Resonant Inc. (RESN) Q2 2020 Earnings Call Transcript

Resonant Inc. (NASDAQ: RESN) Q2 2020 earnings call dated Aug. 05, 2020

Corporate Participants:

Greg Falesnik — Managing Director and Resonant’s Investor Relations

George B. Holmes — Chairman and Chief Executive Officer

Martin McDermut — Chief Financial Officer

Dylan J. Kelly — Chief Operating Officer

Anlaysts:

Tore Svanberg — Stifel — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Resonant’s Second Quarter 2020 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, August 5, 2020, and the earnings press release accompanying this conference call was issued at the close of market today.

On our call today is Resonant’s Chairman and Chief Executive Officer, George Holmes; and Marty McDermut, Chief Financial Officer.

I’d now like to pass it off to Greg Falesnik, Managing Director of MZ Group, Resonant’s Investor Relations Firm, to read forward-looking statements. Greg?

Greg Falesnik — Managing Director and Resonant’s Investor Relations

Thank you, operator. Please note we’ll be using a presentation during today’s call, which is accessible on the Events page of Resonant’s IR website. If you are with us today via phone, please go to the Events page to either view or download the presentation to follow along.

Turning to Slide 2. Earlier this afternoon, Resonant released financial results for the second quarter 2020. The earnings release that accompanies this call is available on the Investors section of the Company’s website 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, 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 the Chairman and CEO of Resonant, George Holmes.

George B. Holmes — Chairman and Chief Executive Officer

Thank you, Greg, and thank you, everyone, for joining us on today’s call. I’d like to welcome you to our second quarter 2020 financial results call. Let us get started by turning to Slide 3. Q2 was a quarter of continued momentum. Our XBAR technology is quickly becoming recognized for its performance and applicability in meeting the exacting demands of 5G.

Before we dive deep into XBAR, let’s take some of the key highlights from the quarter. Revenues of $1.1 million in the first half of 2020, a growth of greater than 450% compared to the first half of 2019. And sequentially, we saw revenue growth of 11% in the second quarter. Over 4.5 million units designed with our ISN technology were shipped in the first half of 2020, a growth of greater than 200% compared to the first half of 2019.

Sequentially, we saw unit volume growth greater than 95% in the second quarter. To date, our customers have shipped over 40 million units designed with our ISN technology. Let me emphasize these are production unit volumes, not just sample quantities. Most importantly, we continue to move our breakthrough expert technology forward.

On the mobile side of XBAR, our work with our strategic partner, the world’s largest RF filter supplier, is progressing very well as we work to deliver upon our second major milestone by the end of this year.

On the nonmobile or WiFi side of XBAR, we fabricated 5G filters at our fourth foundry and delivered a complete 5G XBAR WiFi sample kit to an existing partner, who has extensive foundry and broad distribution relationships that support a majority of the OEMs throughout Asia. We were able to successfully package XBAR devices in two different high-volume packaging technologies. Every day, we expand the manufacturability and capabilities of XBAR, making it much more valuable.

Let’s turn to Slide 4. I want to emphasize, we believe XBAR is quickly becoming the recognized solution for high-frequency 5G applications. It has been referenced in a number of corporate and industry publications. The best example being a recent report from one of the largest and most reputable teardown companies, System Plus. In that report, they reviewed the Skyworks’ BAW filter, which included our unique XBAR technology and partnership with the world’s largest RF filter manufacturer, along with other traditional BAW technologies. The ongoing validation leads us to fundamentally believe we are revolutionizing RF filter design and delivering on the true promise of 5G.

Slide 5 highlights what everyone knows, 5G will be revolutionary. Industry momentum continues toward the promise of full 5G. But what does that really mean to business and consumers? 5G will have download speeds 20 times faster than 4G. For example, a movie that takes six minutes to download on 4G will take less than 20 seconds with the real 5G. 5G latency, or the time it takes to send data from one point to another, is 25 times faster than 4G. The data transfer with 5G will be almost instantaneous and unlocks new use cases for mobile data never before imaginable with 4G.

5G will not only be revolutionary to next-generation mobile phones, but smart devices, sensors, connected vehicles and more. 5G’s low latency and high-speed is what makes the Internet of Things possible on a wider scale. It’s no wonder the dollars going into 5G are massive as the market is expected to contribute roughly $7.6 trillion to the global economy by 2030.

WiFi is no exception. The opportunity is booming. For example, in the U.S., the WiFi 6E band was recently approved with over 1 gigahertz of bandwidth. That’s 18% fractional bandwidth of 6.5 gigahertz. We expect there to be continued efforts at expanding these bandwidths in lower frequencies, which can also be enabled by our XBAR technology.

