Lou Basenese

About the Author Lou Basenese

Founder and Chief Analyst at Disruptive Tech Research – a technology research and advisory firm, focused on pinpointing the most promising disruptive technology investments. Early. I'm 100% independent. That means absolutely no pay-to-play arrangements, no hidden agendas and no hype. Just solid research. I employ a primary, bottom-up fundamental research approach to uncover investment ideas that are underfollowed, underappreciated and undervalued by the broader investment community. For the last decade, I have been providing independent economic and equity research for individual and institutional clients. I started my investment career at Morgan Stanley, where I helped direct over $1 billion in in institutional capital. After growing bored with the monotony of asset allocation studies, investment policy statements, manager searches and evaluations, and Retirement Plan Service Provider RFPs (among other things), I left and co-founded Wall Street Daily, which quickly became one of the web’s largest financial publishers with a daily circulation of more than 700,000 readers. I have been fortunate to appear regularly on CNBC’s Closing Bell, as well as be mentioned in other media outlets, including in The Wall Street Journal, The New York Times, Morningstar and MarketWatch. I earned my MBA from the Crummer Graduate School of Business at Rollins College, which is also were I met my beautiful wife.

Resonant (RESN): 5 Reasons to Let It Ride on 5G


Resonant (RESN) didn’t disappoint, but investors did.

Blame it on the cacophony of companies competing for their attention at Mobile World Congress for creating a 5G-news induced stupor. Blame it on premature, but understandable profit-taking after the stock enjoyed an 200% run-up to start the year. Or blame it on a simple lack of understanding of the significance.

Regardless the cause, investors need to snap out of it!

Monday’s announcement regarding Resonant first 5G RF filters that use its XBAR™ resonator technology is a big deal.

That’s not based on the company’s or my beliefs, but rather the latest developments and market assessments by competitors. And here are five data points to prove it…

Critical Context /

A Super-Fast 5G Primer

Pardon the Captain Obvious statements here. But it’s necessary to set the backdrop:

  • 5G is a big deal. Per Qorvo’s recent white paper, “Once rollouts begin, 5G handsets are predicted to become the fastest-growing sector of the smartphone industry for the next decade, with shipments increasing from 2 million in 2019 to 1.5 billion in 2025, according to Strategy Analytics.” Translation: The future for the entire RF industry is tied to 5G. Period.
  • 5G is happening now. After years of anticipation and several false starts, global rollouts are underway. Case in point, last week Samsung unveiled the first 5G phone, followed by Huawei and Xiaomi this week. And more are coming. In fact, a total of nine 5G-equipped smartphones are slated to launch in the first half of 2019 alone. Even the marketing geeks at Qualcomm couldn’t resist the temptation to celebrate 5G’s arrival (see here). That said, it’s important to remember that we’re just at the beginning of the 5G boom, as you can see in the chart below.

  • 5G is stretching the industry’s design capacity to its limits. Here’s the key, as QRVO’s President of Mobile Products, Eric Creviston, said, “There’s a lot of these [5G] products to be developed and we’re working hard to get our engineering at scale to be able to fully staff all the opportunities, frankly.” In other words, there’s a tremendous need for speed. All the more so because the first phase of 5G standards didn’t get set in stone until Release 15 from the 3GPP on July 13, 2018. (There have been subsequent updates (see here) in September 2018, October 2018, January 2019 and February 2019.) That didn’t leave much time for industry heavyweights to gear up, which leads us to the first reason RESN’s latest announcement is significant.

Reason 1 /

5G Coming In Hot: Incumbent Design Approach Can’t Keep Up

On QRVO’s most recent conference call, CEO Bob Bruggeworth confessed, “5G capabilities are coming sooner than our industry had originally expected.”

Normally, unexpected and urgent demand is not a business problem to bemoan. But it is here.

You see, the entire RF industry relies on a design approach that dates back to 1931. It’s known as the “acoustic wave ladder.” And it’s labor and time intensive by nature. (Think lots of trial and error.)

