Resonant Inc. (RESN) CEO George Holmes on Q4 2018 Results - Earnings Call Transcript

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About: Resonant Inc. (RESN)
by: SA Transcripts
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Earning Call Audio

Start Time: 16:30 January 1, 0000 5:23 PM ET

Resonant Inc. (NASDAQ:RESN)

Q4 2018 Earnings Conference Call

March 14, 2019, 16:30 PM ET

Company Participants

George Holmes - CEO

Martin McDermut - CFO

Moriah Shilton - LHA IR

Conference Call Participants

Michelle Waller - Needham & Company

Anthony Stoss - Craig-Hallum

Ilya Grozovsky - National Securities

Kevin Dede - H.C. Wainwright

Operator

Greetings. Welcome to Resonant Inc. Fourth Quarter Fiscal Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded.

I will now turn the conference over to Moriah Shilton, Senior Vice President for LHA. Thank you. You may begin.

Moriah Shilton

Thank you, operator. On the call today are Resonant’s CEO, George Holmes; and CFO, Marty McDermut.

Earlier this afternoon, Resonant released financial results for the fourth quarter and full year 2018. The earnings release that accompanies this call is available on the Investors section of the company's Web site at www.ir.resonant.com. 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. Resonant is one of the few pure play companies exposed to a key growth area within smartphone as we transition into the 5G environment. We are uniquely positioned with our Infinite Synthesized Networks or ISN software platform and rapidly expanding IP portfolio to take advantage of this opportunity.

Now let me tell you how 2018 was a year in which we successfully increased Resonant’s footprint in many areas to be able to capitalize on the filter market growth opportunity from $9 billion today to $27 billion in 2025. First, we expanded the number of devices contracted by our customers by nearly 40% to greater than 70, up from greater than 50 in 2017.

We’ve doubled the number of devices accepted by our customers as meeting their expectations to greater than 20 from greater than 10 in 2017. And the number of devices that’s shipped for royalty revenues more than doubled to greater than 10, up from four in 2017 and this included our first 5G filter.

Our average royalty rate continued to grow while industry average selling prices are decreasing phenomenally, which is expected for an industry seeing current technology being commoditized as new technology is being introduced.

We also accomplished major advancements in our Infinite Synthesized Networks, ISN platform, a suite of proprietary design tools that enables the design of complex filter products at approximately half the unit cost and approximately half the time of traditional approaches. This allows us to work closely with our customers to help them get to market quicker.

The main advancements in ISN were; first, we improved design efficiency with our designers now producing on average 6.8 designs per year per designer, up from 4.5 in 2017. This metric is probably the most significant advantage Resonant has as we develop ISN into the standard to beat for RF front-end design.

Second, we released our first trial-based module named PMTx to an external customer which provides real-time manufacturing process feedback. PMTx 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 disrupted to the manufacturing process.

One of our foundry partners used PMTx in the third and fourth quarters to effectively characterize hundreds of wafers going through their fab to maximize throughput and first-run results. This year, as we expect our customers to scale up our present design, PMTx will be deployed to control the process for higher yield.

And lastly, we continue to reduce our dependency on expensive third-party solutions. We are continuing to expand our ISN platform by building our own internal software modules specifically tailored for RF front-end design requirements. An electromagnetic EM simulation tool is currently development and we expect to be ready for benchmarking by the early part of next year.

Late in the fourth quarter, we unveiled our IP standard library introducing a complex of solutions as its first offering, design and collaboration with the company’s foundry partners. We have one licensee for this product with additional customers both existing and new expressing great interest that we expect to convert in the coming quarters.

We plan on increasing the number of design bands in the library in 2019, including devices utilizing our XBAR technology and market them aggressively to both existing and prospective customers.

Our investment in adding Bulk Acoustic Wave, BAW, design capability to our ISN platform is paying off, enabling new 5G opportunities that utilize our XBAR resonator technology.

Adoption of 5G is dependent on much larger bandwidth capabilities that now is currently available from existing filters. Filters using our XBAR resonators can deliver bandwidth performance needed in a small footprint that allows handset makers to maximize available real estate.

In addition, leveraging our XBAR technology doesn’t require custom non-standard processes that drive up cost and limit flexibility. Instead, we use existing manufacturing processes for fast design, production and low unit cost.

