Resonant Inc. (RESN) CEO George Holmes on Q3 2018 Results - Earnings Call Transcript

About: Resonant Inc. (RESN)
by: SA Transcripts

Resonant Inc. (NASDAQ:RESN) Q3 2018 Results Earnings Conference Call November 13, 2018 4:30 PM ET


Moriah Shilton - SVP-LHA Partners, IR

George Holmes - CEO

Jeff Killian - Interim CFO


Anthony Stoss - Craig-Hallum

Quinn Bolton - Needham and Company

Kevin Dede - H.C. Wainwright

Cody Acree - Loop Capital


Greetings and welcome to the Resonant Inc. Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host Moriah Shilton, Senior Vice President of LHA Partners, Resonant's Investor Relations firm.

Moriah Shilton

Thank you, Operator. Please note, we'll be using a presentation during today’s call which is accessible on the Events Page of Resonant's IR website. If you have reached us today via the phone, please go to the Events Page to either view or download the presentation to follow along.

Turning to Slide 2, on the call today are Resonant's CEO, George Holmes; and Interim CFO, Jeff Killian.

Earlier this afternoon, Resonant released financial results for the third quarter of 2018 ended September 30, 2018. The earnings release that accompanies this call is available on the Investors section of the company's website.

Turning to Slide 3, additionally, some of the information in this 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 statements are 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 filings with the SEC. These forward-looking statements speak only as of the date of this call 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 call.

With that, it is my pleasure to turn the call over to George.

George Holmes

Thank you, Moriah, and good afternoon.

Turning to Slide 4, the third quarter was full of excitement for Resonate. It was dominated by ensuring a solid trajectory as we drive the exit 2018 with excellent momentum in a rapidly growing market. We have a lot of excited thing to talk about, most of which happened in the quarter and we’ll discuss a few things that happened subsequently.

Our focus in the third quarter was to create velocity in getting products in the production and generating ramping royalty revenues specifically focusing on designs accepted by our customers, designs qualified from shipping by OEMs, and major advancements in our ISM platform.

We continue to focus on executing on the things that we control internally. We have the greatest potential to directly impact our trajectory as we exit 2018 and enter 2019 which means delivering designs on time, meeting our customer's expectations, facilitating our customer's internal qualifications.

Our stated objective in 2018 is 20 devices accepted by our customers by year end. To-date we have 17 devices that have been accepted by our customers. Of these designs we estimate the mix to be 30% tablets, and 70% vertically integrated customers. More importantly, we estimate 30% of these will be Tier 1 companies.

Unlike typical licensing companies, which find themselves waiting for all the revenues to commence once they deliver parts specification, we don't wait. We are actively involved with our customers in getting us qualified at OEMs in an effort to reduce time to ramp royalty revenues.

Some examples of what we do include facilitating OEM qualification of our customers devices including quality and reliability testing and most importantly handset testing. After OEMs qualify devices, handsets are produced and sold to the end consumer, we get paid per unit royalties on each device shipped for sale.

To that end since the end of Q3 2018, we have been notified by customers that two additional devices have been qualified by OEMs and begun to ship, bringing the total to six devices generating royalty revenues with four more expected to go before year end.

Our stated objective is that 10 devices qualified by OEMs and available to ship and get paid royalty, ramping royalty revenues by year end. Our fees and average royalty rates also continue to grow, putting us in great launching point as we enter into 2019.

We've expanded the capabilities and significantly enhanced the value of our infinite synthesized networks or ISN platform. As we drive to commercialize ISN for internal use. Some of these enhancements include improved design efficiency, more designs per designer approaching double-digits, reduce cost to design filters and modules, we've reduced cost by roughly 20% since the beginning of 2018.

Standard to support different process technologists include both statically [indiscernible] introducing new cutting edge resonator technology, we call XBAR, ideally suited for 5G applications. We expect this to be much more than just an extension of our ISN platform in the BAR, but with these new XBAR resonators we believe we will have a significant advantage in developing designs for the 5G market.

We completed and demonstrated to customers the innovative real-time engagement tool ISN compare. We further extended ISN into the cloud and continue to validate modules with customers. PMTx over last quarter was used regularly by one of our customers to deliver instant runs on time and to specification.

And now I'd like to have just Jeff Killian, our Interim CFO, provide more details on the accomplishments we did this quarter in the three key segments of our business. Jeff?

Jeff Killian

Thank you, George.

For those of you who are new to our story, there are three key segments of our business. Team, technology, and software tools which I would like to review.

First, our team, turning to Slide 5, in early October we appointed Bob Tirva to our Board of Directors. His extensive financial expertise including corporate, managerial finance, and mergers and acquisitions will be invaluable to our Company.

