Resonant Is A Good Short As Its XBAR Resonator Is Years Away From Commercialization

Summary

• With Resonant (RESN), an RF filter resonator designer, the more design wins they claim they have, their revenue gets lower or flat, which is nonsensical.
• Resonant’s RF filter design simulator process is not unique, and is done by all of the top RF filter manufacturers.
• Resonant’s own lead engineer says its XBAR resonator is a long way from becoming a commercial product. It may never get there.
• Without a fabrication facility to test the simulator software design, it is hard to improve the software.
• Resonant calls XBAR a "breakthrough" yet there are no published white papers or data sheets on it.

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Resonant (NASDAQ:RESN) was founded 2012. It was a spinoff of failed technology company Superconductor Technologies (OTCQB:SCON). SCON now trades for under $1 with a market cap of around $3M.

Resonant designs resonators for radio frequency (RF) filters in the mobile device industry. We have spoken to some RF Filter engineers, and have read many research papers on the RF Filter design industry. Resonant is designing a resonator, it calls XBAR, which it calls “breakthrough resonator technology”. We are skeptical that the XBAR can ever compete against the incumbent FBAR and other BAW filters. Coupled with the company’s miniscule revenue and high cash burn, we believe RESN is a good long-term short.

In its seven years of existence, Resonant has never generated more than $250K in quarterly revenues. For quarter ended 6/30/19, the company only generated $63K in revenues. And that’s with their consistent claims of increasing design wins and acquiring more customers who “keep coming back for more design orders”. The customers they are getting clearly aren’t getting their products to market in order to pay Resonant a significant amount of royalties.

Right before the company reported its abysmal Q219 earnings report, on 8/6/19 they issued a press release announcing they’re doing an equity offering. In the PR, it states:

“Murata Manufacturing will lead the round, demonstrating interest in Resonant’s technology.”

Murata led the round with a $7M investment at $2.53 per share, but hadn’t given Resonant the money yet. The market didn’t think highly of this news, as the stock stayed around $2.50 for the next week. After about 10 days, the stock went above $3.

Recently, on 10/2/19, Resonant announced that Murata has officially sent Resonant the $7M investment, and entered an agreement in which Murata will pay Resonant $9M over a three year period for milestone achievements which are undisclosed.

Resonant claims to have an advantage over the competition through their computer simulation software to design resonators for RF filters. Our research has shown us that Resonant’s technology is nothing special and doesn’t give them any advantage. Its competitors use simulation software too. The company is competing against multi- billion dollar companies like Broadcom, Qualcomm, Qorvo, and Skyworks. These companies make billions of dollars in annual revenues. Resonant doesn’t have the R&D budget to compete with these behemoths, who clearly know what they’re doing given their innovative success.

The More Design Wins And Customers Resonant Gets, The Lower Or Flat Its Revenues Get – Huh?

In what Universe is this company in, that the more business it gets, its revenue doesn't improve? We can only conclude that the new design wins and customers it gets aren’t putting out much commercial product.

Resonant’s CEO, George Holmes, on 1/16/19 boldly predicted:

“We believe 2019 will be a breakout year for Resonant, building upon our expansion in 2018.”

Yet, the company’s subsequent performance didn’t reflect Holmes’ statement. The following is the company’s revenues over the past couple of years:

Source: Bloomberg

As shown above, Resonant’s revenue estimates have been over $200K every quarter since Q317. Yet Resonant has never been able to generate over $200K in revenues in a single quarter in its seven years in existence. The last quarter, Q219, was the company’s worst, at only $63K in revenues.

From the Q318 earnings call slides, slide 17 shows the company’s increase in design wins over the past few years:

Source: Q318 Earnings Call Slides

The chart above shows that the company’s design wins went from over 25 at year end 2016, to over 50 in year end 2017, to over 75 at year end 2018. And with that increase in design wins, the company claims that there’s an increase in revenue potential. Yet, the company’s revenues have remained practically immaterial over the past couple of years, and this last quarter the company couldn’t even make $100K in revenues. How did the company come up with that chart above? Resonant seems out of touch with the amount of revenues it can realistically generate from its customers.

At the company’s presentation at the Ladenburg Thalman investor conference on 5/30/19, Mike Eddy, the VP of Corporate Business Development, said:

Which is why we have the 11 customers we have, and they keep coming back for more and more designs from us.

If the customers keep coming back for more designs, then why are revenues decreasing?

In its Q119 earnings call slides it shows:

Source: Q119 earnings call slide

In the company’s Q219 earnings call slides shows a slight improvement:

Source: Q219 Earnings Call Slides

Yet the company’s revenues tell a different story, with Q219 revenues being the lowest it has ever been over the past 2.5 years.

