RESN (RESN) 2017-06-22 Earnings Call Transcript

Ladies and gentleman. Greeting and welcome to the Resonant Virtual Roadshow webinar. At this time, all participants are in a listen-only-mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg Falesnik, Managing Director for MZ North America, Resonant Investment Relations Firm. Thank you. You may begin.

Thank you, Operator. At the market open today, Resonant issued a press release announcing its seventh customer engagement. This release is available on the Investor Relations section of the Company’s website at www.resonant.com. You can also find on the Company’s website, the presentation entitled Resonant Virtual Roadshow June 22, 2107, that will be referenced during this called for those of you that would like to follow along. Additionally, some of this information in the news release and on the conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, and anticipate, and similar variations, identify forward-looking statements but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance and the Company’s actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Resonant’s most recent Form 10-Q and 10-K and subsequent fillings with the SEC. These forward-looking statements speak only as of the date of this release and the Company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release. Resonant’s CEO, George Holmes, is your host. He will introduce the rest of the team and give a short presentation. With that, I’ll turn the call over to you George.

Thank you, Greg. Good afternoon to everyone joining today’s call. With me today is Jeff Killian, our Chief Financial Officer. I will be referencing a new presentation Greg has described earlier and I will encourage you to follow along with the webcast or by reviewing the presentation on our website. Since we have a mix of new and existing investors, I will take a few minutes to summarize our value proposition and the business model before getting into the substance of the update. We start our meetings as always with our Safe Harbor Statement. Please refer to this slide for details regarding forward-looking statements. The market opportunity is staggering. According to Navian, $7.5 billion worth of filters were sold last year, greater than 40 billion units and the shift to LTE is necessitating a major increase in both the number and complexity of filters. Meaning the total cost associated with the IOR front end of phone continues to rise. The problem is not just the cost but also the size of the IOR front end occupies. The lack of enduring bandwidth to create these complex filters and the time it requires to design, test and ultimately delivery them to the market and into the phone. These problems are especially challenges utilizing traditional industry tools that are still used by the majority of the vendors today. Our value proposition is disruptive on every front. We utilize a completely novel approach to allow filter designed to only meet specifications but to be incorporated into simpler and cheaper production formats. We also enable a whole new set of players to become relevant in an industry in a short period of time. That is now controlled by a small handful of players. Our revenue model is asset light and our royalty base where we drive a percent of revenues for every filter shipped based on our designs. We have shown how capable our team is and that our customers truly value the work that we are doing for them. Lastly, and likely the most important part of this note is that filter technology is the key requirement of the handset. We are not introducing new features or technologies into the handset but rather solutions that have the potential to improve performance and reduce costs without the additional of fundamentally new components. Let me take a few moments to recap the last few conference calls while reintegrating four major themes. Designs Cycles. Design Cycles, from the time we sign a licensing agreement until we expect to see early ramps for revenue are for ISN Ready; we expect to see the value of potential early revenue in nine months to 12 months. For ISN Pilot, the time is more likely to be 12 months to 18 months. We currently have greater than 15 ISN Ready designs under contract and greater than 10 ISN Pilot designs under contract. Royalty Rates. Royalty Rates for companies licensing their technology on a per unit royalty basis tend to receive royalties ranging from 1% to 20%, depending on the contributed value of their IP know how and volume. We believe that based on the value of our team, tools and technology, and the contributed margin we enable that we have the ability to achieve blended royalty rate in the low double digits for per unit royalties or approximately 10%. Contracted Filtered Revenue. For Contracted Filtered Revenue, based on Navian, our customer’s position in the marketplace, from the market share perspective, the devices that we currently have under contract represent greater than $290 million in filter revenue, over the next nine months to 18 months as this is made up of duplexers and quadplexers or about 4% of the overall filter market. Transforming the Industry. Transforming the Industry, we enable entrance from the RIFC market to enter the filter market as fabless filter manufacturers. This is a major advantage from a design and speed standpoint and it has translated into several customer engagements at this point. What this all suggests is that we deliver competitive design for our customer and are successful in securing sockets with OEMs [ph] modern manufacturers and referenced design companies. We have contracted any [ph] royalty revenue approximating $25 million to $30 million. Given our early licensing date we have indicated we have the potential to start modest revenue ramps in Q2 of 2017. As we have stated before we don’t expect a 100% of these contracts to reach production but we should be no different than your typical component company on design conversions to revenue. As a reminder, we’ve already demonstrated that we have developed commercially ready designs that meet customer specifications and that one of our customers had shipped one million parts as samples to several of their customers for testing in Q1. Now, let me move on to today’s news, where we announce the expansion of our customer base to our seventh customer with designs under contract. This new customer established RIC component provider services an extensive customer base in China, which is one of the key growth areas globally, including key tier one handset manufacturers. This agreement cover two quadplexers that will be manufactured on two separate fabs. Further demonstrating the sensibility to enable the transformation of the filter industry and include the fabless model. As we march towards the close of the second quarter, it’s important to recap the success in 2016 in comparison to the first half of 2017. We began 2016 with a few months of cash and a baseline of zero customers and zero devices under contract. By year end we had tallied up six customers, each with multiple licenses under contract, totalling 27 sockets. We closed finances worth $17 million and acquired GVR Trade, which was secured key technology and personnel for the Company. We expect to close the second quarter of 2017 by adding one additional customer to bring our total to eight, and sockets under contract to over 35. As we continue to develop our ISN Foundry Program, we have characterized and developed designs for a total of seven different foundries on multiple design processes, such as SAW and TC-SAW and we plan to expand the ISN platform to include BAW, in the near future. We also secured an addition $7.5 million in cash from Longboard Capital in the first quarter. As we finish the first half of 2017 and look back on the quarter, of the quarter’s successful execution against our plan with the focus on under promising and over delivering, we have successfully reduced risk in our business and we believe that it is not a question of if, but only a question of when we will be successful. As such, I want to touch on our revenue ramp. As we have discussed in conference calls since early 2016, we expect our licenses agreements for ISN products to have the ability to convert to revenue in nine months to 12 months from the time the license agreements were signed. We have also noticed previously; third party tear downs be a way for the market to potentially identify Resonant technology and only in handset devices and it’s through those potential tear downs that the market will be able to gain an understanding of who our partners might be and which handset OEM’s are their customers. We too, use third party tear downs to validate and audit our designs lens, to ensure our royalty streams. In Q2 we contracted for tear down on a number of devices and can at this time verify that our technology has been designed into and OEM handset that is generally available on the market. It is an early design win in a niche market phone that will contribute to the modest royalty stream that I can also verify has begun this quarter. While we cannot conduct tear downs on every new handset, we will engage in these activities periodically to validate our revenue stream. It is through this process that we can not only confirm royalties but also in some cases we can validate the timing to convert designs. We believe that this handset is one of many handsets that will contribute to the royalty ramp we hope to see in the balance of the year. Which will set the stage for more aggressively ramping royalties in 2018. Lastly as a public venture, micro cap company, we went public in 2014. We feel lucky to have such loyal investors that are on this call today. Some of you have been with us since the IPO and many of you have shown significant additional support for the Company since we have restructured at the beginning of 2016. It’s through calls like this that we hope to further demonstrate our execution, further reduce risk and give you a view into our potential growth with the opportunities we have in front of us. Our execution is, that as we achieve growth, diversification in the revenue base and obtain a clear line of sight to long-term profitability we will be able to convert interest and ownership from a number of fundamentally based intuitional investors whom we’ve met and express significant interest in the Company. This would be the next major inflection point as a public company. Thank you once again we will now take a few questions.