We made significant advancements in the fourth quarter of 2018 and recently with our BAW technology development. In October of 2018, IEEE International Ultrasonics Symposium, IUS, in Japan, we announced we had developed IP for our breakthrough resonator technology we now call XBAR, which has resonates up to 38 gigahertz.

We were extremely pleased at the speed of this development. At that time, we set and announced a very aggressive goal for ourselves to demonstrate a filter using XBAR resonators by Mobile World Congress in February 2019.

In early February, we announced we beat that major milestone and have fabricated our first filters using our XBAR resonators. Late in February, we announced we have exceeded our own expectations by delivering filters with approximately 3x the bandwidth compared to current technology in the 5G frequency range and measured approximately 1 dB of passband insertion loss ultimately minimizing the transmit signal loss, and hence prolonging battery life.

Many of the companies we met with at Mobile World Congress highlighted in their feedback to us that to-date they had not seen or unaware of any other company that has been able to demonstrate a real filter at these frequencies or with these bandwidths.

During our invitation-only meetings at this year’s Mobile World Congress in Barcelona, we demonstrated actual measure results from our XBAR filters. We met with some of the largest operators, Tier 1 handset OEMs and module suppliers as well as Tier 1 and Tier 2 component suppliers both vertically integrated and fabless. Our guests all of which could be potential Resonant customers and partners claimed that this is the first time they had seen filters with bandwidth this wide from acoustic filters demonstrated with actual measure results from physical samples.

Combined with our trade secrets program and more than 165 issued and pending patents, up from more than 125 at the end of 2017, we believe these recent achievements position us well with XBAR to deliver the performance 5G demand; faster, better and more cost effectively, which shortens the time to market for potential customers and further enhances Resonant’s long-term value for shareholders.

This year, we expect to continue to expand our footprint and presence in our served markets while additionally leveraging our XBAR technology to enter potentially new markets such as CPE and infrastructure. Most significantly, we believe XBAR’s performance is not currently matched by any existing players in these markets.

I’ll go into more detail about our expectations for 2019 after Marty provides more detail on our full year performance in 2018 financials. Marty?

Martin McDermut

Thank you, George. First, our fourth quarter 2018 financials. Fourth quarter 2018 billings which included deferred revenues were $177,000 which is more than double quarter-over-quarter and more than 3x year-over-year.

Revenue was $128,000 as compared to $115,000 in the prior quarter and $171,000 in the fourth quarter of 2017. Our royalty revenues of $39,000 were $9,000 greater quarter-over-quarter.

For devices shipped in the fourth quarter of 2018, average royalty rates increased to roughly 9.6% from roughly 9.4% last quarter and ASPs decreased phenomenally due to increased pricing pressure in the China market.

Research and development expenses were $4.1 million, up from $3.6 million in the prior quarter due primarily to increased payroll and product development costs. Sales, marketing and administrative expenses were $3 million even with the third quarter of 2018. The net loss was $6.9 million or $0.25 per share based on 27.2 million shares outstanding.

Non-GAAP adjusted EBITDA was a loss of $5.5 million or $0.20 per share compared to a loss of $4.9 million or $0.18 per share in the third quarter of 2018. Cash burn for the fourth quarter of 2018 was $5.2 million. Cash, cash equivalents and investments at December 31, 2018 totaled $21.3 million.

Turning to the full year 2018. Billings totaled $681,000 compared to $468,000 in 2017. Revenues were $524,000 compared to $653,000 in 2017. As of January 1, 2018, we adopted Accounting Standards Codification or ASC topic 606.

Revenues from contracts with customers which negatively impacted our revenue by $71,000 for the year ended December 31, 2018. Under the guidance and effect for 2017, our revenue would have been $595,000 for the year ended December 31, 2018. The remainder of the difference relates to the timing of design efforts. Royalty revenues were $159,000 compared to $40,000 in 2017.

Total operating expenses were $25.3 million compared to $19 million in 2017. The increase is primarily related to higher cost associated with increased headcount as well as increased development costs related to our ISN software development as well as increased activity on our filter designs under development.

We ended the year with a total of 67 employees, 15 of whom have a PhD and 46 of whom are part of the technical staff. Net loss was $24.8 million or $0.98 per share compared to $21.7 million or $1.44 per share in 2017.

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

George Holmes

Thank you, Marty. I’d like to spend a few minutes now focusing on what fuels our excitement and confidence on our long-term growth opportunity and what we believe is the inevitability of our success.

