In Part I of this two part series, we discussed how next generation cellular technologies are responsible for increased demands on RF Filters. In particular, LTE carrier integration is necessitating complex filter designs that not only filter out unwanted signals, but can combine multiple signals across different bands for higher bandwidth and lower latency than has previously been achieved. And, they must do all this without increasing the space, weight or power demands that they have been allocated by the cell phone designers.
In response to these issues, Resonant (RESN) is developing a fundamentally new technology called Infinite Synthesized Networks®, or ISN®, to configure and connect resonators, the building blocks of RF filters. The ISN platform allows RESN to develop unique, custom designs that address the increasing complexity of the RF Filter, by both reducing the size of the filter and improving performance.
Resonant believes that its patented ISN technology will enable cell phone manufacturers to design complex filter products at approximately half the unit cost and in approximately half the time of traditional approaches. This is, of course, a compelling proposition for manufacturers and should enable RESN to garner significant market share. In this piece we discuss Resonant’s business model, the size of the market, and examine the success they have achieved in the market to date; extrapolating this into possible future success. Finally, we take the result and put a fair market valuation on it, discount it back and voila, have a price target for the shares.
Royalties are King
I love royalty models. You design a product and let others deal with the issue of producing items containing your work. Meanwhile, you sit back and collect high margin checks. Best business model there is, and it’s almost what RESN is doing.
I say almost because RESN doesn’t design RF Filters. They go one step further up the food chain; Resonant’s software allows cellphone manufacturers to design their own filters. It’s pure brilliance. Every customer can have their own filter design. Yet, RESN doesn’t have to do the design, the customer builds their own. So, as they migrate from one model to the next, Resonant needn’t do any more work, but their software will enable the design and, thus, earn them a royalty.
This is at once a very sticky model and also one that enables excellent penetration of a customer’s complete product line. Once a customer gets comfortable using your software to design one unit’s RF set, it makes perfect sense for them to replicate this process across the entirety of their product offerings.
All of which means that, if Resonant’s ISN® platform performs to expectations, the company should continue to win sockets, increase market share, and reap ongoing royalties.
Sizing the Opportunity
Okay, so far I’ve discussed the issues present in the RF Filter market, that are leading to ever more complex and expensive designs. We talked about how Resonant has an industry leading platform to address these issues and how their SaaS licensing model is an ideal avenue to take market share and revenues. Now, it’s the fun time as we discuss the size of the market and the potential revenues that will flow back to RESN and, thus, its shareholders.
On their most recent earnings call, CEO George Holmes did an excellent job of laying out the metrics underlying the opportunity in front of the Company. Based on his guidance, I have created a model that sizes up the high end of the filtration market. Check it out…
The above spreadsheet is my best guess at the part of the RF Filtration market that Resonant is attacking. The lines in blue background are company guidance, the rest being my extrapolation thereof.
As you can see, the market size is huge at 14.7 billion units. The average cost per unit, on the other hand, is quite small at $.39. This is very deceptive, however, as units can really vary in value depending upon their complexity. And, multiple units can go into one device. For example, in the iPhone, there is $22 worth of equipment related to the RF Filtering, according to CEO Holmes.
However, while fully acknowledging the fact that Resonant is going after higher valued filters, I stuck with the $.39 average cost of each unit. This is done in an effort to have a very conservative model. I’d rather be surprised on the upside by RESN as they move into serious revenues.
With all this in mind, you can see that Resonant has, with 25 sockets under contract at year end, about 5% market share. This assumes, as the CEO said, that each customer maintains current market share of the sockets upon which RESN is going to be receiving royalties under the new designs…a reasonable assumption.
Based on the socket size for the wins Resonant has, extrapolated out, the total market size is 580 sockets. I have built into my model Resonant gaining new sockets at a rate of 8 per quarter, which is lower than the rate achieved late in 2016. This brings them to 20% market share by the end of 2020. Is this a reasonable assumption? I certainly hope so.
Giving each socket 1 year to get into production, and using a 7% (once again, conservative versus their guidance) royalty rate on $.39 cost per unit, and an average of 25 million units per socket with shipments starting 15 months from contract win date, I have built out my revenue model.
If Resonant hits my numbers, which are conservatively based off their forecasts, they can be producing over $65M in revenue in the year ending December 2020. Not too shabby.
Translating Into FMV
The most enjoyable part of any analysis is seeing your “conservative” estimates translate into astounding share price gains. Because, that’s what we’re here for, to see these small companies with great technology and dynamic leadership execute upon their business plans and grow into successful, and highly profitable, enterprises.
Using my revenue forecasts, and being too lazy to put together a complete earnings model (I do assume future dilution and have ratcheted up shares outstanding to 23M), I have built out a forward looking Price/Revenue valuation model. I think P/R is a fair way to value a company that delivers Software-as-a Service for a business model. It should be highly profitable and incredibly sticky, if done right.
As you can see, just based off of next year’s revenue estimate, RESN is undervalued. Now, I like to use a 10X revenue multiple for exciting stories like Resonant, but choose your own; I’ve thrown in options for you to choose from. However, if you want to come along with me, at year end this year, RESN shares should trade at $8.52 per share based on next year’s revenue. However, we all know 2018 is just the tip of the iceberg for royalties here, so looking further out, by year end 2020, RESN could be a $38 stock. Which is great, but how does that translate into FMV today? Let’s see…
Using a 20% discount rate, you can see that shares in RESN are deeply discounting future success. Even if you like using a 5X revenue multiple, based off where they might be in 2021, the shares should be worth $11 right now. In my 10X world, RESN is currently trading at over a 70% discount to FMV of $18.35, still using 2021’s numbers.
The bottom line here is this…Resonant is a leader in a space that is increasingly complex and driving manufacturers towards solutions like their ISN® platform. Their business model is one of a high margin and sticky SaaS offering. Based on current design wins and the overall size of the market, if they continue to get traction, revenues should start kicking in over the next few years. If it all comes to fruition as forecast by the company and my model, shares in RESN are clearly discounting this future success.Tailwinds' Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit http://