It involves RF engineers designing a part, fabricating it and then testing to see if the part meets specifications. If it doesn’t, they tweak the design, fabricate it again and retest. This iterative process goes on until the modeled and desired performance of the part matches what’s measured to the end customer’s satisfaction. As I’ve shared before, it can take 10-20 turns to get it right.

Even a layman can see this model isn’t built for speed. In fact, in this design paradigm, the only way to meaningfully increase design speed is to accelerate fab turn times. That’s easier said than done. Not to mention, it also comes with an unsavory opportunity cost – is it worth giving up fab capacity to test new parts that might never be sold instead of producing already approved parts for revenue?

Now contrast this with RESN’s technology. It uses existing manufacturing processes, yet can “design complex filter products at approximately half the unit cost and in approximately half the time of traditional approaches.”

How’s that possible? It’s simple really. RESN’s approach is primarily software-based. As such, it can perform thousands of simulations or “virtual iterations” to determine an optimal filter design before it ever needs to fabricate anything.

When it comes to speed, simulation always trumps trial and error. And the results bear it out. Forget 10 to 20 turns. RESN is qualifying parts in less than three turns. Sometimes it only takes one.

Add it all up and we have the perfect storm for RESN’s disruptive solution. The incumbent approach is inherently ill-equipped for speed. Yet RF industry dynamics – namely, increased urgency for 5G parts and increased complexity – promise to stretch it to the limits.

Lest you think this is all conjecture, here’s how the heavyweights characterize the industry dynamics (emphasis mine):

  • Here’s QRVO’s assessment: “With operators insisting that handsets include 5G content in time for their planned network deployments, smartphone manufacturers are under pressure to develop implementation strategies for meeting challenging 5G RF requirements, even as specifications are still evolving. These requirements include unprecedented bandwidth and peak-to-average power ratios together with very high power amplifier (PA) linearity and extensive carrier aggregation-driven frequency congestion…For smartphone manufacturers, the challenge is how to quickly add 5G support to handsets that are already densely packed with 4G LTE functionality – and to do so without delaying product release cycles or endangering their ability to meet global shipment volume targets.”
  • And here’s SKWS’s assessment: “It’s necessary that new technology be brought into the same physical form factor, that same handset, new technologies, new spectrum, new frequencies, more filtering. The ability to coexist with different devices brings in a tremendous amount of complexity and challenge…”

At a time when RF filter makers prefer and require more time because of technical challenges and constraints, they have less. That means there’s going to be no choice but for customers to increasingly turn to RESN for 5G design needs.

Let me be clear, though. This isn’t only about 5G.

Reason 2 /

It’s Not A Tumor Pivot: 5G Is Additive (And Multiplicative)

Investor conversations in the past necessitated clarifying that RESN’s launch of an IP library represented an expansion of the sales funnel, not a strategic pivot (go here for a refresher).

It’s important to clarify the same in regards to RESN’s XBAR technology, officially launched in October 2018 and the 5G market opportunity.

5G is not a pivot! For RESN. Or for any RF company.

As Skyworks Solutions’ President and CEO Liam Griffin said on the most recent conference call (emphasis mine):

“Now, if we look at the opportunity, if you could just envision what we’re looking at here is, you’ve got a 4G technology engine that is in place already in your device and that is not going away. 5G is going to be incremental and additive to your current handset… So, it’s going to offer increased opportunity for companies like Skyworks.”

That includes RESN.

Once again, the data drives home the point that by no means is RESN abandoning its existing 4G sales strategy and opportunities. To the contrary, the 4G side of the sales funnel is booming, based on the latest quarterly report.

You’ll recall, RESN is “seeing more demand for new designs” and expects to have 75 or more design contracts in place by year-end. Most of these are 4G-related. Plus, royalty revenue is expected to start ramping in the first half of 2019. And that’s being driven by all 4G parts, except for a single 5G filter (Band 41, presumably).

To recap, the good news is 5G is additive for all RF companies. In a big way. QRVO publicly stated it expects the 5G market to add $1 billion in market opportunity in 2020.