Okay, great, thank you.

Ladies and gentleman, we have reached the end of our question-and-answer session. That will conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you, Sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Cody Acree of Drexel Hamilton. Please proceed with your question.

Thank you for taking my question. George, congrats on the progress. Maybe just a little further clarification on this tear down. Any idea on volume of what you would expect from this OEM, as you characterized as niche market handset. Any further color?

You know it’s a great question and I wish I could give you some real clarity as to where these things are going. This is the first of what we believe many OEM devices that we see in the marketplace here in the balance of the year. Unfortunately, although we have some visibility we don’t have a great deal of detail from our partners on which phones they are trying to get products designed into and much like the market the best way that we will see this is when we find them in the marketplace. Or we see our royalty reports that basically come 15 days after the end of each month. So, not a lot of clarity unfortunately and it just so happens we picked one of the right phones because we were looking at all the phones that came out this quarter and were able to identify that we made it into a phone and we felt pretty excited about it and wanted to make sure everybody heard about it.

Well congrats definitely. Is this a Chinese handset initially?

We are not in position to actually say whose handset it is, at this time. You know, unfortunately because of the NDAs we have, with our partners we are not able to do that. What we expect that you will find, though is that not only while we do tear downs, there are other tear down companies out there that actually own the rights to their own documents and will ultimately publish those in the marketplace and folks like yourself will be able to get access to them.

Right, thank you. Then just anything about this licensing agreement, that maybe stands out. It seems like you have been getting a large number of quadplexers here with the recent announcement, just anything about this announcement that maybe stands out from your prior?