George Holmes became the CEO of Resonant in January, 2017. As shown in his biography, he was formerly the Chief Commercial Officer for Energous (WATT). Energous is another speculative technology company that has performed poorly over the past few years.

Resonant Has High Cash Burn

Resonant is now burning a whopping $7M per quarter, more than ever before. And yet annual revenues remain well below $1M. This is shown below:

Source: SEC filings

Our estimated 2019 numbers are based on how the company has performed in the first half, adjusted by info we got from the company in the Q219 earnings call. It had a loss of about $14.5M and revenue of $200K from 1H19.

The 2^nd Half Of 2019 Will Likely Continue To Have Disappointing Revenues

In the Q219 earnings call, Holmes said he expects growing volume of unit shipments in Q319. He said that 400K units were shipped in July. We estimate that Resonant makes about $0.13 in revenues per unit. We come to that number by Holmes statement in the Q219 earnings call that 1.5 million units were shipped in 1H19. Resonant generated about $200K in revenues in 1H19, so that comes to: $200K/1.5M = $0.13 per unit.

Therefore, we estimate that Resonant generated $0.13 x 400K = $52K in July, 2019. Multiple by 3, that comes to around $150K in revenues for the quarter. That’s a big miss from the $334K Q319 estimate we showed above from Bloomberg. We assume revenues increase to $200K in Q418. That’s how we came to expected revenue of $550K in 2019. We’re not including the $9M in milestone payments from Murata over the next 36 months, we don’t know when that will get paid.

Resonant’s Own Lead Engineer Says Its XBAR Filter Is A Long Way From Commercialization

The IET Digital Library is a website with many technical papers and journal entries designed for scientists and engineers. It’s not what companies present to investors at investor conferences to persuade them to invest. There’s no buzz words or overly optimistic projections here, it’s what’s really going on.

This article from the IET Digital Library discusses Resonant’s work to develop its XBAR filter, which is supposed to be its “breakthrough” resonator technology. The article quotes Resonant’s VP of Advanced Engineering, Patrick Turner. Dr. Turner received his PHD in Physics from The University of British Columbia, as shown in his LinkedIn profile. He’s a true scientist, not a salesman or investor relations rep, so he tells it like it is without exaggeration. He states:

Although the technology has come a long way in a short time – from first technology demonstration to functioning filters in under 6 months – there is a lot of work remaining to make this a commercial product, which is the ultimate goal.” notes Doctor Turner. “the next step for commercial products is to develop filters for fabrication facilities that are capable of volume manufacturing to prove the technology's manufacturability including high yield and low cost.

Turner’s quote above means that the XBAR has a lot of work to do to reach commercialization, if it reaches there at all.

From this XBAR research paper published in June 2019 it says:

XBARs (laterally excited bulk acoustic wave resonators) might be the solution.

Key word is “might”, and that shows that the research isn’t done yet to make a functional product. It’s still in the development stage, and we believe it won’t be ready for commercial production for many years.

Resonant’s software, Infinite Synthesized Networks (ISN), is a simulator software to create its XBAR resonators. This page describes how the ISN works.

In the Ladenburg Thalman presentation, Mike Eddy stated:

The ISN depends entirely on physics. All we need is the materials, properties and physical dimensions of the design, in order to get the software to optimize the performance of the filters that go into these RF front ends. Very different from what’s done traditionally which is very empirical. Most filters are done by integrated, filter manufacturing companies who have both a design team, and their own fab. They design, send it out through the fab, they measure it, it doesn’t match the model, so they tweek the design, send it through the fab again. Multiple iterations, it’s very empirical, and takes time and high cost. Resonant’s fundamentally different way of designing filters allows us to design in software and when we do a simulation for a customer, they are very confident that their fab will come a design that is accurately represented by the simulation before it goes into the fab. Really what we provide with our ISN, is short development time, lower cost, and fast time to market for our customers.

We believe there are many fallacies in this above statement. Analyzing it piece by piece:

The ISN depends entirely on physics.

Yes, that’s true, so does any semiconductor manufacturing process. All designs are according to the laws of physics.

All we need is the materials, properties and physical dimensions of the design, in order to get the software to optimize the performance of the filters that go into these RF front ends. Very different from what’s done traditionally which is very empirical. Most filters are done by integrated, filter manufacturing companies who have both a design team, and their own fab. They design, send it out through the fab, they measure it, it doesn’t match the model, so they tweek the design, send it through the fab again. Multiple iterations, it’s very empirical, and takes time and high cost.

Our research has shown that the above statement is false. Resonant’s ISN is not different from what other RF Filter manufacturers are doing. Other companies also have computer simulation programs. They also usually have a fabrication plant (FAB). Their process is first they do a computer simulation based on mathematics and the laws of physics, and then they build that model in their fab. However, RF Filters are extremely complicated, and the real chip almost never matches the computer simulation. There are many other very subtle factors that go into creating a chip that a computer doesn’t take into account. How the chip turns out from the fab is also good feedback to make adjustments to the software simulator.