Turning to Slide 6. We ended the third quarter with a total of 65 employees. 13 PhDs and a total of 46 who are part of the technical staff. We have been fortunate to retain and recruit new and very talented employees in large part due to their view of the opportunity here at Resonant. This team is focused on five major areas: first, execution against our 60 plus contracted devices; second, applications and field support of our customers; third, quality and reliability; fourth, delivery of our ISN software platform; and fifth, expansion of our IT and trade secrets.

Turning to Slide 7. Our ISN platform began supporting SAW, extended to TC-SAW in 2017. And as we noted at the beginning of the year, extended into BAR in order to have end-to-end design suite for the RF front end.

Turning to Slide 8, in October at IUS in Japan we announced we had developed IT for technology we call XBAR which has Resonant’s up to 38 gigahertz and we were extremely pleased at the speed of this development. Internal test indicates that XBAR technology could be used to develop cultures for devices used in 5G both in the 3 to 6 gigahertz range, as well as millimeter wave operating and 28 gigahertz and higher frequencies. Combining these recent achievements with our more than 150 patents and trade secret program as its well positioned to capitalize on the coming 5G market opportunity.

Turning to Slide 9, now an update on our software tools and a significant achievement with our ISN software platform in the third quarter. We are successful expanding the breadth of our ISN platform. Currently our ISN platform supports a lower cost SAW and TC-SAW process technologies.

Our roadmap is focused on the inclusion of higher frequency BAR and FBAR solutions to ensure we participate in the demand created by 5G. Based on our measurements, XBAR outperforms best-in-class Film Bulk Acoustic Resonators or FBAR devices and frequencies above 3 gigahertz which is ideal for 5G.

Turning to Slide 10, we have launched a new feature of our ISN platform called ISN COMPARE that allows us to work with customers in real time to evaluate new designs. This new feature enables the ability in real time to two devices to meet market specific performance and market requirements which gives our customers the unique ability to meet market demands in a very competitive market. A demonstration of this feature is available on our investor website.

Turning to Slide 11, last quarter we announced that we hit a major milestone in the development of our ISN platform by deploying a cloud-based module, a process monitoring tool named PMTx our first external customer was using this in their processes. This was an ISN software module that enables customers to turn information obtained in the manufacturing process into process control parameters in real time. Whereas other control methods are slow, expensive and provides delayed information. Our customer use this tool over 25 times within the quarter to support the in-process control of over 100 development wafers ensuring they were delivered correctly the first time.

We're also reducing dependency on extensive third-party solutions. As noted in our last call, we have assembled a world-class team specializing in computational electromagnetics or CEM. Their focus on reducing design and simulation time continues and we expect to be able to report on their progress later in the quarter when we published our first paper.

Turning to Slide 12, lastly I wanted to remind everyone of our model development timeline and the time it takes to convert finished designs into royalty revenue. Simply put there are three buckets; first, Resonant’s filter development; second, our customers’ test and acceptance; and third, the handset OEM's qualification and ramp.

Our development time from signed contract to design acceptance can range from nine months to more than 36 months depending on the complexity of the design. Our customers' test and qualification time typically ranges from three to six months. Then the handset OEM’s qualification time typically ranges from three to six months as well.

The combined time ranges from the fast track of 50 months to the high end of 48 months. The big takeaway is the designs identified using our technology in Tier 1 phones set records by going from signing contracts to phone on the shelf and available to consumers in less than 12 months.

But we are very proud of the breakneck speed that we seized contracted designs, made it into the market and demonstrate the power of working with Resonant. Going forward we expect more typical design to product launch times which are in line with our model and we believe represents a fraction of the typical time to market for the industry.

Turning to Slide 13. I'd now like to discuss our financials. The third quarter of 2018, billings which include deferred revenues were $77,000, down 37% year-over-year and 66% quarter-over-quarter. The nine months ended September 30, 2018, billings totaled $504,000, up 21% from the same period in the prior year. Revenue for the third quarter of 2018, was $115,000, up 8% year-over-year and down 7% quarter-over-quarter.

Our royalty revenues at $30,000 were $10,000 lower quarter-over-quarter. However, our devices shipped in the quarter of 2018, the average royalty rates increased from roughly 9.2% to 9.4%, and ASPs have also increased nominally as we transitioned from our first proof-of-concept devices to higher value devices. Research and development expenses were $3.6 million, up from $3.3 million in the prior quarter due primarily to increased payroll cost, site development, and travel expenses.

General and administrative expenses were $3 million, up from $2.8 million in Q3, 2018, due to increased payroll expenses and expenses related to our move to new offices. And net loss for the third quarter of 2018 was $6.3 million or a loss of $0.23 per fully diluted share based on 27 million shares outstanding. Non-GAAP adjusted EBITDA in the third quarter of 2018 was a loss of $4.9 million or a loss of $0.18 per fully diluted share compared to a loss of $4.2 million or a loss of $0.16 per fully diluted share in Q2 of 2018.

