Little did I know. Little did I suspect.
On Tuesday, I penned a short article on the subject of who's who in the world of flat-screen TVs -- an industry that has interested me since I first covered the IPO of LCD panel maker LG.Philips
Waiter, may we have the point, please?
Yes. I'm getting to that. So as I was saying, on Tuesday, I wrote a few words on how a little no-name flat-panel TV maker, Vizio, had come out of nowhere to grab an industry-leading share in the U.S. market for LCD televisions -- and how it had dethroned erstwhile fastest-grower Syntax-Brillian
In writing about this, I stepped into a hornet's nest. No sooner had the article posted than the emails began to flow in. Apparently, I am a hater and a basher of Syntax-Brillian (S-B), out to "get" the stock for reasons unknown and unnamed.
Which could not be further from the truth
Fact of the matter is, I don't yet know a whole lot about S-B. Certainly not enough to hate it. But I am learning. And S-B helped me along yesterday, when management issued a press release describing its shipment, sales, and earnings expectations for the coming quarter and the rest of fiscal 2008. Reviewing the response among the mainstream press, I'd say that few people liked what they heard. Then the shares plummeted 8%, on a day when the rest of Wall Street was enjoying its strongest one-day percentage gain of the year.
For this drop, I blame the press release's less than lucid explanation of S-B's shift to a new, royalty-based business model for its Chinese TV sales, and perhaps investors' misunderstanding of how the new business model relates to the old in terms of profitability. Because the more I look at S-B's plan, the more I like it.
Sometimes, bringing a fresh pair of eyes to a company helps in seeing things more clearly. In hopes that such is the case today, here's my take on the new and improved S-B.
S-B's old business model consisted of building TVs and, in the U.S., selling them to Target
Under the new model, U.S. distribution remains the same, but Chinese sales are undergoing a complete revamp. Instead of selling to SCHOT for resale to retailers, S-B will move to a licensing model with its "China-based distributor" -- an oblique reference to, I presume, SCHOT. S-B will license the Olevia brand name to SCHOT, which will then buy its own components and manufacture, advertise, and sell its own TVs -- paying S-B royalties for the privilege.
According to Wednesday's press release, the current quarter should see 200,000 to 210,000 units sold in China under the new arrangement, yielding between $2.75 million and $3.25 million in royalties for S-B. That works out to a royalty of between $13.75 and $15.48 per unit. In addition to the Chinese sales, S-B expects to sell another 250,000 to 275,000 units in the U.S. and other non-China countries.
Reviewing the numbers, we can see that most media outlets focused on S-B's prediction that with nearly half of its global market now moving to a royalty-based business model, "sales" in the coming quarter will range between $155 million and $175 million -- lower than analysts' predicted $303 million. This, according to the media, is bad news. But the way I look at it, it's not bad news at all. Quite the opposite.
Put aside the U.S. sales for a moment, and consider the margins that S-B will be earning in China. According to S-B's most recent 10-Q filing, "Average selling prices [ASP] for LCD televisions decreased ... to $556 per unit for the quarter." Now take the midpoint on S-B's predicted per-unit royalty ($14.61), and divide it by this ASP. What you get is about a 2.6% per-unit royalty. Royalties, traditionally being a high-margin revenue stream, could eventually help boost the company's margins.
Meanwhile, having freed itself from the day-to-day oversight of Chinese sales, management will be able to focus on its U.S. strategy. And considering the inroads Vizio has been making here (remember Vizio? This was a song about Vizio), the U.S. seems to be where management's attention is most needed.
Estimates, schmeshtimates. What's important here is that S-B is focusing its attention where it's needed -- the U.S. -- while putting its China sales on a more profitable autopilot. That's good news for shareholders. Yesterday's sell-off was overdone.