The even better news? 5G is also multiplicative for RESN, thanks to the key technological differences I highlighted earlier.

Thanks to the company’s software-based and patent protected ISN approach, RESN can efficiently tackle the toughest design challenges, including ones that might be beyond the reach of traditional design methods. Or in the company’s own words, “With XBAR, Resonant can develop new ‘greenfield’ filter designs for both high frequency and large bandwidth that do not currently have competing acoustic filter options.”

Reason 3 /

Timing Matters: RESN Is Ahead Of Schedule And The Market

If design speed is paramount, it’s important to put some context around RESN’s latest accomplishments. By all measures, the company is ahead of its own 5G schedule. Based on my research, it appears the company is ahead of most of the competition, too.

Consider the facts…

From Years to Months to Weeks

  • In August 2018, RESN’s CEO George Holmes told investors to expect it to take up to two years to develop 5G capabilities: “In the second quarter [2018] Resonant developed and patented a novel BAW structure, which in simulations outperforms best-in-class FBAR resonators. In order to validate this new technology, we are prototyping test wafers. These developments are expected to produce results in late 2019. And if successful, should enable design in a 3 GHz to 5 GHz range or the 5G band with better insertion laws, rejection levels, higher power handling and wider pass bands then anything currently available in the market today regardless of process technology.”
  • By October 2018 – a full year ahead of schedule – the company announced 5G capabilities and its first development wafers.
  • In November 2018, Holmes said RESN was already moving “the technology from a development foundry to a full production foundry” in hopes of having third-generation wafers to share at Mobile World Congress in late February 2019.
  • Last week, RESN hit that milestone. At the same time, management also moved up the timeline from the Q3 conference call to having “filters coming out based on that technology by the end of next year [2019]” to “having have foundries qualified and producing parts as early as the third quarter of 2019.”

While RESN’s design and fabrication time of the new 5G filter is impressive at only a few months, going from designs into production in a few weeks would put RESN in rarified air. Guess what? Based on the latest corporate video that capability appears in the cards (“ISN platform can bring fundamentally new device structures into production in weeks.”).

History also suggests further acceleration in design speeds is in the cards for RESN. The company has consistently compressed design times for each type of RF filter it adds to the ISN platform (SAW, TC-SAW, BAW, etc.). There’s no reason to expect it to be any different for 5G.

And that leads us to an obvious question: How does RESN’s 5G rollout stack up against the competition?

Missing In Action

If you’ve been following the headlines, multiple 5G phones have been announced already. It’s fake news. None contain a true 5G filter. Not as far as I can tell. Instead, they contain Band 41 filters, which is a crossover from 4G. (Before you ask, yes RESN has a Band 41 filter, too.)

Don’t just take my word for it, though. The purpose of today’s note is to provide perspective into RESN’s unique value proposition through the eyes of the competition. With that in mind, here’s QRVO explaining what qualifies as a 5G filter:

“As anticipated, the [3GPP] specifications define two broad spectrum ranges at sub-6 GHz (FR1) and millimeter wave (FR2) frequencies. They include the first set of new 5G FR1 bands, including n77, n78 and n79, which will be used in many global 5G deployments. Many LTE bands have also been earmarked for refarming as 5G bands in the long term, but only a small number of those are expected to see near-term use, including n41, n71, n28 and n66.”

The folks at Huawei see it the same way:

“The C-band (3300-4200 and 4400-5000 MHz) [or n77, n78 and n79] is emerging as the primary frequency band for the introduction of 5G by 2020, providing an optimal balance between coverage and capacity for cost efficient implementation.”

New 5G RF Bands Based on 3GPP Release 15

So what is a true 5G filter? For the purposes of our discussions, bands n77, n78 and n79. The millimeter wave frequency bands (n257, n258, n260 and n261) will be the next phase of 5G rollouts.

(Free tip: Keep an eye on the $1.2 billion market cap MACOM Technology Solutions Holdings, Inc. (MTSI) as this segment of the market heats up. It’s a proven leader with enviable market share and patents at higher frequencies.)

