You gotta love Resonant Inc. (RESN:NASDAQ). It seems like every quarter the company misses earning projections, yet dangles a carrot so delicious that investors get distracted. Shorts have reason to feel good; so do the bulls. RESN is a great battleground stock where both parties can claim victory after an earnings call.
This last quarter was no exception. In fact, it seemed to magnify the apparent issues and upside more than ever. For Resonant investors it now appears that the swimming pool is either half-full or half-empty.
Let's start by discussing the case for half-empty. The issue here is simple; business continues to gain traction much slower than expected (guided) and the burn remains very high. Essentially, in the minds of the bears, this company is in a continual cycle of tapping the public markets to raise money. . .with no end in sight.
The Q2 results really magnified the crux of the revenue issue at Resonant. The company reported a whopping $63,000 in revenue, which was a decline from $134,000 in the first quarter of this year! Particularly galling were unit shipments of over 1.5 million in the first half of the year. This number means that there was not only a sequential decline from 800,000 announced in Q1, but a major miss on guidance took place.
To quote CEO George Holmes from the Q1 conference call, "We expect millions of units in Q2 and tens of millions in Q3 based on our customers' current forecast." Uhhhh. . .you did 700,000 or so units, not millions. And, this guidance was given to investors one-third of the way through the quarter, which implies that management has no clue as to if/when revenues are actually going to ramp.
With a burn of $7 million per quarter, Resonant doesn't appear to have a light at the end of the tunnel in terms of achieving positive cash flow.
Or, do they???
While the bear case on Resonant seems to have been fattened up with a honey-covered salmon based on the earnings report, the bull case also (finally) became much stronger. This strengthening of the half-full argument comes from a major endorsement of Resonant by Murata Manufacturing Co. Ltd. (6981:Tokyo; MRAAY:OTC.MKTS).
For those who don't know, Murata is a wireless filter manufacturer based in Japan and with major ties into Asian markets. They are a 500-pound gorilla in this industry, with 30% market share in duplexers and over 75% share on some modules. Murata is an ideal partner for Resonant.
This week Murata, with $7 million, led a $10 million investment round in RESN. This transaction is taking place at Tuesday's closing price of $2.53 per share. This is a solid deal, coming inline with the market price and having no warrants attached.
Even more exciting, Murata has entered into an agreement to pay $9 million in upfront royalty fees to Resonant. Now, these fees come in four tranches, an initial payment and then three more installments as milestones are hit over the next three years, so it's not like Resonant is getting the full $9 million at once. But, this is nonetheless a very positive endorsement of Resonant's technology.
And, isn't that what it always has come down to for Resonant? They are trying to break into a highly competitive industry. Their products have to go head-to-head with not only incumbent players, but they often compete against internal design teams. Customer traction has, therefore, been coming at a snail's pace.
The company has told investors that 5G is a game changer. Instead of creating me-too products that are maybe better, definitely cheaper, in 5G Resonant has taken the lead. They have said this for a while. Murata has just shown us that it quite possibly is true.
Which leaves investors at a crossroads with Resonant. The current business is mediocre. It appears to be ramping (400,000 filters in July is a big improvement), but is still small. The company is burning cash and, even with the recent raise, will need more a few quarters down the road. However, the road is looking more golden now. They have signed a major Tier-1 partner and have said they expect more. Things could finally be turning for RESN.
In terms of the stock, I think investors will be rather blah about it for a while longer. We have all heard the hard sell about design wins, revenue ramp, etc., for a while. The company has disappointed in the past and I think a clear indication of a major revenue inflection is needed to get the stock going. So, I think it treads water for this current quarter.
But, at Tailwinds, we are focused on the future. Murata has given us the biggest indication yet that Resonant is indeed well positioned for 5G. The uptick in volumes in July suggests that the train is leaving the station. We have had a smallish position in the name as we wait to see where things are headed. Now, we believe more than ever that they are headed in the right direction. The timing of such is uncertain, but look for us to take our position up in size over the coming weeks as we head into what now looks to be a very pivotal Q3 conference call.
Daniel Carlson is the founder and managing member of Tailwinds Research Group and its parent company DFC Advisory Services, which is a licensed registered investment advisor (CRD # 297209). Tailwinds is a microcap focused research company that provides research on and consults to over 20 emerging growth companies in the technology and life sciences arenas. DFC Advisory Services is an RIA that manages money dedicated to investing in the companies covered by Tailwinds. For more information on these two companies and their track record, please see www.tailwindsresearch.com. Prior to founding these two entities, Dan spent many years working with small public companies, having been CFO of two public companies and helping finance many others. A 1989 graduate from Tufts University with a degree in Economics, Danís formative years in business were spent as an equity trader, first on the Pacific Coast Stock Exchange then on the buyside at several multi-billion dollar firms.
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