Cash, cash equivalents and investments at September 30, 2018, totaled $26.4 million compared to $31.1 million as June 30, 2018 and $19.5 million at December 31, 2017. In the first-half of 2018, we raised net proceeds at $21.2 million from a public offering. Cash burn for the third quarter of 2018 was $4.8 million.

Next I wanted to comment that today we have filed an S-3 shelf registration statement for $15 million. The S-3 will be available to us should we need to raise capital over the next three years.

I'd now like to turn the call back over to George.

George Holmes

Thank you, Jeff.

Moreover I'd like to highlight your ongoing commitment to the Company, stepping back in when we needed you. And your leadership and dedication have made our business partnership really work. Thank you.

Turning to Slide 14. Now I'd like to welcome Marty McDermut, who'll become our Chief Financial Officer on November 15. I look forward to working with Marty as he brings more than 30 years of broad financial leadership and business strategy to the team as we continue to build long-term value for the Company and our shareholders.

Now let's spend a few minutes focusing on what fuels our excitement and confidence in our long-term growth opportunity and the inevitability of our success.

Turning to Slide 15. This sheer size and growth the filter market is staggering largely fueled by the demand for bandwidth caused by digital gaming and data. While there has been some softness in the broadband proliferation and carrier aggregation in 2018, it is expected to ramp aggressively in 2019 and coupled with the ramping of 5G will fuel the filter market growth that you'll estimate to be more than $27 billion by 2025 or 3x the market today.

Resonant has tools and technology to deliver designs of complex filters that will be key to realizing 5G wireless data rates. We believe faster, better, cheaper than anyone else. Our overall confidence is bolstered by continued validation of our technology and business model through customer acquisition, development, and execution, and ultimately shipments of devices for royalty revenues, the main highlight to growth in our customers and contracts since I joined in early 2016.

We have continued to increase the number of contacts per year since 2016. We expect the number of contracts to roughly triple by the time we reach the end of 2018, from that early milestone we achieved at the end of 2016 with over 25. Our customers expected revenues in these contracts is increasing at an even higher rate, $112 million at the end of 2016, $290 million at the end of 2017, and we expect to end 2018 with close to $600 million. These factors set a real meaningful trajectory as we look forward to 2019.

Turning to Slide 16. I also want to highlight our Foundry Program. We have continued engagement with Fabless customers and are excited to announce that our Fabless customer shipped filters in October. We also believe we will see our first shipment of our module from a customer before the year end. This is important because module carry higher ASPs for more revenue for the Fabless company and ultimately higher royalty revenues for Resonant. We believe these early first shipments represent roadmap that will deliver royalty raise for many of our Fabless customers in timeframe shorter than our standard engagement model.

Turning to Slide 17. Let me provide some additional color on our royalty rate and potential. As precociously noted, by year end 2018, we expect to be approaching 10 devices qualified by OEMs and available to ship and generate ramping royalty revenues. As of today November 13, six of these devices are already producing royalties. We expect continued execution as we'll be delivering seven digits in quarterly billings before the end of first-half of 2018.

Revenues depend on a lot of things, some of which is not 100% predictable. While we directly control our development, delivery, and qualification of our parts by our customers, our customers getting the OEM to qualify has taken longer than they our customers projected.

Let me highlight a key fact that we've not mentioned on previous calls. Big part of our value proposition is that we're able to design cutting edge devices and low cost manufacturing processes, giving our customers to compete aggressively by opening up new market segments, a model that this will allow them to capture share at least equal to exigent market share as noted by Navian and Yole, with a potential to increase share.

In preparing for this call, we examined the share obtained of the first four devices we began shipping. And for these four devices that shipped into five OEM handset sockets, our customers were able to outpace their average market share for those sockets and in some cases up to 10x the average market share they have as reported by Navian reports.

We can guarantee this will happen on every socket win. This is a great indicator however that our customers are taking advantage of how competitive our designs are making them in the marketplace. We expect to close the year approaching 75 license contracted, which we expect to represent roughly $600 million in potential annual filter duplexer and quadplexer product sales based on our customer's current share of market. If we are successful this will be over 5x where we ended in 2016.

We also expect to reach 20 devices accepted by our customers, 17 of which have already been accepted as of today. These 20 devices represent approximately $210 million in annual sales value. We have historically been conservative and we don't expect 100% of these to convert and we are focused on models that range from 30% to 70% of design conversions.

We expect sockets that reach production will continue to generate royalty revenues for greater than two-and-half years. We have continued to drive our design efficiency, getting devices accepted by our customers in less than three spins. Our latest two devices exceeded this goal are accepted after two spins which significantly increases speed to market and lowers cost.

Turning to Slide 18, we believe our technology is revolutionary and transformative. Admittedly our business model is unique in the industry. With this comes great opportunity but also some risk. Let me highlight some of things that I've discussed in the past to demonstrate that we're going to do to mitigate that risk and best position our Company to capitalize on the significant opportunity ahead.

