BUY (RESN, $7.17)
Disrupting The RF Filter Supply Chain– Initiating Coverage With A BUY Rating & $14 PT
December 5, 2017
Investment Conclusion. We are initiating coverage of Resonant Inc. with a BUY rating based on our belief that the company’s RF filter designs will help customers produce cheaper and higher performance filters resulting in increased market share and a growing royalty stream. The current 8 customers with over 35 filter designs gives us some comfort that the utility that Resonant provides clients is real and provable. Resonant’s patent portfolio of 125 pending or issues patents gives us some comfort that this is a unique and defensible business. We believe that revenues in 2018 will be approximately $5 million up from approximately $1 million in 2017. For 2019 we are estimating revenues of $15 million. We expect operating expenses of $23 million in 2018 up from $18 million in 2017. We believe adjusted EBITDA in 2017 and 2018 will approximate a loss of $13 million in each year. For 2019 we are estimating adjusted EBITDA of a loss of $6 million. We are establishing a 12 month price target of $14 per share based on our belief that as Resonant progresses and ramps revenues the discount to fair value that is being applied will narrow.
Resonant Inc., headquartered in Santa Barbara, CA, creates filter designs for radio frequency (RF) front-ends for the mobile device industry. The RF front-end is the circuitry in a mobile device for analog signal processing and is located between the device's antenna and its digital baseband. The Company uses a technology called Infinite Synthesized Networks (ISN) to configure and connect resonators, the building blocks of RF filters. The Company uses ISN to develop new classes of filter designs. The Company is also developing a series of single-band surface acoustic wave (SAW) filter designs for frequency bands. The Company is developing multiplexer filter designs for over two bands to address the carrier aggregation (CA) requirements of its customers.
The market for RF filters is growing as a result of the growth in RF bands that mobile devices need to support. A Mobile Experts LLC study predicted that the RF market will grow from $4 billion in 2014 to $12 billion in 2020. RF filter are also increasing in complexity due to the need for carrier aggregation. All of this lead to incremental growth in the dollar content of RF filters in next generation mobile devices (5G, etc.)
Resonant creates filter designs for radio frequency (RF) front-ends for the mobile device industry. The RF front-end is the circuitry in a mobile device for analog signal processing and is located between the device's antenna and its digital baseband. Resonant’s designs lead to cheaper and better performing RF filters.
Resonant licenses its designs to its customers and collects royalties. Resonant’s customers are filter manufacturers, SAW foundries, RFFE module manufacturers, transceiver suppliers and mobile handset OEM’s. The company license’s specific designs for each costumer and they pay royalties to Resonant.
Resonant currently has 8 customers with over 35 filter designs. The ability to add customers and have current designs accepted into new mobile devices is the driver of future revenues for Resonant. The patent portfolio of 125 pending or issues patents gives us some comfort that this is a unique and defensible business. Importantly, Resonant’s business model is nimble and not capital intensive.
The main risk is the company’s ability to convince customers to use its solutions. Resonant’s success are primarily tied to the company’s ability to convince customers of the significant benefits (cost, size, performance) of its designs relative to the existing solutions. The length of time that it takes to bring a design to fruition and get designed into a mobile devices is also a risk as it takes a considerable amount of time and the landscape could change in that time.
We believe that Resonant’s revenues will begin in earnest in 2018. We believe that revenues in 2018 will be approximately $5 million up from approximately $1 million in 2017. For 2019 we are estimating revenues of $15 million. We expect operating expenses of $23 million in 2018 up from $18 million in 2017. We believe adjusted EBITDA in 2017 and 2018 will approximate a loss of $13 million in each year. For 2019 we are estimating adjusted EBITDA of a loss of $6 million.
We are initiating coverage of Resonant with a BUY rating. We are initiating coverage of Resonant Inc. with a BUY rating based on our belief that the company’s business model is attractive to RF filter manufacturers as it speeds time to market and reduces costs in the highly competitive arena of RF filters. The wins the company already has under its belt gives us confidence that the concept has been proved and now it about expansion of slots in mobile devices.
We are establishing a 12 month price target of $14 based on our DCF analysis. Our DCF analysis yields a value in a range from $13.50 per share at 2.5% perpetual growth, to $15 at 3.5% perpetual growth, resulting in a price target of $14 for Resonant shares. We believe that as Resonant continues to add customers and ramp its revenues the discount to fair value that is being applied will narrow.
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