So what’s the real freaking difference between 4G and 5G? In a word – bandwidth. Real 5G filters have wide channel bandwidths. Sorry, but Band 41 doesn’t fit the bill. It has typical channel bandwidths of 5, 10, 15, and 20 MHz. And that’s the key challenge in going from 4G to 5G, as Qorvo outlined in its white paper:

“Another major change in the transition from 4G to 5G is the unprecedented bandwidth that handsets must support. Increased bandwidth is a fundamental tenet of 5G: it is key to enabling the faster data rates targeted with new 5G bands. Single-carrier bandwidth can be up to 100 MHz – five times the LTE maximum of 20 MHz (Figure 3) – and in the FR1 range there can be two uplink and four downlink carriers for a total of 200 MHz and 400 MHz, respectively. The challenges of managing this bandwidth are expected to ripple through the entire RF subsystem, raising the bar for even the most innovative RF companies.”

If I lost you in the weeds of RF gobbledygook, I apologize. Let me boil it all down to what matters:

  • RESN announced data for a functional, real 5G filter (Band n79).
  • If bandwidth is the critical spec, RESN nailed it already, too. Per the company press release, “In early tests, the prototype XBAR filters have demonstrated greater than 500 MHz of bandwidth in the 5 GHz frequency range.”
  • No one else is publicly talking about the availability of band n77, n78 and n79 filters.
  • My sources indicate even at Mobile World Congress, the big RF filter makers only shared prospective specs, not data from functioning parts.
  • A careful review of QRVO’s website shows that 5G filters have not been deployed yet (see here).
  • QRVO’s new product announcement email (sent yesterday) has no mention of band n77, n78 or n79, either
  • SWKS is focusing more on systems solutions. It appears the only product available so far related to 5G filters is a power amplifier module with integrated filtering for 5G bands (see here). But there is no data sheet available yet.
  • Broadcom has no mention of 5G filters on its product pages.

I’m not naive to believe that the bigs aren’t close to releasing 5G parts. By their own admission, they’re hard at work.

  • Per SKWS’ Griffin, “We’re working on that right now with customers that matter. A lot of collaborative strategic dialogue between our customers and ourselves to craft the best possible solutions for 5G.”
  • Per QRVO’s Bruggeworth, “On the design front, we’re supporting robust 5G design activity at many mobile customers, primarily for ultra-high band, sub-6 gigahertz applications.”

What I’m suggesting is investors shouldn’t be naïve to the two-fold significance of RESN’s impressive progress on the 5G front.

Remember, the company “expects to have foundries qualified and producing [n79] parts as early as the third quarter of 2019.” That means RESN is clearly on the leading edge. Moreover, RESN’s ability to design new and more complex filters quicker than the competition ensures it will remain there. Especially given the demand dynamics.

Reason 4 /

When, Not If: Industry Dynamics Demand New Solutions

At the outset, I highlighted the single biggest gating factor for RF filter makers – design engineers.

Remember, SWKS’s Creviston said, “There’s a lot of these products to be developed and we’re working hard to get our engineering at scale to be able to fully staff all the opportunities, frankly.”

Good luck with that!

Well before 5G rolled out, the industry was suffering from a shortage of RF engineers.  A plethora won’t magically appear simply because companies need them more than ever. In other words, the solution to the design capacity problem isn’t headcount because, frankly, there aren’t enough heads.

Even if there were, for reasons outlined earlier, the technological constraints of the current design approach would prevent companies from keeping up with demand by simply adding engineers.

How big of a design capacity shortage are we talking? RESN estimates that RF filter companies need to increase design capacity 8X by 2025 in order to maintain market share. That’s conservative.

Thanks to the complexity of 5G, making standardized parts that can be sold to multiple handset makers, thereby leveraging a single design project, multiple times, won’t happen often. Why? As SWKS’s Griffin reveals, “What we are seeing in 5G is every customer wants it differently. Whether it’s a geographical roaming issue, it’s a size issue. They’re different, they’re different.”