Now with Slide 6. At the device level, meaning your mobile phone or smart devices, the industry isn’t truly ready for the real 5G, which we have historically defined as wave 2, highlighted in the infographic we published in June on 5G.

So what’s the problem? Early 5G phones use inefficient filtering technologies that won’t cut it in the future generations because they rely on the uncrowded use of the 5G frequency spectrum and are not concerned with out-of-band emissions. The next wave of 5G, what I’m referring to as wave 2, will deliver high data rates, but require much larger bandwidths and protection from interference, requiring a different type of resonator technology than is used today. So in many ways, players who talk about having 5G capabilities today are focused on the initial coverage and leveraging it as a marketing tool, but are not ready for the next phase.

To our knowledge, Resonant’s XBAR technology is literally the only RF filter technology that has showcased the ability to innately meet the complex requirements of bandwidth of 5G applications. When I talk innately, I mean natively, out of the box, to meet these requirements. Not only do we believe our technology is the best solution today, it’ll likely be the lowest cost one as well.

Other competing technologies that have been used in the market are using things like doping or additional external components to increase resonator bandwidth, which negatively affects performance, and still doesn’t meet the full bandwidth demands required of 5G. And all these technologies are competing against one another. The beauty of Resonant’s business model is that we are enabling customers rather than competing against them.

Now let’s turn to Slide 7. So how did Resonant become the RF filter solutions provider with the exclusive technology to deliver upon the promise of 5G? As we’ve discussed before, the key differentiator is our Infinite Synthesized Networks, or ISN, multiphysics electronic design automation or EDA software platform, specifically created for the development of RF filters. ISN enables us to design faster, better and more cost effectively than competing technologies.

What do I mean by that? The faster comes from our ability to leverage mathematical models to rapidly design filters that often require few returns through a foundry and provide a path to straightforward integration into modules. The cheaper comes from several areas, fewer engineers are needed, few returns are needed, filters can be manufactured on a cheaper process due to the precision of our designs. The product can get to the market quicker. The better comes from our ability to solve these complex challenges demanded by the increasing filter requirements such as those demanded by 5G. What’s key here is the use of our ISN platform to simulate thousands of variations that we believe can’t be contemplated by traditional methods.

Now let’s turn to Slide 8. So today, we stand at an attractive intersection. The combination of the demands of 5G, the innovation of new materials, such as engineered substrates, the strength and speed of ISN that have allowed us to create our completely novel XBAR technology, which as I highlighted earlier, is quickly becoming recognized as uniquely positioned to meet the demands of high-frequency 5G applications.

The biggest validation of our XBAR technology was clearly the strategic deal and partnership struck late last year with the world’s largest RF filter manufacturer. As a reminder, this entailed a strategic investment of $7 million into Resonant. And Resonant secured a $9 million multiyear commercial agreement for four bands utilizing our XBAR technology. And we’ve continued to make tremendous amount of progress with this partnership. And based on our road map, we are reiterating that we expect to achieve the next major milestone, the second of four, by the end of this year.

To explain just how significant this opportunity is, I’d like to give you an idea of the scale and importance of this engagement. Seven companies control more than 98% of the market for both filters and duplexers. Our partner is the clear leader in both categories, controlling 37% of the filter market and 32% of the duplexer market. Their filter market share is bigger than the second and third largest players combined. So from where we’re standing today, we’re feeling really good about the progress and validation we are getting from the 5G market.

The opportunities in nonmobile we are engaged with for WiFi and infrastructure applications are focused keenly on XBAR’s ability to deliver performance necessary in high-frequency and wide bandwidth. That said, I’d like to remind you that 4G is still the dominant filter in the market today, and it will continue to grow, largely driven by MIMO and non-standalone 5G, which uses 4G as an anchor, there will be an increasing 4G content even in 5G phones as a backstop for 5G coverage. These next-generation 4G designs will need to have lower cost and higher power than ever before.

The China 4G market, which is dominated by smartphones, represents 38% of the overall market, and there is a big move for more non-U.S.-sourced content. We have a number of large and dominant filter foundry partners in Asia already, moving very aggressively to enter the market to supply large Chinese handset manufacturers. We delivered the first two designs in the second quarter and expect to deliver the next five designs in the third quarter to these partners. This allows us to serve as a turnkey filter technology foundry services business partner to fabless and OEM customers, increasing their competitiveness in this marketplace. And these are all companies we have signed standard per unit licensing and prepaid licensing agreements with already.