First, our technology. We leverage your ISN platform to help our customers manufacture the products more cost effectively, just over three significant milestones this quarter which deserved further comment. We have now deployed an ISN model at one customer locations that is specifically designed to help increase yield. It is currently being used by our customer to validate capabilities and deliver parts more predictably.

We now set IUS our new BAR Resonant technology XBAR to allow us to deliver high-frequency devices in BAR within our process technologies and even wants to deliver devices rapidly for the expanding 5G market.

And we also provided a demonstration of our ISN COMPARE tool which is also available in the Video section of our Investor website. ISN COMPARE provides real-time comparative analytics to ensure the designs are customer asking for a specifically meet the stringent demands of the application they are targeting and outperform their competition. Second is our business model, our business model is licensing design on our royalty basis. We are focus on companies that we believe have the shortest time to revenue.

For the vertically integrated companies that are more nibble in capturing share by being aggressive and shortening their time to market or by leveraging our foundry model to enable entirely new segment of the filter market or fabless filter companies who want to move quickly to enter the market.

We have now demonstrated that these companies can enter the market quickly. We just now announced the first fabless customer and shipped their first devices for royalty and in Q4, 2018 we expect to see our first fabless module to be qualified in shipping in the market as well. These elements combine enhanced predictability huge risk and create enormous opportunities for Resonant.

As we look towards 2018 and beyond, we will enter with the royalty generating engine that has proven it can capture significant picture with qualified designs. With a trajectory that has being fueled by 20 devices accepted by our customers and 10 devices qualified by OEMs and available to ship.

We have an ISN design platform that we believe that can deliver design for all process technologies, faster, better and cheaper including those for complex RF customers the key to realizing 5G wireless data rates. Finally, we ended Q3 with 26 million in cash providing significant runway to execute against our plans.

Now I’ll hand it over to the operator for Q&A. Operator?

Question-and-Answer Session


[Operator Instructions] Our first question comes from Anthony Stoss, Craig-Hallum. Please proceed with your question.

Anthony Stoss

George if you don’t mind take us through the timeline on the XBAR on your BAR technology takes us through the steps that need to be met before you can hand off a sample or when do you think you might be first revenue on the BAR side. And then of these six devices that are currently generating license revenue, how many different customers are there within that six and then I have a follow-up?

George Holmes

Let me try to take that first question about our BAR technology. As noted as early as late last year, we said that this year was going to be focused on developing BAR adding it to our ISN platform. We thought it would take two years. As we noted last quarter, we were able to pull that in significantly and our plan was at that point in time to be doing development wafers this past quarter.

We were successful with those and we’re able to actually make a presentation at IUS and actually talk about the performance of those new resonators that we developed at a BAR. They had very high frequency performance and it was our belief is our belief that those will put us in a very unique position to compete effectively in the 5G market. The timing of that to get to the point of your question is again additional development wafers being worked on this balance of this quarter and targeting to be in a position to speak more candidly about the performance of those resonators at Mobile World Congress in the first quarter of next year.

It’s our belief that point in time that we will have some very good data off of public third-generation wafers at that point. So that we will be able to share with potential partners the actual specific performance that we could start developing actual filters against that technology that would be available in the latter part of next year. That answers your question?

Anthony Stoss

Yes helpful. And then of the six devices currently generating revenue I would assume that’s probably two customers but…?

George Holmes

It’s actually more than two customers we now have three customers that are actually generating royalty revenue. We have a follow-on device from one of our initial customers. And then one of our new customers, one of our fabless customers entered the market with its first product shipping this last - since the end of last quarter so and just in the first month of this quarter. We expect to see a first model from our established customers - this quarter as well.

Anthony Stoss

And then lastly from me, what have you learned or what can you do to help speed up either testing once it’s beyond your hands I guess either filter makers or the ultimate smartphone customer?

George Holmes

That’s a great question, I think that when we started this process two and a half years ago, we must like many licensing companies thought we’ll get our designs done hand them off to our customers and then sit back wait and see. And they would just start shipping product and we would start seeing royalty revenues. I guess we’ve learned a lot since then. And as we look against some of the major players in the royalty business took five to 10 years to see royalty revenues.

Clearly that wasn’t to be acceptable for us ourselves as a growing start-up company but also we want to create a faster ramp to royalty revenues to create value for our shareholders. So what we started at that point in time and as we've noted in the past couple of quarters, we first started working on reliability testing that was kind of some of first work that we did, install long-term reliability testing of those devices so that we could hand complete reliability reports for our customers.

At that point in time, this time last year for example we weren’t actually allowed to get involved with the handset testing. We have been asking to help in that regard because that is something there is a component supply if we get involved with your end customer and help them get your parts qualified. But as we were one step removed as a license or of technology, they were I think uncertain whether or not we could add value in that last mile of the qualification process.

