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Resonant 2Q18 results +2

18:01 09-Aug-18


The Resonant conference call has just concluded.  It is up to 10 customers now and is being more selective about taking on new ones.  Hiring appropriate new design talent is getting to be difficult, but those employees are much more productive than the competition, completing a double digit number of designs per year.  As a result of this and qualification times, revenue is actually progressing a bit slower than anticipated, but is still ramping to seven digits per quarter by year end.

The most important technological revelation from the call was mention of the development of a novel BAW filter in 3-5GHz (5G?) range, which is expected to enter production in late 2019.  The filter is expected to be better than anything seen to date.  This move into BAW filters comes earlier than expected, and Resonant is developing computational electromagnetic modeling software to support the effort.  Generic software of this sort has high per seat licensing costs, and Resonant's is specific to filter design.  Importantly, the company is filing patents and developing test wafers as part of the process.

Operationally, royalty rates doubled QoQ to an average of 9.2%.  Part of this is the phase-out of royalties on one of the early, low-margin filters that was shipping, and that had an impact on revenues for a the quarter.  The newer designs will take time to show up in financial results due to the process, which looks like this:
  1. 9-36 months from signed contract to customer qualification
  2. 3-6 months for fab qualification
  3. 3-6 months for OEM qualification
Once that is complete, though, Resonant typically collects royalties on parts for about two and a half years and some of these royalty rates have already ranged up to 20%.  Since most of the business is in China, there is some concern about collection and intellectual property, though I continue to think that, as a design house, Resonant has less risk than most on the latter front.  Management also explicitly stated that there is minimal if any impact from trade relations, and even cited discussions indicating that upcoming developments could shift business towards Resonant!  Given that it is disrupting the normal fabrication model, that is quite believable, so long as customer and revenue diversity is maintained.  Anyone who doesn't understand what I'm talking about here should review the AMSC section of the website.

One final footnote is that Resonant's CFO is retiring for family reasons.  The search for a replacement should be concluded this quarter, as a number of highly qualified candidates have already been identified.  Just in case more bad press starts circulating, it seemed pretty clear to me that this really is purely personal, and is not indicative of any business problems.

In fact, I'll conclude by saying that I think Resonant is near a tipping point as it should become clear to incumbents that it is beginning to successfully disrupt the industry.  As such, realization of its potential is unlikely to wait on confirmation in the financial results.  There is still risk, but it is completely plausible that relations between America and China could both accelerate and complicate the realization of the company's potential.  With China leading the way towards 5G, I think buying the post-earnings dip(s) makes a lot of sense for those willing to live with the risk and volatility.

On 08/09/2018 04:35 PM, Esekla wrote:

The EPS # below has been corrected.

On 08/09/2018 04:29 PM, Esekla wrote:

Resonant has reported on its second quarter:

  • a loss of 22 cents per share misses by 4 cents
  • on $124K of revenue, which misses by $286M

I'm guessing that the big top line miss has to be the accounting changes related to revenue recognition that I touched on in the last report.  Regardless, some of the technological progress is impressive, particularly qualifying two devices for pre-production and sampling with a single turn.  Related to this may be the cloud deployment of a first of its kind software module to help one of Resonant's largest Asian customers with the fabrication of complex filters, thereby significantly improving design and fabrication times.  I will be listening to see if this is expected to add to the revenue stream going forward. 

Management now estimates that end user revenue for its customers has grown by $25M to $475M and it affirms its outlook to achieve 7-digit revenue by year end.  Since royalty revenue doubled from last quarter and Resonant now has more than 60 contracted handset sockets, I expect that to continue to ramp steeply in 2019.  The conference call is about to begin, more afterward.