There have been several meaningful validation points to discuss in the market since our last earnings call. As highlighted by most measures, we surpassed our year-end milestones set forth adding credence to the growth in 2019 looks promising.

We have capitalized on the strength of ISN platform to extend its performance to include SAW, TC-SAW and BAW which was done in a fraction of the time we projected unleashing Resonant to become the fourth multiplier in the market.

We believe we have the ability to set the industry’s leading standard with design efficiencies on average of 6.8 designs per design every year across all categories of designs from the simple to the very complex.

We continue to capitalize on our strengths leveraging ISN’s tools and technology to provide a competitive advantage in design time and efficiency as the current 2G, 3G and 4G technologies become even more commoditized.

Most exciting is the development of new cutting edge resonator technology, XBAR, which has the potential to revolutionize the filter market for 5G. XBAR empowers us to much better participate in the growth of the entire market from 9 billion today to 27 billion at 2025.

Our overall handset sales have been sluggish. We are one of the few pure plays positioned in this dramatically growing RF front-end market. Our ISN tools enabled Resonant to go from presentation at IUS to demonstration of filters with XBAR resonators in less than five months.

We demonstrated bandwidth 3X that of traditional [indiscernible] filters to an entirely new set of 5G customers. I’ll mention again, customer feedback was quite promising. This gives us the ability to set the standard benchmark for performance in this exciting rapid growth segment of the market. I’m truly excited about our prospects for the rest of the year.

With that, I’ll turn it back to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question is from Michelle Waller with Needham & Company. Please proceed with your questions.

Michelle Waller

I’m on for Raj Gill. Thanks for taking my questions.

George Holmes

Hi, Michelle. How are you?

Michelle Waller

I’m doing well. So I guess I just wanted to start out with the royalty ramp and if you guys continue to see reaching the seven-digit figure by the first half of '19, is that still on target?

George Holmes

Let me jump on that. Marty can follow up with some additional details at the end. Bottom line I think it’s too soon to tell. What I can tell you right now is that going into the fourth quarter and early part of the first quarter, we saw that both [indiscernible] as well as a number of the large module manufacturers were indicating softness in the market. What I can tell you is we were very pleasantly surprised that that didn’t stop our customers in the fourth quarter. They continued to help us meet our key indicator milestones of greater than 20 devices accepted and greater than 10 devices having shipped for royalty revenue clearing noting that our customers are not discouraged by the macro market environment and they’re moving aggressively to try to get their new devices into the market. We’ve seen significant validation points from all of our customers that have delivered royalty revenue, reminder again that’s greater than 10 devices. They are aggressively moving to sample Tier 3, Tier 2 and Tier 1 OEM handset manufacturers as well as the reference design companies with hundreds of thousands of devices being shipped for royalty revenues in the first month of the quarter. They continue to ask us help with the qualifications and spins [ph] for margin, all indications that they’re engaged with the OEMs. So all of this makes us very cautiously optimistic as we continue to drive the royalty, we are convinced this is inevitable given where we are and we continue to be focused on not only supporting our customers with existing technologies and making sure those devices get into the market as fast as possible, but working diligently to capitalize on the new opportunities we have driven by our XBAR technology. I hope that helps. Marty, did I miss anything?

Martin McDermut

I’d just add that even in spite of a softening that we saw in Q4, we beat our milestones which precede any ramp that we’re going to have, and we’re seeing early indications of sampling new bands are also encouraging, but we’ll go along with this model as we’ve talked about. Yes, we get high margins. We got to balance that against the predictability of what are customers’ specific execution. So we’re driving hard to support our customers and achieve the goal that we set out.

George Holmes

I hope that helps, Michelle.

Michelle Waller

Yes. Thanks for the color. So then for my follow up just trying to see if you guys have any 2019 KPIs like you did for 2018? And then if maybe you guys have any comments on what you or your customers are seeing in the China Mobile market as you said it’s been sluggish, but just wondering if you’ve seen any impact on design activity with customers or anything there?

