Memory IC Shipments Underpin Strong Q3 Results

Peraso (PRSO) reported Q3 ‘23 results well above expectations driven by the initial shipments of memory IC products against a large backlog of end-of-life (EOL) purchase orders. Sales of mmWave products also increased sequentially and exceeded our projections even as customers continued to work through an inventory overhang. Reflecting a favorable mix of higher margin memory products, gross margin was slightly ahead of our assumption, which combined with Peraso’s ongoing cost containment efforts, resulted in both adjusted EBITDA and non-GAAP EPS beating our estimates and consensus.

Although cash at quarter-end appears low, strong collections in October combined with customer deposits on EOL memory IC orders should sustain Peraso through Q1 ’24. We expect the company to raise capital in the new year, but we note that another influx of memory orders would provide additional liquidity as the company evaluates its options. In this regard, management continues to expect at least $15-$20 million in EOL purchase orders with deliveries ramping through mid-2024 before winding down in 2025.

As for the mmWave business, we believe sales have largely troughed and are poised for sequential growth moving forward. New use cases for dense urban environments and military applications have emerged and could pave the way for more material revenue growth in the coming year. In the meantime, management recently enacted another round of workforce reductions to better align the organization with near-term revenue generating opportunities. The cuts are expected to yield annualized savings in excess of $2 million, and we believe will enable the company to achieve positive EBITDA and cash flow within a few quarters.

We raise our estimates for this year and next, primarily reflecting an uptick in our assumptions for EOL memory IC sales as well as increased operating leverage following the latest round of cost reductions. We also introduce our FY ’25 projections, which reflect the full winddown of the memory business in the latter half of the year partially offset by a doubling of mmWave product sales. Although highly speculative given the current state of the balance sheet, we continue to believe shares of Peraso are significantly undervalued given the company’s large backlog of EOL memory IC orders, traction in the unlicensed fixed wireless access market and pipeline of potential mmWave customers. Our price target remains $1.00 based on an unchanged FY ’23 EV/Sales multiple of 2x.

Exhibit I: Reported Results and Guidance Versus Expectations

Sources: Peraso, K. Liu & Company LLC; FactSet Estimates

Q3 net revenue was $4.5 million (+36.0% Y/Y), well above our estimate of $2.5 million and consensus of $3.0 million. The upside relative to our model was primarily attributable to higher sales of memory ICs as Peraso commenced shipments against a large backlog of EOL orders. Sales of mmWave products also increased on a sequential basis and outpaced our expectations, albeit to a lesser extent.

Non-GAAP gross margin of 58.0% was in line with our 57.8% assumption. Total operating expenses were also in line with our estimate. As a result, the upside in revenue largely flowed through to the bottom line, and both adjusted EBITDA of $(0.9) million and non-GAAP EPS of $(0.04) beat our estimates of $(2.3) million and $(0.09), respectively, and consensus of $(2.2) million and $(0.10).

Cash and investments at quarter-end totaled $0.7 million. In Q3, Peraso used $2.3 million in cash for operations and capital expenditures were immaterial. Subsequent to quarter-end, the company collected $3.7 million in EOL proceeds, another $0.4 million related to shipments in October and $1.1 million of customer deposits to fund inventory purchases of its memory IC products.

Consistent with the past few quarters, management refrained from providing specific financial guidance. However, the company continues to expect a meaningful uptick in EOL memory IC orders, which in turn should boost revenue, margins and cash flow. Additionally, Peraso recently reduced its workforce by 28%, which is expected to generate annualized savings of approximately $2.2 million.

Exhibit II: Estimate Revisions

Source: K. Liu & Company LLC

We raise our estimates for this year and next to reflect an increase in our expectations for EOL memory IC sales and a decrease in our forecast of operating expenses. We also introduce our FY ’25 projections, which include revenue of $18.5 million and adjusted EBITDA of $(3.8) million. Underlying our assumptions for the year are the winddown of the memory business, which we expect to contribute just $2.0 million in revenue compared to $15.0 million in FY ‘24, and a doubling in mmWave sales to $16.0 million. Although the lower mix of memory IC sales will weigh on gross margin, we anticipate steady improvement in mmWave product gross margins as volumes scale. That said, barring further cost reductions, we believe sustained profitability on an adjusted EBITDA basis is unlikely until FY ’26.

Our report with model and disclosures is available here.

Disclosure(s):

K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has received compensation from Peraso Inc. (PRSO) in the past 12 months for “Sponsored Research.”

Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.