We have subsequently generated enough credibility where we are actively involved with all of our customers in working with them with the handset OEMs. And if you recall on the last quarterly call, I said we just had a team that had come back with six new handsets from OEMs that we were actually involved in doing qualification and matching on to get those devices so that we could actually get products qualified by our customers. That process continues, it's something that we think we’re pretty good at, we leverage our ISN platform very, very effectively to allow us to do software matching of those devices.

So we are doing it the old fashion way which is kind of pick and place matching of components. We think it's part of what’s going to allow us to not only get the balance of the 20 devices accepted by our customers this year, but to also increase the number of devices we have shipping from six to 10 before the end of the year.

We have a great deal of confidence that that’s going to happen. The key thing for us is just to continue doing what we say we’re going to do with our customer and their ultimate customer and as long as we make them look good they are going to continue to invite us to the party so that we’re able to help them in that regard. So I think it’s more of what we have been doing, it's really ramped up in the last two quarters and I would expect that would continue in the first part of next year for sure.

Anthony Stoss

It very clear on that George if I could slide in one more related to BAR again. On the higher frequency ranges have you - what have you discovered so far in your ability to hit those higher frequencies and I think that there is a lot of BAR guys out there now that are trying and they can’t get them to work well anything about 5 gigahertz just curious what, what you guys are experiencing so far?

George Holmes

I think we’re feeling pretty good about that. At this juncture we did some demonstration at IUS. I think the key thing for us is those first samples - first two wafer lots are kind of early indicators that the design and the methodologies that we're using in the core IP has merit. I think we are moving the technology from a development foundry to a full production foundry which is happening now, the next couple of lots the wafers will come off of a much more production type of foundry so we'll get some better data there.

We're feeling good about the Resonant's we're seeing I mean, one of the things that allows guys to have confidence in that 5 gigahertz to 6 gigahertz range for full grown filter is that they see resonators that are performing at greater than 25 gigahertz. And so that was kind of the major threshold that folks had seen up until the point that we demonstrated devices in north of 30 gigahertz and in some cases we saw Resonant's all the way up to 38 gigahertz as noted in Jeff's comments.

So I think we're at the early stages yet. I want to see us make some more progress this quarter. We're doing some work with some partners as well in this regard. I think that activity is going to increase and ultimately at the end of the day if we're able to do demonstrations at Mobile World Congress in the first quarter I think that will be a major step to getting engagement's that we’ll see actually filters coming out based on that technology by the end of next year.

Anthony Stoss

Yes, thanks George.

Jeff Killian

Yes, just to drift back Tony real quickly back to what have we learned and a couple of our learning pieces have actually manifested themselves into ISN models as George said. I mean, PMTx, that process monitoring tool was really created because our designs worked but our customers processes often switched or changed and we could help them identify that so they can improve their yields and get their products to market faster. And finally the new ISN COMPARE, another enhancement was really based upon the learning or more importantly the need from our customers that we hope fulfill.


Our next question comes from Quinn Bolton, Needham and Company. Please proceed with your question.

Quinn Bolton

Congratulations on hitting or tracking number milestones you've put up for 2018. I guess the question I've got is trying to explain the disconnect between the fact you're hitting a lot of the milestones you've put out for us in terms of devices under contract, devices accepted by customers, devices shipping for royalty revenue, yet royalty revenues declined now for two quarters sequentially, it's only $30,000 it sounds like you're not going to hit the $1 million of revenue in the fourth quarter. How do we connect the dots on the milestones you guys appear to be hitting and the lack of revenue generation from hitting those milestones?

Jeff Killian

Maybe I'll jump in your first, Quinn. So we alluded to that in I guess my section a bit. As new designs begin to get traction, we had few of those that jumped out and set very record pace of getting from license agreement into royalty revenues. Those were our first proof-of-concept they were lower value that we've talked about. Some of those were in short lived Whitebox phones but they're still proof-of-concept.

The other devices that we had in place, for instance, over 25 license agreements that entered to 2016, means the real model that we've echoed here it takes 24 plus months to get those into a position to ramp. And then our customers get the opportunity to push those into OEMs.

And so we're still on I think on track from that business model whether it be ISN ready or ISN pilot and the other ISN products that we put out there. But it's really a kind of two year plus shot to get those into the market and ramping and that's why we think that we're still on target to deliver ramps and royalties in the near-term.

Quinn Bolton

Exactly it sounds…

George Holmes

Let me answer that Quinn, just real briefly. I think overly at the end of the day the big picture hasn't changed. I think one of the things as a licensing company, we internally have to stay focused on is stacking up the opportunities of things that we control. And as we stack up those opportunities, it goes back to something just did a couple of quarters ago, we're well past – if this is going to happen, it's just a matter of timing and when.

Clearly, we have been pushing this envelope very, very aggressively. We're doing everything we can to help our customers with the OEMs to try to shorten that trajectory to convert into royalty revenues. It hasn't happened as quickly as they had hoped. We obviously forecast based on our customers forecast but the good news is nothing is gone away either.