George Holmes

Yes, great questions both fronts. Let’s first talk about China Mobile and then I’ll come back and hit the KPIs here in a second. Clearly, China Mobile is – there was a little bit of softening in Q4 but they are driving hard. What we did see in the fourth quarter is they slowed a bit as they were getting ready to move aggressively to support their kind of 70-year anniversary with 5G that is their major target for this year. What we saw is, we saw that the Tier 4 and white box guys basically kind of dry up in the marketplace. That being said, you start looking at what’s happening right now and the activity that has increased in a tempered [ph] pace. There’s a lot of activity in particular around 5G, in particular around the fact that they intend to get over 10,000 base stations deployed at all three of the major carriers. So what we’re seeing right now is activity is again picking up. We attribute some of the work that we’re seeing on our near band 41 5G filter going in the marketplace, being sampled, being largely driven by that. So I think that that is an indicator that as we go into the second quarter and the middle part of the year, we’re going to see activities pick back up. So we’re very, very encouraged by it and we think that’s a large part what’s driving some of the activity we’re seeing with our customers and their activities with the subsequent OEMs. Now as it relates to KPIs, the big thing that comes next from a KPI perspective is for us and we expect to see this really kind of jump into our quarterly reports here in the second quarter is adding to the KPIs royalty revenue and being able to add royalty revenues and actually the unit volumes to add to that. Where we stand right now is we still believe that we’re on target to make an on average 40% year-over-year growth in all the major KPIs we highlighted here earlier in January when we were at your conference. So we think we’re still on track for that. We think it’s still going to be the thing that drives us and again those are things that like team, our ISN platform, our design efficiency, number of customers we have, foundry and packaging partners, devices under contract, total market value of the devices we have as well as devices that are shipped for royalty revenue and devices accepted by our customers. So net-net, on track for an average year-over-year growth of about 40% across the board and that was with a range of 14% to 100%.

Michelle Waller

Okay, great. Thanks for the color.

George Holmes

Anything else?

Michelle Waller

No, that’s all for me. Thank you.

George Holmes

Okay. Thanks, Michelle.

Operator

Our next question is from Anthony Stoss with Craig-Hallum. Please proceed.

Anthony Stoss

Hi, George. Hi, Marty.

George Holmes

Hi, Tony. How are you?

Anthony Stoss

Good. Maybe of the 20 devices that have been accepted by your customers if you can kind of paint a better picture on when those devices will be launching throughout this year by quarter? I assume it’s not five new devices go live per quarter, but just give some sense of the devices going live. And then also if either of you two wouldn’t mind commenting on the burn rate and your thoughts if revenues kind of stay at these depressed levels, what the plan might be later on this year?

George Holmes

Okay, great. Let me take at least the first piece of that question and talk about what’s happening with our customers as it relates to the 20 devices accepted and how that kind of rolls into a royalty revenue potential. The key thing for us as we sit back and look at how these things go into production over time, whether it be from the time we get through the development process which as we stated historically is either 9 to 12 or 12 to 18 months for a majority of the designs we have under contract today for the designs that are custom or library designs that go directly to customer qual, that’s kind of the first piece of the puzzle. That’s followed shortly thereafter by this three to six month customer qual of our customers followed by the three to six month qualification by the OEMs. What we’re seeing right now and kind of the position we find ourselves in is this initial customer ramp, test for yield and this can be hundreds of thousands of units. And in some cases for the major OEMs if you’re talking the top two guys on the list, that can be 1 million units a month for a couple of months as they kind of wring out that qualification process before they go to kind of the digital upswing in unit volume. And so what we see right now is kind of where we are is we’re working through those early hundreds of thousands of units upfront engagements, fine tuning yield, getting them in position for not what I would hysterically call a hysterical quarter-over-quarter, month-over-month ramp but more of a digital ramp in the opportunity. Many of the devices, many of the sockets our customers are going for are replacements of devices that are already in the market and they expect and have shared with us that once they get through this initial test for yield qualification process with the OEM that they’re going to see digital upticks in volume. So going from the hundreds of thousands to the millions of units on a monthly basis, whether it’s the low volume devices that it might be 2 million to 5 million a month, mid volume devices that are 5 million to 10 million a month and high volume devices that are 15 million units a month. So we see that happening – starting to happen and that digital opportunity we expect given what they’re telling us right now, in the second quarter for many of the early devices that we saw that converted at the end of the last year to get this first 10 and that balance of the 10 which was another 10 devices to happen in the third and early part of the fourth quarter. So I think that we’re well positioned on the first half with that first grouping of 10. Second half, the majority of that will happen I think in the third or early part of the fourth quarter. Hopefully that answers the first part of that question. And Marty can tick off on where we’re at on burn.