Whether the simulation is from Resonant or an RF Filter manufacturer like Murata, the process is the same. If all it takes is a simulation to create a commercial chip, then everyone would be doing it by now and not waste their money on many different iterations.

This report discusses BAW resonator 3D simulation software.

This article discusses FBAR 3D simulation.

Here a company called OnScale demonstrates a software simulation for an adjustment of a FBAR.

Eddy further said:

Resonant’s fundamentally different way of designing filters allows us to design in software and when we do a simulation for a customer, they are very confident that their fab will come a design that is accurately represented by the simulation before it goes into the fab. Really what we provide with our ISN, is short development time, lower cost, and fast time to market for our customers.

Our research has shown that the above statement is false. As we have said, a computer simulation cannot accurately represent an RF Filter. There will always need to be multiple iterations. As we quoted Dr. Turner above who said “there is a lot of work remaining to make this a commercial product.” If it could be finished just from a computer simulation, then Resonant would have already created a commercial product.

Through our research of speaking with several semiconductor engineers we have come to the conclusion that:

The entire value proposition of Resonant's ISN is to be able to predict what structures create the best performance for RF filters, thus reducing cost and time to market. Traditionally, the big players run an iterative process with their simulation software, and each time they make a mistake, they use that information and feed it back into their design process, including their software. 5G RF is very hard to do so iteration makes a whole lot of sense and we expect even more iterations during this design process. Our big question on ISN, is how can their solution predict structure performance so accurately outside of this feedback loop? Where do they get their learnings and models?

Resonant’s XBAR Technology Is Far Behind The Competition

The semiconductor space is dominated by large players. Players like Broadcom (AVGO), Infineon (OTCQX:IFNNY), Skyworks (SWKS), and Qualcomm (QCOM). Each of those companies have a market cap above $10B. You don’t see small companies in the semiconductor space because it’s a commodity business with high capital expenditures.

Resonant designs resonators, which is a part of an RF filter. A resonator’s job is to select specific frequencies from a signal. RF filters are very cheap, around $0.50 apiece, so a lot of scale is needed for this business. This website shows how much they go for.

Resonant claims that its simulator software is something unique and better than the competition. Our research says otherwise. The incumbent technology is called FBAR, and Resonant is hoping to replace it with its XBAR. Our research shows us that the 5G FBAR is far beyond what Resonant has developed with its XBAR. FBAR was developed by Avago, which merged with Broadcom in 2016, and the merged company is now called Broadcom.

It states in this article:

Even though many technologies have been tried for filtering, the future is through the continuous incremental innovation of current SAW, BAW, and FBAR filtering technologies. Broadcom is a market leader in filters for mobile phone RF front ends.

How can Resonant hope to compete with Broadcom’s FBAR? Broadcom is a $100B dollar company which has spent over $4B in R&D over the past year. Resonant is a $100M company which has spent about $17M in R&D over the past year.

In a technical book called “RF Bulk Acoustic Wave Filters for Communications”, published in 2009, it states:

Between 1993 and 2003, the FBAR project at Avago probably faced project termination on five occasions. There were probably another 10 to 20 times when FBAR hit what seemed to be a fundamental obstacle in its ability to contribute and compete in the commercial arena. Even today, one of the greatest challenges FBAR technology faces is the ability to get costs down, while continuing to improve performance.

As stated above, it took 10 years to create the FBAR. Therefore, we expect the XBAR to take many years as well to be developed enough for commercialization, if it ever gets there. XBAR will face the same challenges that the FBAR did, and still does.

From the article on XBAR referenced earlier, it shows a graph with the XBAR’s resonance frequencies. This is shown below:

Source: IET Digital Library

The above X-axis only shows a frequency as high as 7 GHz.

This scientific article describes the latest FBAR technology and how it is getting ready for 5G. It states:

FBARs use piezoelectric thin films with thicknesses from micrometers to tenths of micrometers and resonant frequencies between 100 MHz and 10 GHz.

As stated above, FBAR goes up to 10 GHz, while the graph above only shows as high as 7 GHz for the XBAR.

If The XBAR Is A “Breakthrough Technology”, Why Haven’t Any White Papers Or Data Sheets Been Published On It?

There haven’t been any published data sheets or white papers on the XBAR.

As defined on Wikipedia:

a white paper is an authoritative report or guide that informs readers concisely about a complex issue...

Resonant’s XBAR is a complex issue, that it would benefit potential customers, engineers and investors to have a white paper written on it. So why hasn’t the company published a white paper on it? We believe that it’s because it's far from conclusive that the XBAR works or will work, let alone be labeled a “breakthrough”. Resonant’s white papers are shown on its website here. Its last white papers were published in 2017, as shown below:

Source: resonant.com

As a reference, here you can download a published FBAR white paper.