Yes, I think you know obviously doing quadplexers in SAWs is going to be pretty significant when that gets into the marketplace considering the only quads that are out there right now are SBAR and BAW. So, as we take these designs and drive them all the way through into production with our partners that will be a pretty significant achievement in and of its own right and we are doing with the quadplexers, we have under contract right now we have SAW only quads, we have SAW, TC-SAW quads and then we have all TC-SAW quads. I would say, really the thing that really jumps off the page for this specific agreement is that they did the same quadplexer and are placing it on two different foundries really to demonstrate and facilitate, you know, their ability to leverage volume ramps out of both different foundries. Which I think, you know, it’s exactly what you see in semiconductors in the fabless models. So, I think this is a great validation. We’ll be very excited when they get these models into the marketplace.

Then lastly, sorry, I’m not sure if Jeff is on. But you mentioned your liquidity position, if you could just give us a little more color as to what your runway is, now that you’re starting to get some visibility revenue, where do you expect your balance sheet to kind of land for the next few quarters?

Yes, Cody, it’s Jeff. Thank you. We ended in the last quarter with $13 million in cash and that cash can get us into 2018, you know, regardless of the revenue ramp that we are looking at. So, we continue to you know, monitor closely the revenue ramp and its very encouraging to see following the market that we found evidence of our designs getting attraction which equate to the royalty ramp. That royalty ramp, we have $290 million of market, that our customers currently address and with the royalty description that George gave moments ago, it’s a range but you can pick anywhere from 7% to 12%, you could pick 10% and when you start drawing those quadrants you can see that we have a significant amount of royalty opportunity coming. It’s based upon the phone and the timing it’s clearly in the $20 million per year type of opportunity. It’s not all going to hit, but to watching it very closely we’re conservative by nature because we have a number of new customers, a number of contracts that we’re executing to. We don’t want to be short on resources to execute to make this company as successful as we can for our shareholders. So, all that being said we monitor it closely. The revenue ramp could come on aggressively so it’s not really a foregone conclusion that we have to look go back and get more money but we won’t run ourselves into a position where cash is too tight so we can’t execute on those contracts and those important partners and customers that we have in hand today.

Very good. Thank you, guys and congrats on the progress.

Thank you.

Our next question comes from Kevin Dede of Rodman. Please proceed with your question.

Afternoon George, Jeff. Thanks for taking my question. Thanks for hosting this call. I think it’s very helpful to get some insight on the progress you’ve made in front of what’s probable an early August second quarter report right. Would you mind just taking us through the timeline again. I think it was Slide 9. Could you just talk to the development year that was 2015? One customer engagement there. Then sort of transformative year 2016, multiple more customer engagements, especially in the first half. Speak to the number of customers you’ve seen come on board, the number of design wins and how those have translated to royalties.

Oh, my goodness Kevin, that’s a pretty complex question. Let me see I can sort of tackle it. First, let me start with, way-back at the beginning if you look at kind of where we kind of started last year. Obviously, no customers, no prospects and we started engaging customers pretty aggressively. What I can tell you is that you start looking through Q2, Q3, Q4 and how we end up last year and how it trajected into this year and you look at those early customer engagements. Probably the best indicator that I can give you that is tied to the call today is how well we executed on and are delivering against the early designs because those are the early designs are the ones that are in that nine month to 12 month ISN ready kind of timeframe. In that first grouping, it happened in the second quarter of last year, we had five designs that we secured with customers and were able to convert them to licensing agreements. Initial design work was secured in Q1, licensing agreement signed in Q2 and for those initial agreement, obviously, they were not for these high value devices that we started getting in the second half of the year that ultimately cumulated with a number of quadplexers in the fourth quarter. But those early designs of the five, we have four that have contributed to the early royalty revenues that were seeing this quarter. I would tell you that those revenues are modest, as you might expect, these were if you recall, we had sampled that million units in February. We had that call-in February and we talked about designs that were trajecting with low value filters, but the big significance there was that we had converted a company that had never been in the mobile filter market enabled them to get into the mobile filter market and do it in less than nine months. Obviously, the filters we did for them were lower value but it was definitely something that validated the business model, showed that we could convert designs, showed that we could convert designs and ultimately drive them into production and actually drive them all the way through to royally revenue. We did that on three there, and most recently the one we identified this quarter in a tear down that we did ourselves. So, historical look back on one customer and were still waiting royalty reports from the second that identified that device in the phone. So basically, four of five devices went all the way through. I can tell you right now that the fifth device is still being, we still have an engagement on the device and we are still at this point have not seen any devices be set aside, that we have under contract. So, everything is still being worked and we are pretty lucky in that first grouping but they were obviously simpler filters. As Jeff said, I would echo what he said earlier that you know while we’ve got a large number of devices under contract today, $290 million dollars’ worth of filter value out there in the market. I don’t expect that we will get that, 80% conversion. I think that would be fantastic but I think that’s probably on the three- sigma category, I think will be probably more right in the middle of the bell curve on design conversions just like most semiconductor companies are. So, you know, it would be a little bit less than that but I think we’ve shown out of the box we’ve had some really good success. Does that answer your question Kev?