Martin McDermut

So in the quarter we burned 5.2 million and that’s a good base. We are going to add – continue to hire but we’re also being very careful about our cash. The other thing you have to consider – build in or consider is the [indiscernible] ramp. And then there is a seasonality piece to our cash burn. If you go back to Q4 of '17 and look at – and then the first quarter of '18, you’ll there was a jump and we paid off some compensation programs that we accrue during the year, so you’ll see it jump in the first quarter to pay those liabilities off and then it will come back down to a more normal level that you saw this past year around the $5 million.

Anthony Stoss

As a follow up, George, I know within 5G, each band [ph] is different and pricing is different. Can you give us a sense on your XBAR where do you think kind of an average license fee per unit would be for you guys?

George Holmes

We expect that kind of the XBAR based filters and Tony you may know and understand this better than many in this space just because of your longevity in the filter area and covering them both. These are the most complex filters. You’re talking n50, n79, n77 and n79 in particular being a wide bandwidth filter we think that’s going to be a device that’s probably going to have somewhere north of 10% royalty rate as a standalone device. And if you could do something exciting, which is something that I think is in the cards for companies like us, which is making an actual duplexer out of maybe an n77 and an n79 filter, for example, that could give you as much as 1.5 gigahertz of spectrum in a duplexer. That would cover in all practical terms the entire global spectrum from 4G; that would be a pretty remarkable device and so that would get out there at the higher end. And companies like us that leverage a software tool are going to be the ones that have the ability to get there first. And so our partners that engage with us on devices like that really are going to have a multiplying effect to their market opportunity we believe as we continue to design these devices here in the balance part of this year.

Anthony Stoss

Thanks, George. Good luck.

George Holmes

Okay. Thank you much, sir.

Operator

Our next question is from Ilya Grozovsky with National Securities. Please proceed.

Ilya Grozovsky

Thanks. George, on the last answer you gave a very vivid description of kind of what 2019 would look like in terms of potentially shipments of devices. What would that translate to in annual revenues if it played out the way you just described?

George Holmes

Ilya that is such a good question and as you know, we don’t – we are not giving guidance for the balance of the year at this juncture. At this juncture we are cautiously optimistic that we’re going to be moving forward and converting these devices that we have currently under contract. I am very excited about that. I’m more excited about what 5G does to the overall market, because 5G while it feels like it’s kind of a sparkly lights conversion for a lot of guys that are out there in this space, but what it actually does is it creates even a greater pressure on the 2G, 3G and 4G devices that are going to continue being manufactured through the balance of the next five years. And the companies that are in this space delivering those devices are going to see those devices get further commoditization on the pricing of it and it’s going to have greater requirements to move very quickly and very efficiently. And we are right there at the sweet spot with our ISN tool having the ability to have greater design efficiencies than we believe anybody else in the marketplace. And so we’re going to be ideally suited to help them. And then the multiplicative effect you get from adding 5G high frequency devices on top of that and us being kind of the guy at the forefront with wide bandwidth devices should make our partners very well positioned to capitalize on the growth market opportunity. Now that’s a little bit ahead of the discussion that you asked me to answer, it really gives you a view I think of what we believe the market opportunity in the grandiose scheme is. And I think it well positions us to deliver on the promise that I think all of you guys that have been following [indiscernible] as a benchmark for us through the balance of the year.

Ilya Grozovsky

Okay. Thanks. And then lastly, did you buy back any shares in the fourth quarter given that November announcement?

George Holmes

Yes, we bought back about a couple hundred thousand shares. I think it was 81,000 – couple hundred thousand dollars worth and I think that translated to about 81,000 shares.

Ilya Grozovsky

Great. Okay. Thanks, guys.

Operator

Our next question is from Kevin Dede with H.C. Wainwright. Please proceed.

Kevin Dede

Good afternoon, gentlemen. Thanks for taking the call.

George Holmes

Hi, Kev. How are you?

Kevin Dede

I’m good. Thanks, George. Could you give us a little more color on the specifics of what you showed at Mobile World Congress and how you’re comparing it to other filters that apparently other people can’t make? Just fill in some of the – I think it’s some great information. I just didn’t quite understand the full context.