So I think that is probably the biggest key and why we're very focused on these milestones of 20 and 10. 20 devices accepted by our customers they are now promoting and those 10 devices that are accepted by the OEMs and actually starting to ship royalty revenues. We're now up to six on the royalty revenue front, we’re at 17 on the accepted by our customers front.

We're going to drive through the end of the end zone on both fronts I believe and be in a position to start really capitalize on the fact that we've got this pent up opportunity that we highlighted for last couple of quarters. And that as you look at whether it be the north of $450 million we have in our contract that $200 million worth of devices we are trying to get qualified and accepted by our customers by year end. That we believe is going to be kind of the front end of that dominoes start to fall. So, that we're going to start to be able to start seeing more predictable royalty revenues from our customers, hopefully that helps, sorry about that.

Quinn Bolton

No, it's helpful. I mean obviously I was just trying to figure out kind of when the revenue ramp started. Yeah based on previous discussions I think you guys had pointed back to the inflection in designs under contract in Q3 of 2016 really ramping up in Q4 of 2016 as the basis for your projection to hit $1 million of revenue. More seven figures of revenue in the fourth quarter of 2018 implying about 24 months time to revenue. It sounds like what you're saying on today's call that that might be more like a 30-month window instead of a 24-month window. I think Jeff, in your comment you said you think now you can kind of hit that $1 million revenue mark in Q2 of 2019?

George Holmes

Like you said, in the first-half of 2019 we'll hit that seven figure mark and I think we feel very confident about that as the structure.

Jeff Killian

Yes, I think it's the quarter-in and quarter-out and forecasting a ramp for start-up company with brand new customers I think we're pretty much on schedule.

Quinn Bolton

Well, let me maybe just then ask the last question. You guys haven't given the formal guidance for the fourth quarter of 2018 revenue. You had previously talked about $1 million or seven figures, where do you think Q4 comes out? I mean is it going to track on $100,000 or $200,000 range, are we half-way to seven figures? Maybe that's where the disconnect is I mean if you guys are couple $100,000 short of $1 million in Q4 it's not a big slip, but it's still on $100,000 or $200,000 range that you tracked in almost to the last one to two years. It looks like it's more like a six months delay.

George Holmes

As you sit back and look at it, Quinn, I think your latter comment is probably closer to what we believe given our customer's expectations. We've got a lot of products they are going to be coming online this quarter which this quarter being the fact that it's the 13th of November is we had six to seven weeks left. The good news is there's a lot of volume to get shipped in the fourth quarter, we're tracking very aggressively right now.

We got teams, the guys in Asia are working to try to make this happen for our customers, because it's as important as it is for us to track through to royalty revenue capturing these sockets for them with the OEMs is at least it is important when you're talking 7% to 12% royalty for us is a big number for us. But the turnaround in the actual full value of those devices for our customers is a big number as well.

So we are working through to try to drive this all the way through such that we can be on a trajectory that will allow us to get to the test royalty revenues that we all expect. We believe it's teed up with the devices that we have under contract and that we're driving through into production right now. So if I sit back and I had to read the tea leaves based on what our customers have said.

I think that you highlighted it pretty well, I mean it's north of the $100,000 and less than $1 million, it is probably right for the quarter and we hope that we're going to be landing somewhere right in the middle.

Quinn Bolton

Okay. Thanks for the additional color.


Our next question comes from Kevin Dede, H.C. Wainwright. Please proceed with your question.

Kevin Dede

So congrats on getting the ISN comparing with PMTx software out. I know that you're working on it for a while, can you just help me understand how and if there is a way to monetize it? Even people who - the customers understand the efficiency we bring into the game we think that there'll be some perceived value there.

George Holmes

Kevin, let me jump on that first and I'll let Jeff add some color. I think we've noted even since before I joined the Company I think the guys were very excited about their ISN platform even though at that point in time it was perhaps more aspirational than it was actually a complete software suite. Customers have always found it to be something that they would like to have. I think one of the things that we're doing is we're completing filling out the suite to include everything from SAW to TC-SAW to now it's a BAR.

We're also completing to flush out the IP portfolio. I mean, clearly some of the things we have comparability which has been identified by third-party tier down companies now working on with XBAR resonators are some things that are very interesting pieces of IP, they can be internally licensed. I think for us the challenge we have is as we go through and complete the software platform is, if when and how would we want to deploy that to a customer and what would we want in return for that.

Per unit royalty is the model, the business model we believe is one that where we can create the greatest amount of shareholder value. And so if we're going to license the tool, we'd want to be able to license it on a per unit royalty basis. Today, I think the validation that we had with the PMTx this past quarter the fact that we had a customer use it on over 100 wafers to actually get it through, get these wafers through the engineering run process and be able to deliver them predictably on time to specification was a big deal.