Great job, I know it was open ended intentionally but I think you did a fine job. So, four of the five you said have gone all the way, the fifth currently engaged still, right, they haven’t bumped it. So, there is potential there to still drive your conversion to a 100.

Yes, I wouldn’t’ count on that on a quarter-over-quarter basis. You know, there are a lot of guys out there in the marketplace that have been doing this for a lot longer time than we have and 100% conversion rate on design ends is not typical. I don’t know anyone who does that and you know I’ve been selling semis for quite a while and optical components and other things. I would be happy with anything north of 50 and if we can be in the 50% to 80% range we should be very happy with our success.

Great. Okay. So, a little bit more on today’s announcement. I know you said it’s locally China and you can see devices going to that end market but you’ve also said that they are tier ones. I’m curious to know if these customers of yours have exposure to some of the contract manufacturers that might sell devices the devices outside of China, Europe, North America.

Yes, definitely as we target manufacturers we talked quite a bit about the customer stratification Kevin. You know we start with filter manufacturers, we talk about newly enabled foundry filter marketplace and then we move all the way up to the modules. So, as we are looking at the column to get this too near revenue quicker because that’s what we are all about right now. Getting cash flow and revenue to help support more and more designs and more and more customers, it’s clearly those filter designs with our customers that have the ability to not only got to one market but the mobile markets.

Sorry about that Kevin, I had to step up, I had a coughing fit. But I think what I would highlight here about the Chinese market is while Jeff is 100% correct. I think that these devices have the ability to see the light of day outside of China, the nice thing is timed to revenue. As he’s indicted and I’ve indicated historically the kind of area we are focused and these partners that we said we are engaging now have a real opportunity their Chinese OEM’s to move very, very quickly. There are a number of large Chinese OEM’s not only addressing the Chinese market but they are addressing other markets as well.

Okay, so if you were to look at the seven customers that you have now, could you stratify them by whether are not their attached to a fab or not?

I think the answer there is yes. We have tended not to give that kind of resolution when we add them up in a group. We have talked about them individually of fabs and fabless companies on the individual press releases. Just let me think here. I would say, you know there is 2/3 of them have their own foundry.

Okay, thanks, fair. Okay, last question for me. Can you talk to the evolution of the other business models? I mean I know you talked about developing an STK and I know you are trying to get some other engineers on board. Can you just talk about how you see your progress for the balance of the year given, where you are and whether or not you need to make any adjustments?

Well we have made a pretty big adjustment about four or five months ago when we changed the organization shortly after I took on the role of CEO. Our VP of Engineering, EVP of Engineering Neal Fenzi has been expanding his development team, very, very aggressively. We just hired this past quarter a very talented VP of Engineering and Operation with Andrew Kay. We’re going to continue; we have got one other spot in that regard that we are bringing on at a very high level. These are all things that help us, you know, mature as a company and really accelerate our ability to convert designs quickly. We are still leaning very heavily on our software platform. We think that’s one of the things that gives us a very significant advantage over everybody in the marketplace and the more people we engage the more significant we think that platform is. When we talk to customers and they talk about how many designs they can do with their engineering team and we talk about how many designs our team can do on a given year we are significantly advantaged in that area. I think that is one of the key benefits companies get when they engage with us. They get that access to the capability and I think that’s why we see our customer base expanding, why we see our customers that our doing business with us expanding their platform with us. So, hopefully that answers your question.

Right. Sorry, just to rephrase maybe George. Do you think that you’re still potentially addressing developing an STK, you know maybe for devices that may not have the same volume in the end market?