George Holmes

Okay. So let’s see if I can cover off on some of this stuff. A lot of guys are talking about having 5G filters. There’s things out there about the ultra platform on 5G front-ends. There is 5G portfolios out there of highly integrated front-ends that are being talked about by some of the module manufacturers. What we heard from everyone of the OEMs that we talked to at Mobile World Congress is that after displaying – when we were displaying an n79 filter that 5G bands at a high frequency will likely be either discrete components or a single band module. So what does that all mean? It means you’re going to have devices that are going to have a requirement of very high bandwidth. We demonstrated 600 megahertz of bandwidth and what we in our first trial on a device with – and so when we did that and we were showing that off to different folks, bandwidth is king when it comes to 5G filters. And the fact that we had that much bandwidth gave a lot of guys pause to think that we were going to have a tremendous opportunity to convert that into real world devices very, very quickly. So let’s come back to what did we show? When we set out and started this whole process, if you recall, it was this time last year I said we were going to spend more money in 2018 on the development of our software. We were going to engage in pushing different modules out to the cloud and pushing that out to our customers, which we did with the PMTx tool. We said we were going to add the addition of electromagnetic simulation into our portfolio to try to eliminate some of the broad-based applications that we current licensed to drive cost down, drive speed up and really further augment the tool that we have that’s specifically designed to support the development of RF front-end. And we also said we’re going to start down the path of developing a BAW integration into our ISN platform. We already had SAW. We developed TC-SAW in 2017. We said we were going to start that process in 2018 for BAW and we said it was going to take us – we thought about two years. And if you recall last year, midyear, we said, hey, we had a major breakthrough and we were actually designing our first devices in that case it was going to be resonators in the midyear timeframe after the first major development. So first anchor in the ground is we had patented in some new structures and those structures were patented and we found the first patents in the mid part of last year. We were very, very lucky we were able to develop resonators against those designs and we developed those resonators and actually demonstrated them at IUS in October in Kobe, Japan and those were the resonators that had very high frequency; 3 gigahertz, 4 gigahertz and we were very excited about that. And I set the bar not only for this group but also for our internal team to work to try to develop a filter by the Mobile World Congress that happened last month. And it was a pretty tall order considering we invented this structure in June of last year and we’re trying to – less than nine months later demonstrate a fully working filter. Well, the initial thought was we’d get to Mobile World Congress. We’d have a device that looked like a filter but probably wouldn’t have great isolation, probably wouldn’t have any great WiFi rejection, probably wouldn’t be completely right on frequency. And so we just hoped we’d had something that looked like a filter. Well, first part of the month of February we identified that yes, we had done that and we thought, well, let’s try to work on this a little bit further and leverage our ISN tool, try to see what we can do through simulation to do some work against the devices that we had already fabricated. We’re able to do that. We’re able to shift the frequency down and ultimately we were able to develop and demonstrate at Mobile World Congress an n75 center band filter with 600 megahertz of bandwidth. We thought that was pretty exciting and we were pleasantly surprised that everybody we showed it to thought it was pretty exciting as well. So that’s kind of the rounded out picture. Clearly what we’re working on today is taking it to the next step which is working to add things like power durability and other things to those fundamental structures and devices so that we can continue to march down the path to get these devices into our library by year end. I think I said on my last note that we hoped to try to be in a position to have devices in our library by the end of the third quarter and that’s what we’re targeting. And so what does that mean? That means we have to do everything you have to do to complete the device development, ultimately do all the reliability testing on the device and ultimately find some guys to partner with to be able to do some things like handset testing as well. We think we are on a path to get that done and that’s what we’re working towards.

Kevin Dede

So, George, your n75 was done in XBAR just to be clear.

George Holmes

n79 was done in XBAR. Yes, sir.

Kevin Dede

n79 in XBAR, okay. And did you show that at Mobile World Congress too or --?

George Holmes

That is what we showed at Mobile World Congress with an n79 --

Kevin Dede

Okay. I thought I heard 75, sorry. All right. So with that said, can you speak to your positioning vis-à-vis I guess the module manufacturers and the cell phone OEMs on your positioning with regard to handset builds? One would think given higher replacement volumes as that new technology comes out that you should be better positioned than having to manufacture filters for replacement slots? Can you speak to that a little bit in the legacy 4G world?