Now we're going to see that extend to the TC-SAW version of PMTx is already in the process of being released internally. We're going to allow - we're likely going to allow a customer to have an opportunity to take a look at that next quarter as well. I think these are things that add additional credibility to the overall platform, and when you add additional credibility you create a need and a want which puts us in a better position to negotiate as we go through and look at these things to see if there is an opportunity that we choose to license whether it be a module or a number of modules to an individual customer or customers and do it on a per unit royalty basis.

The big thing for us as we don't want to be doing to sooner before it's time because we want to be in good negotiating position because even the large EVA companies have not been as successful licensing those tools on a per unit royalty basis. I think we're in a very good position because there is no other tool like what we have out there in the market, and so that should put us in a very good position when it comes time for us to have those discussions. Does that answer your question?

Kevin Dede

Well, let me summarize it in layman's terms and hopefully I get hands around it. Essentially what you're saying is in offering ISN COMPARE and PMTx in the conjunction with the service that you already offer, you're hoping that your entire value perception is raised and that you're not thinking about offering individual components for sale per se for use outside of the status quo?

George Holmes

Well, let me clarify it for you, Kevin. I clearly believe that there's going to be an opportunity to license the tool at some point in the future. I think what those two modules that you just identified provides a tremendous amount of credibility with the component manufacturers as they get in, understand them, use them, and allow - those things basically allow them to do design faster, better, cheaper.

Through that credibility when we bring to market new technology like our BAR and XBAR solutions that allows us to be very, very nimble when it comes to working with customers and having them evaluate that technology, we already start from a credibility standpoint. I mean the challenge you have as a startup company is going in the first time and saying "Hey, trust me. What I have is the greatest thing since slice bread. Use this instead of what you're using that you've be using for last 15 years." That's kind of hard.

I think what we're doing through allowing partners to leverage these tools is gain credibility just like we've gained credibility by designing devices and doing it very, very quickly. Our first devices as we - I mean the very first design that we did in 2015 took 11 turns. Last quarter we announced we put two products into the market on a single turn, this quarter we're working at one to two turns.

So those things are credibility statements and those credibility statements allow you the opportunity to get in and not only do more but also not have to give away the form when you do it. Does that help?

Kevin Dede

Yes. I guess my perception is slightly different on your focus, George. You talked about gaining credibility, no argument there, absolutely no argument there. But my takeaway on this commentary that you just provided in the call here is to help provide your customers a little more control of the process and therefore maybe offering little bit more control of the process and expediting the entire operation. I mean when I think through some of the things that you've offered today, it's really about trying to help the OEM make sure that that device works with the design that you offered your customer, is that a fair statement too?

George Holmes

Kevin, I think you are on the track. I think as we go through and do designs for our customers, one of the challenges we've seen as you go through and try to shorten that time to royalty revenue is, processes change and drift whether it be a TC-SAW or a SAW manufacturing process. When we deployed PMTx, it allowed our customers to tighten those processes up so they actually could be very, very repeatable.

You could see why that would be self-serving for us to want to actually deploy our tool but we had a lot of confidence in to a customer that would allow them to be better at what they do already. So I think the two things go hand-in-hand and that - we look at the value that we've said we bring all kind of from day one is, it's tools, team, and technology. And you put those three things together and you end up with a real winning scenario.

And the fact that we can bring those things to bear when we see things aren't moving as quickly as we'd like for them to, I think it's just an added benefit not only for our customers, for ourselves, and ultimately for our shareholders as we work to drive to get royalty revenues happening sooner than what our model suggests.

Kevin Dede

One other question from me George. Can you help me understand exactly how you're helping your customers test their customer's product, the end OEM handset? Understand they are coming - I didn't recognize it, I didn't recognize shortfall facilities to provide that testing like in clean room but are you doing it just in models, just can you sort of walk me through that and may be add a little bit color?

George Holmes

Sure, Kevin. Perhaps you haven't been up to read it recently enough. We've been doing this handset testing now for about I'd say little over six months and probably maybe as long as nine months. It happened just after the first year where we got - started getting really actively involved, but prior to that we did one handset. Typically we had to do it in their lab. Now they actually send handsets to us working collaboratively with their customers. And so what happens is we have the ability to characterize the handset against the actual filter design and do matching networks and software such that we can do matching very, very quickly.

That matching that has historically taken weeks and in some cases months if you’re talking [indiscernible] to happen. We can now do it now in some days depending on the complexity of the design. It’s that work that we're doing there that actually shortens that time to qualification because now we can give an actual match to one of our customers they take it back and run to the qualification process at the handset OEM and a secular work that we’re doing right now.


Our next question comes from [indiscernible], National Securities. Please proceed with your question.

Unidentified Analyst

I just wanted to get a clarification Jeff on your comments about the $1 million first half of 2019. Are you talking about quarter where you do $1 million are you talking about cumulative in the first half $1 million of revenue? Thanks.

