Revenue Recognition Delay Overshadows Solid Q3 Performance

Peraso (PRSO) reported Q3 ’22 results below our estimates as the company was unable to recognize revenue for certain orders shipped to a large customer late in the quarter. More specifically, aged receivables from WeLink Communications prompted management to defer revenue recognition until the associated payments have been collected. According to Peraso’s 10-Q, WeLink comprised 28% of year-to-date revenue, and Peraso has historically collected all amounts due albeit not always in a timely manner. We believe the more conservative approach to revenue recognition this time around is simply to account for the increasing economic uncertainty of late. That said, our sense is that management has no real concerns regarding collectability of the outstanding receivables.

If not for the delay in recognition, revenue would have been in line with management’s guidance and our estimate. Moreover, both adjusted EBITDA and non-GAAP EPS would have beat our projections as gross margin outpaced our assumption and operating expenses came in slightly lower. We note that on a reported basis, both metrics exceeded our projections despite the revenue shortfall as the asset sale and licensing agreement with Intel announced previously was recognized as an offset to operating expenses. We exclude this gain, however, when comparing the reported results to our model.

Turning to the outlook, management’s Q4 revenue guidance excludes any potential contribution from WeLink and thus fell short of our estimate. Should Peraso collect the current amounts due, however, additional shipments could be made and drive Q4 results meaningfully above guidance. In other words, we believe Q4 guidance would have been in line to slightly better than our prior projection had the revenue recognition issue not surfaced. Although we think it is likely that Peraso will receive the amounts due from WeLink, we have followed management’s lead and excluded any potential contribution from our Q4 estimates. We plan to update our estimates for the quarter should greater clarity emerge. Beyond Q4, we assume WeLink will remain a significant customer, and we continue to anticipate that new mmWave customers will ramp over the coming year. We have therefore left our estimates for FY ’23 and FY ’24 largely unchanged. Our price target declines slightly from $4.00 to $3.50 based on the same FY ’23 EV/Sales multiple of 3x we applied previously but now also incorporating potential dilution from an equity raise in the near-term. Although there is a wide range of potential outcomes here, we have made a base assumption that Peraso raises $9 million at a 20% discount to yesterday’s closing price. In our view, Peraso remains a compelling play on the deployment of mmWave spectrum and adoption of fixed wireless access services.

Exhibit I: Reported Results Versus Expectations

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

In Q3, net revenue was $3.3 million (+63.3% Y/Y), below management’s guidance of $4.3-$4.5 million and our estimate of $4.4 million. The shortfall was wholly attributable to $1.1 million in orders that shipped late in the quarter but were not recognized as revenue due to potential collectability issues. As mentioned previously, management has taken a more conservative posture on revenue recognition for customers with overdue receivables but has a history of collecting all amounts due from the customer in question.

Gross margin on a non-GAAP basis was 50.2%, exceeding our assumption of 44.7% due to a higher mix of memory products. Worth noting, had Peraso been able to recognize the additional revenue from WeLink, non-GAAP gross margin still would have come in at 49.0% and exceeded our estimate. This suggests margins for the company’s mmWave ICs and modules continue to rebound from 1H ’22 levels. Total operating expenses of $5.3 million were well below our $8.2 million estimate due to a $2.6 million gain from an asset sale and licensing agreement with Intel that was recognized as an offset to expenses. Excluding this item, operating expenses were slightly below our estimate as lower than expected R&D expenses more than offset higher SG&A expenses. As the $2.6 million gain was not excluded from adjusted EBITDA and non-GAAP EPS, both metrics easily exceeded our estimates on a reported basis. Excluding the gain, adjusted EBITDA would have been $(4.4) million and non-GAAP EPS would have been $(0.23) versus our estimates of $(4.0) million and $(0.20), respectively.

Cash at the end of Q3 totaled $3.9 million. During the quarter, Peraso used $1.9 million in cash from operations and had $0.2 million in capital expenditures, representing a significant improvement in cash burn relative to 1H ‘22.

Turning to guidance, management expects Q4 net revenue of $3.8-$4.1 million, which excludes any potential contribution from WeLink. Prior to revisions, we were projecting $4.9 million in net revenue. Assuming the $1.1 million in revenue deferred from Q3 is recognized in Q4 and shipments to WeLink continue at a similar pace, however, that implies Q4 net revenue could ultimately exceed $6.0 million when all is said and done.

Exhibit II: Estimate Revisions

Source: K. Liu & Company LLC

We lower our Q4 net revenue estimate to exclude any potential contribution from WeLink but our adjusted EBITDA estimate remains intact due to an uptick in our gross margin assumption and slightly lower operating expenses. Our estimates for FY ’23 and FY ’24 are largely unchanged, however, as we continue to assume WeLink remains a significant customer and Peraso lands new customers for its mmWave products.

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.