George Holmes

From my perspective, Kevin, I actually look at our existing customer base and the targets they’re focused on which is 2G, 3G and 4G devices. That’s a sweet spot of our business because if you look at ISN, what does that ISN platform do? It allows you to do designs faster, better, cheaper or most cost effectively than we believe any other way to get designs done and that through fewer turns, that through higher design efficiency. And as the market continues to commoditize as the new technology comes into play, having the ability to go help companies and our partners, which now there’s 11 of them, just be better at that and allow them to do that more efficiently I think that bodes well for us to continue to expand that initial footprint that we’ve created. Now remember, we came into that business after it already had kind of hit the apex of maximum price and maximum volume. And so we’ve done everything that we’ve been doing is to help guys be more efficient leveraging our tools in those segments over the last three years. Now with the advent of our XBAR technology, getting ourselves into BAW and seeing that the 5G market is beginning to develop, I wouldn’t say it is developed by any sense of the imagination, I would say that we’re going to see limited deployment of limited SKUs by the end of this year and start seeing next year to be something that is something that you can actually start getting excited about from a unit volume perspective. But I think we’re at the forefront of that with some very interesting technology, a lot of work to be done on our part. We think we’re well positioned. We continue – we are not changing our business model. We’re continuing to support the customers and partners we engage with on a per unit royalty licensing basis. And we’re actively pursuing companies that we believe could take this technology in the market in a big, big way. And that is the same customer base that we have identified on previous calls that really starts with the vertically integrated customers to the fabless customers to the shot that there may be a niche market OEM that might find what we’re doing interesting. But as I’ve said not only on previous calls here but also in my previous life when we were talking about selling directly to handset OEMs, that takes a really, really long time. And you start that process and it just takes a long time to gestate and ultimately have them get through the manufacturing process. And for us that’s a one-to-one relationship. We tend to like things that are one-to-many. But we’re open to it and we’re going do our best to try to support those guys the best we can.

Kevin Dede

Okay. You mentioned design efficiency improvement and ramping up turns per designer, what, 6.8 I think you said. Can you translate that capacity and efficiency improvement to addressing capacity constraints within design and where you think that positions you in the legacy 4G and as you transition to 5G?

George Holmes

Yes, that’s a really tough one, Kevin, because that’s customer to customer, partner to partner dependent. I think you could probably do the work and figure out that the different players in the vertically integrated space, some of them have low design efficiency and they focus on turning – designing through iteration and that’s what they think they’re good at. And then you’ll find companies that are really, really efficient and they do fewer turns and they think that they’ve broken the code on how to get things through their process quicker. And depending on how the company is, if you’re at one end of that spectrum or the other, our value proposition was a little bit different. We do believe our design efficiency is even with the best of the best that are out there, we do believe our design efficiency appears to be at least double what they’re doing right now. So that puts us in a good spot to help. But at the end of the day, guys want to be helped and we’re out there talking to different manufacturers in this space on how we might do that. The one nice thing that we did when we architected our software solution and this is part of the work we did last year is we didn’t try to make our software, hey, you got to eat the entire elephant to use it. We’ve basically taken our software and basically modularized it. So depending on who the potential partner is, they could take off a piece of it. For example, if they thought our PMTx tool was something they had a lot of value to, they could license that. If they wanted to do our acoustic modeling tool, they could do that. If they wanted to do our modeling and layout, they could do that. It’s a very modularized solution, so you don’t have to eat the whole elephant and literally throw the baby out with the bathwater of what you’re currently using to get comfortable with what we’re doing. You can kind of bring up different modules over time and actually leverage that as a way to get engaged and actually work through the process with us.

Kevin Dede

Okay. So thanks for offering a view to royalty revenue in the fourth quarter versus the third and year-over-year. I appreciate that. But can you talk a little bit about the PMTx solution and specifically just what you were speaking to of that whole licensing model and modularized software? How can we watch the progress that you make there?

George Holmes

That’s a good question because a lot of that is proprietary data that comes out of that. What I would tell you, Kevin, is PMTx and as we talked about it on previous calls that PMTx solution is one that allows companies to intercept data in their manufacturing process, analyze it and make adjustments that is not destructive by going in and actually tearing apart wafers and destroying them to identify where they’re at in the process. So they can make in-process judgments leveraging the tool to try to increase yield and throughput. Different companies have different needs. We’ve built PMTx now so it will support both – to support both SAW and TC-SAW. We don’t have it available yet for BAW. We’re not that far along yet with our BAW product development. I think that will probably happen over the course of the next 9 to 12 months that we add that to that portfolio of solutions as well. But right now the feedback we’re getting is that it allows them to be more efficient, reduce the yield loss that they have by having their process stripped and that’s about all I can say about that at this time.