Here are FBAR data sheets.

Analyzing The Murata Agreement Terms

It’s certainly a win that Resonant solidified the deal with Murata. Resonant was desperate, and we believe the stock would be trading below $2 without it. But there are some drawbacks to the agreement, which we highlight below.

Resonant filed the terms of the Murata Manufacturing Co (MMC) agreement on 10/4/19. It says:

MMC’s rights to the Company’s XBAR technology are exclusive for a period of 30 months, during which period the Company may not grant to any third party the right to develop, make, have made, use, sell, offer for sale or import any filter or resonator produced through the use of the XBAR technology for use in mobile communication devices.

The above states that Murata is the only company that can use Resonant’s XBAR technology for 30 months. This could hurt Resonant’s potential to make deals with other major RF Filter manufacturers.

In Resonant’s Q119 earnings call, Holmes said:

Cleanly focusing on ramping royalty revenues, demonstrating the performance and securing a customer for our new XBAR technology for 5G and adding an OEM to our customer base.

If the customer above wasn’t Murata, then that customer is now lost because only Murata can use the XBAR technology now.

The agreement also states that Murata has agreed to pay Resonant up to $9M as pre-paid royalties and other fees in installments over a multi-year period conditional on Resonant’s achievement of certain milestones and deliverables. The companies don’t say what those milestones are, but Resonant needs to achieve them or it won’t receive the $9M royalty payment from Murata.

$9M over a multi-year period is not very much money for Resonant, considering that it’s burning $7M per quarter. Even if Resonant is able to design its XBAR to compete with the FBAR, it’s still questionable whether Resonant will receive enough royalties to compensate for expenses. But to be able to create a competing technology to the FBAR is unlikely, as we show in the next sections. If the XBAR fails to reach commercialization, then investors are at risk to lose the majority of their investment.

Resonant Has A History Of Underperforming Its Optimistic PRs

On 11/28/18, the company announced it initiated a $4M stock repurchase program. How can a struggling company like this with miniscule revenues afford a stock buyback? They’ll just have to do an equity raise later anyways, which they did. The company did repurchase 80K shares from 11/1/18 until 12/31/18 at an average price of $1.88 per share, at a total cost of $152K. That was all, only about 4% of the $4M repurchase program. This program is set to expire on 11/14/19.

This stock repurchase plan PR was issued right after the stock got annihilated on 11/14/18 after the company reported terrible Q318 earnings results. The stock fell 42% in one day, from $2.89 on 11/13/18 to $1.67 on 11/14/18. Resonant only reported $115K in revenues for Q318, when the estimate was $400K.

During Q318, two CFOs resigned from Resonant. After working as CFO for less than two years, Jeff Killian resigned on 8/13/18. Michael Seifert resigned on 9/21/18 after only working for 17 days after being hired on 9/4/18. One would assume that if its CFOS believed Resonant had good prospects for the future, then they would stick around longer.

On 1/3/19, Resonant issued a PR titled:

“Resonant Expands Relationship with Its Largest Tier 1 Customer”

The PR states that Resonant “signed four new license agreements with an existing Tier 1 filter customer.”

On 1/14/19, Resonant issued a PR titled:

“Resonant Beats Milestone of 10 Devices Shipped For Royalty Revenues in 2018”

In this PR, Holmes stated:

This combined with our earlier announcement where we beat our objective to have our customers accept 20 devices as meeting their technical requirements, including the new requirement in 2018 for passing handset testing, puts us in a strong position to accelerate royalty revenue and positions the company well for long-term growth.

Yet, despite these announcements, why does revenue remain so miniscule for the company? These PRs were too optimistic because the company’s revenues do not line up with their claimed new business. Furthermore, Resonant isn’t providing any details of these sales, the name of their customers, or what devices are shipped.

Conclusion

Resonant has had miniscule revenues, and high cash burn, currently at a rate of $7M per quarter. Based on company updates on the amount of units sold in July, we expect Q3 and Q4 to continue reporting tiny revenue numbers that miss estimates.

Given that it took 10 years for the FBAR to be developed for commercialization, we expect the XBAR has years to go, if it can ever get there. It’s a vote of confidence that Murata invested in Resonant, but it might just be a lottery ticket for them. It could also have to do with years of generating a relationship with Resonant. Holmes stated in the Q219 earnings call:

Relationships that started maybe two or three years ago. We’ve talked about that in the past of how long it takes to get engaged with a Tier 1, lots of work goes on.

With $2B of cash on its balance sheet, a $7M investment is pocket change for Murata.

Disclosure: I am/we are short RESN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.