Oh, you’re talking about-oh okay. You’re talking about our basic our ISN platform. So basically, bringing to market and surfacing our IDA’s software platform to ancillary markets. That’s absolutely in the plan. How we go to market with that we’ll determine over the next probably 12 months to 18 months. That’s still-we’re still developing that. Obviously, you heard me talk about the fact that we now not only have the platform is being heavily leveraged for both SAW and TC-SAW but the fact that we are going to add BAW to the capability set. That really speaks to building out that software platform so that we can do all the different process technologies, be able to support any customer with any requirement from a filter design standpoint and that’s all part of that backend development work that we are doing. We are continuing to work on processing power, processing speed because these designs take a long time. I mean, you can put them into, you know, a modelling tool which we have developed some very sophisticated modelling tools for finite element modelling in synthesis and those things can go in and they can run for 12 hours to 14 hours to pop out an answer. So, we are doing a lot in that area, to make that very, very efficient. I think as we get closer to where we believe that needs to be, we will be in a position to surface that and make offerings in that area.

Fair enough. Just sorry, very, very, very last question. What, do you have sort of a target capability date to handle BAW or do you just see like the capability of the software pushing TC’s into absorbing capabilities that had been previously reserved for BAW?

Well, from a software capability standpoint it’s one of the things that we have a number of companies that have talked to us about engaging on that front. We are not in position to talk about where we are with them at this time or when that product would be available. But we do intend to be well down the road on it this year on it and that’s about as much as I can tell you on that at the time Kev.

Fair enough. Thanks very much George and thanks for engaging all those questions. Greatly appreciated. Thanks again for holding my call.

No worries. Thank you.

Once again ladies and gentlemen, if you would like to ask a question, please press star, one, on you telephone keypad. Our next question comes from Lou Basenese of Disruptive Tech. Please proceed with your question.

Hey guys. Congrats on the official commercialization. Just had two questions for clarity here. You mentioned on the one slide the distinction between ISN Ready and ISN Pilot and you said there is 15 plus designs in ISSN Ready and another 10 plus in ISN Pilot. Does ISN Pilot include the quadplexers, seven or eight quadplexers or does that fit into a different category?

Yes, definitely Pilot. I mean - go ahead.

I was just going to see where the rest fit. If the four designs have made it to the finish line, just curious where the other five or six designs fall in or a few of them advanced or what does that entail. What makes them that much more complex than the quadplexers?

Well I will tell you right now, where we are at Lou, is all of the designs that we have in shop right now would fall into the categories of ISN Ready and ISN Pilot or ISN Advanced. Work that we are working on right now is semi-custom work that we are working on for one partner. Then our ISN Technology platform is really stuff that’s been working on, that’s being worked on by our CTO office, which is still - we still have a back-office work being done in the tuneable area. So, that is really where the technology front comes and that where we are doing our development work and a lot of things like BAW.

Okay.

So, that’s where we view those things. It’s really how we allocate resources and stuff internally and try to have a kind of baseline on how we talk about products. But really, I would say if you are looking at ISN Ready that’s going to be filters and duplexers for the most part. ISN Pilot is really going to be the quadplexers. You could potentially see some of those quads, we’ve done on a multitude of those, move into the ISN Ready area by the end of this year. Then things like triplexers and hexiplexers would kind of bridge the gap between pilot and advanced. Does that help?

That’s perfect I appreciate that clarity and just get to my second question about your bandwidth. It seems like you are adding customers and design projects at quicker and quicker pace. At what point is it 50 projects under development that you reach your capacity with your current engineer staffing or are there as you mentioned with the quadplexers, efficiencies as you do additional designs that allow you to do 60 plus, 70 plus with the same amount of staff?

Well if you look at that, that’s a great question and it’s clearly one our EVP of Engineering is on top of very-it’s a very topical question for us exactly. I would tell you that where we are at right now, we have roughly 38 people on the team, we plan to expand it north of 50 this year. We intended to have the ability to take this number of designs up with the plans that we have right now to where we could be running concurrent designs in the 60, plus or minus 60 range by the end of the year.

Okay.

That means, still taking designs in, working them actively and still pushing designs out more aggressively than we are bringing them in. So, we think with the plans that we have in place, where we expect to end up at the end of the year, roughly 60 I think is the number.

Yes, Lou. This is Jeff. Just to jump on that a little bit. You know, when George talked about the number of fabs that we have helped characterize. You know, once a fab is characterized and your designs are there they also come in much quicker. So, we have a huge investment in the last 12 months getting fab characterization to put designs through on so our efficiency continues to go up like George said.

Yes, that’s a great point and to just add one more-little nugget on that. As we bring on these pure plate foundries’ they become-they have the potential to become sales arms to where they can take designs that are already complete and push them out to other third party filter manufacturers, module manufacturers, as well. So, there is a force acceleration behind that fabless filter model, there is a force acceleration behind working with pure plate foundries and enabling them to take the technology, much like the semiconductor foundries do today.

Okay, great. Congrats, on the progress. I look forward to the next update.