Kevin Dede

Okay, so nothing from a price perspective or revenue perspective?

George Holmes

As we said back in the third quarter, we have licensed that on a royalty free basis today because we’re using it to help learn from a development perspective how to deploy parts of our tool into the cloud, manage it, gather data from it, make it better is all part of the development process for us. So at this juncture it’s a royalty free model for them.

Kevin Dede

Okay. Do you have to characterize it or help your customers characterize it for their specific fabs?

George Holmes

Yes.

Kevin Dede

So there’s some customization involved?

George Holmes

Well, what we have to do is we have to understand, which we do already if you recall, part of what we do when we get – bring a new partner online is we characterize the different processes with PDKs and with TEG wafers so that we understand what the individual processes that they’re running can’t do and we actually plug that into the tool. So it isn’t really a customization. It’s part of the database we build from the get-go.

Kevin Dede

Okay, fair enough. Marty, you mentioned 15 PhDs and I missed another figure that you gave on the R&D headcount side. Would you mind repeating that and then sort of giving me a compare? And then somehow translating it into the 4 million that was spent in R&D in the fourth quarter and where you think that goes?

Martin McDermut

So I think the only other piece of information I had was we’ve got total 67 people. 46 of that 67 are in the R&D group and then you’re left with sales marketing and administrative and sales – of that remaining piece, sales was about half of that.

George Holmes

Also I think we talked about all the things we’re working on. So if we put more money in the business, it’s going in the R&D side. There’s a lot of opportunities for us with us now, the XBAR, so I think what we’re talking about is the design efficiencies that we’re getting actually makes it. So we don’t add designers when we increase our throughput. We do that through our software tools. The people that we’ve added on the design front have been in software to support the software development and in specific module support that supports a specific module, like our EM stimulation tool. Because we are now doing a series of library product, we’ve got a couple of test guys that have joined the team. But for the most part, we’re very lean and mean from a people perspective and the growth in headcount phenomenal.

Kevin Dede

Okay. On that point, George, just to get back to sort of the design capacity industry perspective, are you finding it difficult to get people that you need? Are your competitors pushing hard to take people from your ranks? Just give us sort of a perspective on that.

George Holmes

Well, the nice thing about what we have, Kevin, is unlike a traditional filter manufacturer that basically hires guys with longstanding filter experience because they design through iteration and they have to know RF front-end design, we’re a software company. We design through simulation. So we can take guys straight out of the school, teach them how to run our software and with much fewer RF guys actually capitalize on that software capability to actually do the design work. I think it’s that uniqueness and how we have built the company and what we’re trying to accomplish allows us to bring guys onto our team very quickly and efficiently. I would say we are not losing people to the major players in the marketplace. I think our attrition is virtually nil. Guys who join us they love what they do, they’re excited about the market opportunity and you got to believe when you’re – that guys are believers in what we do when you got – you were a microcap company with volatility in our stock price. And so when you have volatility in your stock price, you get a little worried about your guys and our guys are fully committed because they believe and they know where we’re going and they know what’s out there and they know what the opportunity is. We have the ability to change this entire market. We have the opportunity to build – we’re building a tool that we believe can be the standard for the industry. And now we’ve got new resonator and filter technology to address the next great growth segment in the marketplace. And we think we may be at the front of that. And if we are, that’s going to be great for our partners that we get engaged with. So we’re pretty excited about it actually.

Kevin Dede

I couldn’t tell, George. You might want to say it one more time. Thanks, gentlemen, for taking all my questions.

George Holmes

No worries, Kev.

Operator

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

George Holmes

Great. Thank you, operator. I just want to thank everybody not only on the call today that has been supportive of the company over the course of the last three years since I’ve been here, all the employees here at Resonant that are committed to what it is that we’re doing.

We’re at a very exciting time for the company I think at the precipice of an opportunity that is going to be game-changing in the marketplace and we’re excited for the support. And look forward to keeping you guys up to date. Thank you very much.

Operator

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