Jeff Killian

On a quarterly basis in the first half.


Our next question comes from Cody Acree, Loop Capital. Please proceed with your question.

Cody Acree

If I can go back George mostly but the point to go back to Quinn’s question about the timing of your $1 million ramp, I understand that you get delays. But I guess my question is what changed - you said it was based on customer forecast was it specifically around your filter, was it customer engagement that the end product didn't come to market not necessarily yours or there other issues in the supply chain that may have impacted that ramp I guess. And then what is different about your visibility now versus when you gave it to this earlier?

George Holmes

Well I mean there is a couple of things and they’re added right, when you have four devices shipping your visibility across four devices we now have six devices shipping we’re going to expand it to 10 devices shipping. So, clearly and you have that backed up by another 10 devices that have been qualified you’ve now stacking the chips in your favor.

So that you don't have to rely on just three or four devices to make that number so the sheer power of numbers is in our favor but in particular to answer your questions about why - what has taken the time and have we - let me read into it have lost anything. Was there something that happened that was negative.

I think one of the things that we talked about and part of the reason we deployed PMTx is when you're doing designs is a third-party designer leveraging a tool as powerful as our ISN platform, our tools work as well as the process is maintained if the process changes the design we've done is targeted at a specific process. These processes is drift relatively regularly and by us allowing we want our partners to leverage our PMTx tool allows them to keep those processes on the money on the mark. So they are very, very repeatable that lack of repeatability is what causes delays.

Because you build 1 million parts and then the next million parts is a little bit different that causes a delay whether they're both in stack or not doesn't matter, it’s just that they’re a little bit different. So we’re able to help our customers with our PMTx tools to allow them to keep their process spot on and on the money that’s going to make them more credible with the OEM and make things happen quicker.

And you got to remember if you deliver million parts early production run and then the next production run takes it just a little bit different then they are having an expectation that it's right spot on to be the same, there is an explanation it has to happen all these things take time.

And those things that take time, time is money for us so we want to eliminate that time element which is why we deployed PMTx last quarter and we think it’s going to have a big material fact as we go into the first half of next year.

Cody Acree

Just on a more of a macro level, have you seen any change in your customers aggressiveness their attitudes given the slowdown that we seen across not just the handset market, but maybe the broader semiconductor space and then more recently we've seen some impact into the handset market itself, is that impacting any of your visibility?

George Holmes

Well, I mean I think clearly the thing that didn't happen as aggressively as our customers were forecasting at the beginning of the year is the fact carrier aggregation, the requirement for carrier aggregation for China Mobile and the impact that would have on the requirements for quads and some of the higher-end filters.

It just didn't materialize as rapidly or as in - the demand wasn't as high as expected and so some of the players that were entrenched, it just caused a little bit delay of qualification in new devices because there was excess supply from the guys that were already in the socket. We did see some impact of that.

However, we are seeing more demand for new designs. As we start looking into the fourth quarter we're seeing that activity level is very, very high. So we're cautiously optimistic as we sit here in the second month of the fourth quarter and start looking at kind of what the trajectory looks like for the end of the year and the first-half of next year, we're cautiously optimistic.

Clearly you had carrier aggregation with the big buzz. At the beginning of last year 5G has been out, there is a big buzz for over a year and it's supposed to already start impacting phones the second-half of next year I guess we'll see.

The good news is as we sit back and look at it, there is still a short - there is still a lack of supply as it relates to design capability. And so from our standpoint we're still being asked to do quite a bit, and so I think for us starting from a small number where the power of big numbers I think it's going to be in our favor and I think for us the big thing is just get more designs qualified, get more designs out there, give guys more opportunities to actually push the designs into the marketplace. That's where we're going to win.

So that's what we're focused on. We spent last several quarters very, very, very consciously working on specific designs trying to get them done. We're excited that our first Fabless customer got a part into the market place and the last month or so we expect to see their first model get in the marketplace before the end of the year, they got a number of other devices on the fabless front that we hope to see into the marketplace for year end. So cautiously optimistic is where I'd say we are right now.


Ladies and gentlemen, we have reached the end of the question-answer-session. And I would like to turn the call back to George Holmes for closing remarks.

George Holmes

Thank you, Operator.

I am very enthusiastic as we wrap up 2018 and position ourselves for 2019. We have a royalty generating engine that has proven it can capture significant market share with qualified designs. We expect to exit the year with 20 devices accepted by our customers, and 10 devices qualified by OEMs and available to ship. This is hands down the best position the Company has ever been. We have - the only complete RF design suite and we believe our ISN design platform can deliver designs across all process, technologies, faster, better, and cheaper, including those for complex filters than anyone else.

We also believe our latest advances in BAR, leverage our XBAR technology, have the potential to capture significant share of 5G wireless market. And with $26 million in cash, we have a great runway to execute against our plans.

With that, let me thank everyone for joining our call today. Thank you.


This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.