Make no mistake. This pressure for custom everything isn’t going away anytime soon. “As we move into more advanced 5G, the mobile business is going to get much more complex, and differentiation and execution and scale are going to matter,” said Griffin.

Add it all up and all roads lead to RESN. The company’s ISN technology can improve design efficiency by up to 5X. There’s no other alternative that comes even close. Best of all, RESN’s approach uses existing manufacturing processes. So it’s as low friction and low impact as possible. It only disrupts how RF filters are designed, not manufactured.

11 RF companies (and counting) have already figured this out. And they’re entrusting 70 designs (and counting) to RESN. I believe the unique dynamics created by 5G is going to force the market leaders to come around the same reality. Either after RESN steals enough market share from them or their in-house design capacity constraints force them to search for more efficient solutions. When they do, that’s when things should get extremely interesting for shareholders.

Reason 5 /

The End Game: All Signs Point To Acquisition

The last reason to let it ride on RESN is simple – if management continues to execute, there’s no way the company can avoid being acquired.

That’s not simply because there’s a natural tendency toward consolidation in the semiconductor industry. More specifically, it’s because:

1) Owning RESN outright conveys an enormous and immediate benefit – a 5X boost on design efficiency for the acquirer’s entire design team.

Why effectively rent the ISN platform to offload work from a single designer on a specific project, when an acquirer could bring it in-house to boost productivity for all designers? If the average RF engineer can design one to two parts per year – and a company has a team of 50 engineers – RESN’s software would instantly increase design capacity from 50-100 projects to 250 to 500! Remember from our note in January (RESN: Strongest Buy Signal To Date), a single, high volume part can be generate significant revenue, meaning an acquisition of RESN for added capacity would quickly pay for itself.

2) All truly disruptive RF tech gets gobbled up before it gets to realize its full growth potential.

Look no further than Murata Manufacturing Co.’s  acquisition of Peregrine Semiconductor for $471 million in 2014. The transaction was an unadulterated IP and engineering grab. Per the official press release:

“This acquisition will combine Murata’s world-leading mobile RF module capabilities with Peregrine’s best-in-class RF front-end products. Peregrine has a team of talented RF engineers,” said Norio Nakajima, Executive Vice President, Director of Communication Business Unit of Murata. “Peregrine invented RF SOI, has led its development for 20 years, and accomplished a large number of industry firsts.  We have worked closely with them for many years. Their innovation, including the Global 1 all-silicon integrated RF front-end, is a key strategic area for the mobile industry. This transaction will deepen our existing partnership and position us to meet the expanding opportunities in this field.”

Four days ago we got another example, when Ericsson paid an undisclosed sum for 4,000 skilled employees and leading RF antenna and filter tech from its supplier, Kathrein.

Others are unabashedly on the hunt for targets, too. On QRVO’s last call, Bruggeworth said:

“In the area of mobile, we continue to look at opportunities to bring in technologies as well as other companies. So we have a very active funnel, but at the end of the day, we want to make sure we bring in opportunities that we believe we’re a better owner and we can create and deliver shareholder value and we will continue to do so.”

RESN checks all the right boxes – a growing team of talented engineers, a new tech approach in a key strategic area (5G) and of course, over 165 patents.

As RESN gains more market share, further demonstrating the power of its ISN approach, the more it becomes a silver bullet solution for QRVO, SWKS, Murata or AVGO to scale up faster in 5G. I believe it’s not a matter of if, only when it gets acquired

The Bottom Line /

Don’t Believe The Hype, Believe The Competition

Based on the insights from competitors, the “4G technology engine” promises to drive meaningful and growing revenues for RESN in the here and now. By adding cutting-edge 5G capabilities, the stock now comes with significant optionality.

All it will take is a few key design wins and RESN will quickly become a must own 5G stock for investors and competitors, alike. Before it gets to upend much of the industry, it’s going to get acquired. Accordingly, shares remain a “Strong Buy.”

 

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