Now before turning it over to Marty, let’s wrap this section by turning to Slide 9. I want to briefly touch on our patent portfolio, which has continued to grow. Today, our IP portfolio numbers are 250 filed or issued patents, 85 specifically focused on XBAR for 5G. When we referred to Q2 results last year, we stood at 175 patents filed were issued and 17 focused on XBAR, a significant increase year-over-year. I’m pleased to say that, to date, we’ve been awarded four XBAR patents. And highlight that without question, this is meaningful in such a short period of time.

With that, I’ll pass it over to our Chief Financial Officer, Marty McDermut, for a review of our second quarter financial results. Marty, over to you.

Martin McDermut — Chief Financial Officer

Thank you, George. Turning to Slide 10, I’ll now provide an overview of our financial results. The amounts I talk about are GAAP, except where noted. For the second quarter of 2020, as compared to the first quarter of 2020, billings were approximately $211,000 as compared to $280,000 last quarter. Revenues increased 11% to $604,000 compared to $544,000 last quarter. At the end of the second quarter, deferred revenues totaled $1.1 million. We estimate that amount will be recognized as revenue in the coming quarters.

Research and development expenses decreased 13% to $4.8 million down from $5.5 million last quarter due to a workforce reduction that occurred in March 2020. Sales, marketing and administration expenses of $3 million, down $100,000 compared to last quarter. Operating loss improved to $7.2 million compared to an operating loss of $8.1 million last quarter. Net loss improved to $7.2 million or a loss of $0.14 per share based on 52.9 million weighted average shares outstanding. Compared to a net loss of $8 million or a net loss of $0.18 per share based on 43.8 million weighted average shares outstanding for the first quarter of 2020.

Non-GAAP adjusted EBITDA improved to a loss of $5.4 million or a loss of $0.10 per share compared to an adjusted EBITDA loss of $6.4 million or negative $0.15 per share last quarter. Cash and cash equivalents totaled $23.9 million at June 30, 2020, with no debt. On June 30, 2020, we had a total of 63 employees, 18 of whom have a PhD and 46 of whom are part of the technical staff.

Finally, here’s a few items relating to guidance. We believe revenue growth will accelerate in the third quarter. We expect third quarter 2020 operating expenses to increase modestly compared to the second quarter of 2020, primarily due to predicted increases in fabrication costs of our XBAR nonmobile devices.

I’d now like to turn the call back to George for closing remarks. George?

George B. Holmes — Chairman and Chief Executive Officer

Thanks, Marty. I’ll close with Slide 11. The second quarter has set the stage for an exciting second half. But what should you look for? Here are some metrics and milestones to track. Volumes and revenues have and are expected to continue to increase. Second half of the year will be bigger than the first half.

We got a strong balance sheet with almost $24 million in cash and no debt. We have tremendous momentum fueling our growth. 5G dominates our efforts. By year end, we expect to achieve our next major milestone with the world’s largest filter manufacturer, who is leveraging our XBAR technology for mobile applications targeting 5G. The continued market validation of our XBAR performance has created numerous opportunities for our next engagements in WiFi, CPE and other nonmobile applications.

4G continues to add value. We expect to deliver our next five designs in the third quarter to our Asian foundry partners, whom we have both standard licensing and prepaid agreements in place. We expect the unit volumes in our legacy business to continue to grow quarter-over-quarter.

Before I wrap things up, I want to thank all of our employees, Board and advisory members for all their hard work that has contributed to our current successes during these difficult times of the COVID-19 pandemic.

With that, I’ll hand it over to the operator to begin our question-and-answer session. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Joining us through this question-and-answer session today will be George Holmes, Marty McDermut and Dylan Kelly.

[Operator Instructions] Our first question comes from Tore Svanberg with Stifel. Please proceed with your question.

Tore Svanberg — Stifel — Analyst

Yes. Thank you and congratulations on the continuous progress. First question is on XBAR for WiFi. I was just hoping for a little bit more of a detailed update, George. I don’t know if there are any customer engagements or sort of an inflection points from an accounting coming perspective that you can share with us?

George B. Holmes — Chairman and Chief Executive Officer

Well, hey, thanks, Tore. We’ve got a couple of things. Let me touch on there, and then I’ll hand it over to Dylan to kind of give you an update on where we’re at with the technology. I think where we are today is, with the expanding capabilities we have with the XBAR platform, it’s really becoming clear that we’ve got a really competitive and differentiated offering here with bandwidth and — with the bandwidth that we can deliver into these applications. And with that, we’re getting lots of validation from the marketplace. And so what that really has enabled us to do is get out there and really be a little bit choosy on what the opportunities are that we want to engage on. And as we look at it today, I think we’re still very confident in our ability to secure that next Tier 1 partner. But Dylan, why don’t you give a quick update on where we’re at with the technology.

