax-Brillian Outlook Trimmed On New Business Model For China Market; Stock Slides
c. Syntax-Brillian sees Q2 revenues below street| Stock hit

There are a countless positives that can be taken from the PR and the conference call, but a vast majority of the media articles have commented on the lowering of the projected revenue. And while they mention the change in the business model, none of these stories come out and clearly state that the new guidance on revenues is an apples to oranges comparison. While members of the media are not professional analysts, they need to do justice to their calling by presenting the story fairly. I have seen this with other stocks, media outlook is generally negative as the stock is bottoming and generally gung-ho when the stock approaches the stratosphere. Madness of the crowds I believe. Could it be they are advocating the agenda of the large short interest in this stock? Naaah, that couldn’t possibly happen, could it

While we can rant about this bias, it is wiser to take advantage of the inefficiencies this creates in the market place.

If you think you are right, ignore the market. It is just noise

Editor’s note (11/29/2007):
It is the day after the conference call and as hoped for, atleast one of the media outlets have taken a deeper look into the business model change and revised their opinion. See the latest article from Motely Fool’s Value Investing column

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