Yesterday Resonant came out with their 4th quarter earnings (loss) report. As is quite common for early stage companies, they reported all kinds of wonderful progress, but next to no revenues and a big loss. This is all very normal for a company at their stage.
Sometimes earnings reports, along with their conference calls, spark a rally in a stock despite the ongoing losses. This is due to investors seeing the forest through the trees and buying into the long-term thesis that the company will eventually be throwing off cash and rewarding early investors handsomely.
Other times, companies can hit snags or delays, causing investors to fret about the prospects for a company to ever achieve their goals. This, of course, causes a sell off in the shares.
Resonant, however, doesn’t fall into either of these categories. The Company has continued to hit milestones and hasn’t missed Wall Street forecasts, nor caused them to be lowered. Instead, as the tone of their earnings call demonstrated, they are doing very well, gaining traction as a disruptor in a large, and rapidly growing, industry.
Yet, the stock acts as though investors have cause for concern. It was down around 10% after the call and has been steadily sliding for some time. Indeed, the chart of the last three months looks like something I’d rather ski on than invest in.
There’s obviously a disconnect between the fundamentals, as portrayed by the Company, and the share price. I love disconnects between share prices and fundamentals; this is where opportunity knocks for long-term investors, such as Tailwinds.
But, first, what’s causing the disconnect? Well, simply put, in this case it’s the Company that is causing the weakness. More exactly, their lack of clear and positive guidance on the recent earnings call is causing angst among current shareholders and giving potential investors no sense of urgency to step up.
“I am pleased to share that our expectation is by the end of 2018 we should be receiving royalty revenues in the 7 figures on a quarterly basis.”
The above quote, from CEO George Holmes on the earnings call, sort of sums up the current situation in the stock. He thought he was providing very positive guidance…in George’s opinion, a young company like RESN getting over $1MM in quarterly revenue is a BIG deal. However, expectations from the street were that the Company would be doing much more than $1MM per quarter by year-end.
The exciting part, from an investor’s standpoint, is that the Company WILL (most likely) do as much as four times that figure in the 4th quarter. CEO Holmes was being conservative. Yet, he thought that his conservative number would be positive, since they have accomplished so much. His read on the market was way off…
But, read into the comments and you can tell that things are going great and this number is likely to be far exceeded. Don’t let a CEO’s overly conservative statement scare you. Pay attention to the finer details. That guidance was based on current devices under contract, which are low end and not huge volume. Check out his next comment.
“We expect to add more devices and phones. We continue to work with teardown companies to help them identify our technology in phones and expect more tear-downs providing further validation that our designs have successfully been included in a broader range of phones. These are expected not only to be in Tier 1 phones, but also in other key manufacturers across the globe.”
Okay, I added the emphasis, but you can see what he’s saying. There already is one tear-down that the Company confirmed but has yet to be announced. Meanwhile, there was a large volume spike in filters shipped in January (which approximated 67% of 2017’s filters in one month).
Let me state this as clearly as I can. The Company is gaining traction in Tier 1 phones which means higher volumes and higher priced filters. Do not let their initial lower volume, lower margin products fool you; the tipping point is being reached in real-time and revenues are going to start flowing soon enough.
So, I believe that George misread the street and, had he known that shares would take a big hit, he might have been slightly less conservative with his guidance. His mistake, our opportunity.
Fabless…the most important piece of the earnings call, IMHO
The other piece of information that was missed on the call, in my opinion, is the launching of fabless partners. Forget for a minute what share the Company has, how many devices, how many units, etc. The current business is what it is.
Instead, think about this industry (and it’s very wise to pay heed to George’s persistent comparisons with the semiconductor industry in its early days). In the past it has been dominated by a handful of large manufacturers. Resonant has said that they are enabling fabless competitors; if they can do so, it dramatically alters the landscape of the industry.
An example of this is Intel, which sells modules in this industry. Do you think Intel would like to replace the Avago filters in its module with one of their own (fabless) design? Uhhh…yeah.
Avago is not scared of Resonant. However, they certainly don’t want Intel as a competitor. Yet, RESN is doing just that…enabling significant industry titans to expand their footprint into the rapidly growing filter market. They can only do this with Resonant’s help.
Here’s what George had to say about the number customers:
“I would say clearly the first two that we have had will continue to contribute royalty revenues in the first quarter…we could see as many as 4 contributing to the royalty revenues in Q1.”
In a side conversation with the Company, I confirmed that these two additional, near-term customers are fabless. Which means that the Company’s model of disrupting this market by opening it up to a whole new group of companies is happening.
I find this to be the biggest news the Company could share. If all they did was help design cheaper filters, they would struggle to compete against the incumbent, large manufacturers.
However, by enabling new competition to enter the industry, they are turning the RF Filter market on its head. The landscape of this industry is about to be permanently altered, and RESN is the enabler of it all. The landing of their first fabless customer is the tip of the iceberg; things are going to get very interesting.
I’m a buyer of RESN on the weakness (or even on strength…it’s cheap). I think that CEO Holmes, who is an OUTSTANDING manager in my opinion, totally misread Wall Street’s expectations when he presented on the earnings call.
The Company, at current valuation, is trading around the total amount invested to date. Meanwhile, they are executing to plan and starting to garner revenue and customer traction. Frankly, the valuation is ridiculous.
There should be a tear-down announced soon of a Tier 1 phone with Resonant inside. There should also be an announcement of their first fabless filter partner shipping product. Finally, the Company will likely be much less conservative and provide real forecasts on their next earnings call. Meanwhile, as the below chart shows, we are trading on long-term support and have a major buying opportunity.
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