Dylan J. Kelly — Chief Operating Officer

Yeah. Thanks, George. And as we’ve noted in the quarter, we’ve delivered on our — the first samples of WiFi in June. And where we are is now building out multiple different samples that address the different regional needs, the 5 plus 6 gigahertz rollout. Another thing I’d say we determined is that, particularly, in the infrastructure side, the traditional solution of ceramics are not going to meet the requirements going forward for interference. It will definitely be an acoustic solution. And as George noted, as we’re benchmarking against aluminum nitride BAW. We continued to see we have at least a two times factor benefit and bandwidth. It can hit the whole bandwidth with a single filter. We think we’re the only solution in the market that can do that.

George B. Holmes — Chairman and Chief Executive Officer

Yeah. I think, Tore, what this does, it just makes the XBAR solution that much more valuable. And that — and therefore, creates lots of options for us.

Tore Svanberg — Stifel — Analyst

Yeah. That’s great. And also I had a question on XBAR and Murata. You talked about some sort of next milestones by the end of the year. Obviously, I’m not asking you to preannounce what those are, but maybe you could just update us on how that partnership is going? And if you’re starting to work on perhaps some new designs?

George B. Holmes — Chairman and Chief Executive Officer

Well, the — I think — and thank you for not asking for the specifics because, obviously, we don’t want to dive in deep on that at this juncture. But I would tell you that it is going quite well. I mean, clearly, the thing that makes — gives us lots of confidence here is the fact that they evaluated all the different technologies out there in the market before coming to us and engaging with us on XBAR. And we’ve continued to meet the milestones that they’ve set out for us, and that’s got us on a path that we believe will get us to kind of that next major milestone before year end.

And I think what we’re doing is we’re running hard and fast. And if we’re lucky enough to reach that milestone sooner, I think that will give additional validation that the power of the tools that we have, in particular, our ISN platform, and the team really allows us to do things faster, better, cheaper than you can do at the traditional way to develop filters. And so that really is kind of what we’re focused on right now. We’re focused on — we have a kind of a stop gap that we’ve highlighted that is at the year end, and we’re working real hard to try to beat that. And I think that’s where we see our team putting its efforts in.

Dylan, as you’re managing the team, do you want to add a few comments?

Dylan J. Kelly — Chief Operating Officer

Yeah. I’d just say we’re really fortunate to be partnered up with the world’s largest filter manufacturer. I mean they’re in that position because they’re manufacturing excellence. This goes back to kind of the perfect partnership where we’re breaking the design know-how everything to manufacturing excellence to build these filters. And I’d say on top of it, in spite of the macro conditions, Japan is in a great position in terms of staying open, and we’re able to continue doing our designs in a work-from-home environment, so things are going quite smoothly.

Tore Svanberg — Stifel — Analyst

That’s great. One last question for Marty. Marty, do you have the operating cash flow number for the quarter?

Martin McDermut — Chief Financial Officer

How much we burned for the quarter?

Tore Svanberg — Stifel — Analyst

Yes. Correct.

Martin McDermut — Chief Financial Officer

Yeah. We burned about $5.7 million.

Tore Svanberg — Stifel — Analyst

Great. And that’s down from…

Martin McDermut — Chief Financial Officer

Down significantly from the first.

Tore Svanberg — Stifel — Analyst

Understood. Thanks again and congratulations.

Martin McDermut — Chief Financial Officer

Thanks, Tore.

George B. Holmes — Chairman and Chief Executive Officer

Hello? Operator? Do we have somebody in queue for another question?

Greg Falesnik — Managing Director and Resonant’s Investor Relations

Ladies and gentlemen, it looks like we’re experiencing some technical difficulties.

With that, George, I would suggest maybe you wrap up the Q&A here and do the sign-off.

George B. Holmes — Chairman and Chief Executive Officer

Okay. Well, great. Sorry, guys, that we weren’t able to answer any additional questions here due to technical difficulties. But what I would tell you is, thank you very much for all of your ongoing support. We’ve had a great run in the first half. We’re excited about the opportunities in front of us. We’re doing our best to kind of stay ahead and do what it needs to — what we need to do in the time of COVID.

And as Dylan said, the good news is we’re making lots of progress. And this is a very exciting time for us. We’d like to thank everybody for their ongoing support. And thanks again for joining today’s call.