There's a great video of the tsunami that struck Japan in 2011 that shows the devastating effect it had on a small city. What's most interesting about the tsunami, from my perspective, is that it's not a wave smashing the village. Instead, it's a constant flow from the ocean that just gets bigger and bigger, stronger and stronger, eventually overwhelming everything in its way.
Fortunately for the inhabitants of the coastal cities in Japan, there are tsunami warnings that go off. Residents are warned to go to higher ground and are safe from the destruction that takes place. They were safe, but the devastating effects of the tsunami destroyed billions of dollars of buildings, equipment, etc.
Tsunamis in nature are the results of seismic shifts; the landscape that existed before has changed, never to go back. Tsunamis are the result of a changing world and, if you're not ready for them, they can overwhelm you.
There are also tsunamis in the business world. Changes to the playing field that forever disrupt the landscape. Incumbents who don't see them coming get overwhelmed and new players usually benefit. The retail segment is an example of this, where Amazon is destroying the former leaders and only those who adapt, like Walmart is trying to do, stand a chance of weathering the storm.
For investors interested in RF Filters, and their manufacturers, you can consider this your personal Tsunami Alert.
RF Filter Industry...Change Is Coming
For investors in the RF Filter industry, the seismic event has already taken place. The tsunami, however, is just now starting to reach the shore. If you head for high ground, you'll be safe. Unlike in mother nature, however, advance knowledge can not only keep you safe, you can also profit from wave.
I've already written extensively about Resonant's business model, starting with my initiation reports (here and here). Therefore, I'll only touch briefly upon what RESN does in this article, instead talking more about why their business is going to alter the landscape of the RF Filter industry.
The RF Filter industry is an $8.5 billion market, that is dominated by four large players, Avago (AVGO), Murata, RF360 and Taiyo-Uden. It's an increasingly important piece of the communications industry as more bandwidths proliferate and mobile traffic increases in volume and complexity.
The designing of filters, before Resonant, was done by each filter manufacturer in an iterative process. They would take an idea, create a design, tape it out, then make a sample. Test the sample, then retape and resample. Sometimes this process would go through 50 iterations before there was a product.
Resonant (RESN), with their ISN design platform, has created software that enables a much quicker and more efficient design process. The software has also allowed more complex filter designs to be manufactured on cheaper platforms. These two things (faster and cheaper design process, cheaper BOM) are going to disrupt the RF Filter industry.
A few people (myself, Lou Basenese, several sell-side analysts) have been saying this for a while, but the investment community appears to be waiting for revenue to really jump on board RESN stock. This is like waiting for the tsunami to hit before realizing it's coming.
To date Resonant has 8 customers and 35 socket wins. These are good numbers, but revenue has only been a few hundred thousand dollars. It feels like investors are translating the lack of revenue into meaning that the socket wins will never translate into revenue.
This is a terrible translation. When the water goes out before the tsunami, it's not Low Tide...it's a precursor to the wave.
So, how exactly does Resonant disrupt an $8B industry? I think the best way to explain how this is going to happen is with several examples. These are not theoretical examples...this is what is happening in real time right now. And, this snowball is just starting, the avalanche is still a ways off.
How The Disruptive Forces Will Play Out
There are a few players in the RF Filter space. There will be more. Here is how Resonant's ISN design platform is going to affect them and also the overall market. These effects are real and will drive major change to this industry.
- Filter Manufacturers. There are numerous players in this industry, once you get beyond the big four of Avago, Murata, RF360 and Taiyo-Uden. This is where quicker and cheaper comes into play. The OEMs are really agnostic as to whom they buy from...they actually prefer multiple venders!
Electronics manufacturing is all about lowest cost of production, because (despite Apple's success) this is generally speaking a cutthroat, low margin business. By enabling other filter manufacturers to compete on time and price, OEMs will be ecstatic and many other players will take share.
- Foundries. This is where Resonant has made a splash lately, with the announcement of a band 41 design ready for sampling and mass production at a foundry. RESN's software enables foundries to use Resonant designs and sell them as white-label products to cellphone component manufacturers. This enabling effect aids the aforementioned filter manufacturers, but also opens the door for foundries to seek out new customers and markets.
- SAW vs. BAW, and its effects. This is really the most exciting thing that RESN does at this time; their software has enabled complex designs that were only capable of being made in BAW in the past to be produced in SAW. In a nutshell, this lowers COGS on a filter by 30%. There's a great article which talks about the cost differential here, but it's not aware of how RESN is enabling the expansion of the SAW market. The tsunami is unappreciated by incumbent players, which is what makes the Band 41 announcement of last week so important.
There are two types of foundries, SAW or BAW. They have their target markets: SAW is cheaper to make, high volume items, and BAW is more complex, higher priced designs. Now, Resonant has just brought one design, with more in the works, from the BAW universe into the SAW terrain.
The cost savings of 30% by producing a Band 41 filter in SAW versus BAW is HUGE. In a low margin business, to be able to offer a product at any discount, you can disrupt the market. Band 41 is a high volume band...at approximately 2.5B units, it might be the highest volume band out there. And, there is right now an available white label filter available for purchase at a discount to every incumbents COGS.
- RFIC players. As we move from an industry of entrenched players, to one where white label products are available, the playing field has just changed. This is the fabless model that RESN talks about; companies that didn't make filters traditionally, can now offer them as part of a product suite.
This has to be very upsetting for the entrenched filter manufacturers. Because, the RF integrated circuit makers, who bought their filters in the past, can now design around them. And, these are not bit players. Companies like Intel (INTC) are now able to be in the filter business. Intel is already selling to a large chunk of the phone market (like the iPhone). There now can be more Intel Inside. It's not a significant stretch of the imagination to see Intel sitting down with an OEM and saying, "if we offered a less expensive filter, would you place a purchase order?"
When The Waves Recede, What Will The Landscape Look Like?
This is the big question and, frankly, I'm still getting my head around the answer. There are going to be numerous new players in the filter space, including fabs producing their own designs.
Right now there is a lack of supply in the filter market. The landscape changed when Qualcomm (QCOM) bought TDK and created RF360…which is called a joint-venture, but is really just Qualcomm in drag. Already, OEMs are not happy buying from Qualcomm, which they got locked into doing when RF360 came into existence. They are looking for outside sources. Imagine if Avago manages to buy QCOM??? There is a ton of room for new entrants that enable the OEMs to purchase direct from the manufacturer, something they are certainly used to doing.
The RF Filter market is growing rapidly and is expected to continue to do so. It is also on the verge of a tidal wave of change. This is all being enabled by designs by Resonant. The future winners might not be determined yet, but I'm confident in saying that RESN is going to be one of them.
Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit: www.tailwindsresearch.com/disclaimer/
Disclosure: I am/we are long RESN.