Revenue - costs = profit. BRN needs revenue. Lots of revenue.

BRNs annual report shows the power of the IP licencing model, or the "ARM model", and the potential that as customers increase, the revenue will jump at a mind-boggling pace.

It can be seen that from one licencing deal, that >$1mil revenue can be derived for BRN. And BRN can have multiple licencing deals per customer. Combine that with an recurring nature (for as long as the company sells the product under licence) and the revenue can add up fast.

This post is not intended as a hype. I know how emotional this company is for everyone. This is an attempt to demonstrate what BRN is trying to achieve with its business model.

edit: posted mid type.

Youtube channel by ASX Investor did a video on BRN in Sep 2021.

ASX Investor scored an interview with Rob Telson, the VP of sales and marketing. I found the following interesting:

> Rob is an ex-ARM employee. Spent many years there, and BRN is emulating ARM’s commercialisation strategy, so a good asset to have on board with the company.

> Rob did not reveal anything outrageous or unknown, but for me, it built more confidence in BRN, knowing that they know where they are going and how they intend to get there, in a deliberate and planned way.

> Rob made an observation it took ARM 10 years to go from start to success. BRN was founded in 2011, and here 10 years later, they are on the cusp of success (mostly hidden behind NDAs!)

>Lastly, I found Rob’s response to the question about competition to be very political, very neutral. He didn’t say that the big boys (IBM, Intel, ARM, Nvidia etc) had a better or worse product than BRN, just that BRN’s was unique and BRN therefore deserved a seat at the big boys table.

Youtube channel by ASX Investor did a video on BRN in Jun 2021.

I like how he compares logically BRN's situation to other companies to help fight that bias investors have:

> A pre-production or pre-commericalisation company can still have value.

> Don't value a company using revenue metrics when it doesn't have revenue. Use another technique and he goes through examples.

> How to value and think about risks with BRN.

On 30 Aug, Auzbiz reviewed BRN @40:50

Guest reviewers were Gaurav Sodhi from Intelligent Investor and Mathan Somasundaram from Deep Data Analytics.

What I heard them say?

Mathan described it as a meme stock, but also acknowledged its blue sky potential and all the risks that come with such potential.

Gaurav was even less positive, using the term "stupidity" if someone invests. But to his credit, he thought also implied that this stock is outside of his circle-of-competence. I also considered the investing style at Intelligent Investor in his response, and for those that don't know, it is comparatively quite conservative (which is their choice - no judgement!).

This will sound defensive, but it’s meant be factual. I also heard some inaccuracies about BRN, such that it has no product, which was true until recently. Which says to me, just because we see talking heads that are the "professionals" as Gaurav says, we should not blindly trust them, but use them as an avenue for ideas, a opposite opinion, or a confirmation bias of our own research.

https://brainchipinc.com/brainchip-holdings-welcome-to-the-revolution/ [released 20 Aug 2021]

A shout out to @Slymeat for this excellent find. Even though it is research paid for by BRN, it still goes to assisting investors understand BRN’s value proposition.

The part that stood out to me was the example of a customer and the revenue streams. It is on page 18, but I have recreated it here and added my own timeline assessment.

BRN enters into an agreement with a customer to licence it technology with specific integration requirements for their widget. Agreement terms include paying for NRE (non-recurring engineering work to incorporate the chip requirements for the widget), a one-time licencing fee, and then royalties – in this customer’s case, 5% of each chip that incorporates akida tech (or an alternative might be the widget incorporating akida tech). The sale price of this widget is $25, and this company will sell 1m widgets in year-1, 5m in year-2 and 10m in year-3. Time periods are my analysis:

1.      NRE fees of $0.5m in the single FY (the work may take 6-18 months, so average of 12 months)

2.      One time licence fee of $1m (made after design and before production (month 13, or second FY from agreement)  

3.      Royalties in year 1 (or second FY from agreement) of $1.25m (1m widgets x ($25 x 5%))

4.      Royalties in year 2 (or third FY from agreement) of $6.25m (5m widgets x ($25 x 5%))

5.      Royalties in year 3 (or fourth FY from agreement) of $12.5m (10m widgets x ($25 x 5%))

With this example, BRN's financial report notes on page 9 of the half year results make more sense. They list Product revenue (royalties), License revenue (one time pre-production fee) and Development Service revenue (NRE). Just listed in the reverse of their example, which is why I was easily confused!

Assessment: Model the numbers on worst and best cases as required for your risk tolerance, but their paid research example demonstrates how BRN's licencing model, whilst taking 12-24months, is the preferred way to generate large revenue per customer.

On a basic valuation level, the report states NTA is $0.0097USD per share, or $0.013AUD, and share price at posting is approx $0.50 AUD.

Note. I haven't verfied their NTA this by my own calculations of NTA.

[edit: thanks @slymeat!! I missed a couple of decimal places and the FX markers!! maths before coffee = bad)

BRN has released its half year results here.

I am a believer in the technology. I think an inflection point of sorts for BRN is here. They turned their chip design into a tangible chip. They remain stress testing this first round of production chips before pushing to their EAP customers for those customers to do their T&E. What we want to see now is the commercialisation of their product. So, my takeaways focus on that.

Take-aways for me include:

1.      They appear to have their first sales, $700k worth. What is unclear to me, and I want to better understand, is their breakdown of Product/Licence/Development Service revenues (on page 9) and how that matches to their offering of Processor IP and Processor System on Chip.

2.       The 5000% revenue gain sounds impressive, but it’s simply the start – nothing to get excited about, in the sense that it was nothing before and is now something. The next 12 months from here will be a better indicator.

3.      On page 19, they break down this revenue by region. One customer is worth $400k licence revenue and $100k engineering or development revenue, so $500k total. Whilst not necessarily indicative of all future customers (could be larger or smaller), it does provide an assumption base point from which to hypothesize. At the same time, I am not worried that this one customer is the majority of their revenue right now.

We know that BRN is not cash flow positive. We know it probably has 12 months cash flow or runway left. On the assumption that BRN continues to dilute issued shares to generate cashflow on the journey to a market cap of $100 bil, I asked myself – what does the outstanding shares issued look like for other +$100 Bil companies?

Well, after some googling:

NVIDA has a market cap of $490 bil and shares outstanding of 2,500 mil

AMSL has a market cap of $324 bil and shares outstanding of 412 mil

Texas Instruments has a market cap of $174 bil and shares outstanding of 933 mil

Intel has a market cap of $219 bil and shares outstanding of 4,232 mil.

In my valuation, BRN has a market cap of $108 bil with shares outstanding of 2,160 mil.

So its not immediately a negative to the thesis if BRN issue more shares. However it would require (as always) an analysis of a combination of factors to assess whether the issuing of new shares was an overall positive or negative to one’s thesis.

BRN is a technology company, therefore ask thyself, do I understand, or can I get access to someone who knows:

-          The impact of transformative technologies

-          The scope of transformative technologies

-          What is IoT and the types of sensors available

-          What is AI and the types of AI

-          Options for how AI are trained and the acceptable error rates for each use case

-          What is edge computing

-          Edge computing vs cloud computing (differences and synergies)

-          Computer chip design process and timelines

-          How computer chips are programmed and the languages used

-          How/when/where computer chips are produced

-          Options for how computer chips are commercialised

Then from there, add in all your standard business assessment techniques that you use.

Simples.