Reports Q2 '23 Results and Announces Evaluation of Strategic Alternatives

Peraso’s (PRSO) Q2 ’23 results fell short of our estimates and consensus as the company felt the impact of the inventory correction cycle underway across the semiconductor industry. Additionally, a couple of large opportunities previously highlighted by management have yet to close, thereby clouding the prospects for a near-term boost to revenue and cash flow. On a more positive note, initial indications from customers notified of the end-of-life of Peraso’s memory IC products suggest the company will receive $15-$20 million in purchase orders over the next 18 months. The associated shipments and revenue could commence as early as this quarter and will extend out to 2025. We are encouraged by the early indications and consider the pull forward in demand timely given the company’s constrained capital position.

Regarding the balance sheet, cash now sits just above the amount used in operations in Q2. According to the associated 10-Q filing, Peraso has sufficient liquidity to operate into Q4 ’23 but will need to raise additional capital prior to year-end. We believe the company has several options to at least bridge through to next year when the combination of mmWave production ramps, accelerated memory IC sales and potential new partnerships will hopefully position Peraso to bolster its balance sheet on more favorable terms. In addition to exploring financing options, however, Peraso has also engaged an investment bank to assist with an exploration of strategic alternatives. Given Peraso’s technology leadership and commercial traction with 60GHz mmWave solutions, as well as potential opportunities in 5G fixed wireless applications, we expect the company to draw interest from strategic acquirers. We note that recent transactions in the space, including Radisys’ acquisition of Mimosa for 2.3x sales and Renesas’ pending acquisition of Sequans for 4.7x TTM sales, support a valuation for Peraso well above the current stock price.

While we believe Peraso remains at the forefront of a significant growth opportunity, we are resetting our expectations for this year and next to reflect ongoing inventory correction headwinds. We now expect the company to approach breakeven exiting FY ’24 as opposed to achieving profitability for the full year. We note that our estimates continue to leave room for upside should management successfully close the large engagements previously highlighted, accelerate the pull forward of memory IC end-of-life orders and move additional customers to production. That said, our price target declines from $1.25 to $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

Q2 net revenue of $2.4 million (-43.9% Y/Y) was well below our estimate of $4.5 million and consensus of $4.3 million. Relative to our model, the miss was primarily attributable to lower than expected sales of mmWave products as customers continued to manage inventories tightly. Sales of memory ICs were also marginally lower than we projected, but we were encouraged to hear that initial indications from customers affected by the end-of-life of Peraso’s memory products is expected to yield $15.0-$20.0 million in purchase orders over the next 18 months. We had previously been forecasting memory IC revenue of $11.5 million between 2H ’23 and FY ‘24. As the company’s memory products boast gross margins in the 60%-75% range, the pull forward in demand should translate into improved margins and cash flow all else equal.

Gross margin on a reported non-GAAP basis was 45.9% but included a non-cash inventory charge of $0.3 million. Excluding this item, non-GAAP gross margin would have been 57.1%, exceeding our estimate of 51.1% due to the higher mix of memory products. Total operating expenses also compared favorably with our estimate due to lower SG&A expenses than we modeled. However, the lower costs and expenses were not sufficient to offset the shortfall in revenue, resulting in both adjusted EBITDA of $(2.8) million and non-GAAP EPS of $(0.12) missing our estimates and consensus.

Cash and investments at quarter-end totaled $2.7 million. In Q2, Peraso used $2.2 million in cash for operations and capital expenditures were immaterial. Similar to last quarter, management refrained from providing specific guidance for Q3 and FY ’23, citing ongoing macro headwinds, limited visibility into the potential contribution from two large transactions that could close by year-end, and uncertainty related to the magnitude of memory end-of-life orders that may be shipped this year.

Exhibit II: Estimate Revisions

Source: K. Liu & Company LLC

We lower our estimates for this year and next, primarily reflecting ongoing inventory correction headwinds in Q3 followed by a more gradual rebound in mmWave product sales. We note that our estimates could prove conservative should one or more of the aforementioned large transactions close in Q3, or if customers begin to accept shipments of memory end-of-life orders.

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.