We are initiating coverage of Peraso (PRSO) with a price target of $4.00 based on a FY ’23 EV/Sales multiple of approximately 3x. We believe Peraso has a long runway for growth driven by the deployment of 5G networks and the corresponding rise in bandwidth-intensive services. Peraso develops and sells integrated circuits (ICs), chipsets and modules for use in wireless applications leveraging millimeter wavelength (mmWave) spectrum. The company’s products have already seen strong adoption by wireless equipment vendors offering point-to-point (PtP) and point-to-multipoint (PtMP) solutions and by wireless internet service providers (WISPs) developing proprietary solutions for fixed wireless access (FWA). Although Peraso’s success to date has largely been driven by devices supporting the unlicensed 60 GHz spectrum leveraged by WISPs, the company has also introduced dual-band chipsets targeting licensed 5G spectrum. In other words, Peraso’s addressable market opportunity is expanding to encompass the broader FWA ecosystem. Despite the strong secular tailwinds driving its business and expectations for significant growth ahead, shares of PRSO trade at a depressed valuation. We attribute this to Peraso’s atypical entry into the public markets via a reverse merger with MoSys, a fabless semiconductor company with an extensive memory IP portfolio, and the company’s need for capital to support its growth aspirations. Once the latter is addressed and all eyes are focused on Peraso’s growth prospects, we expect shares of PRSO to be valued more similarly to those of other high growth, early-stage semiconductor companies.

Investment Highlights

A Play on 5G FWA. The rollout of 5G wireless networks leverages a much wider swath of spectrum than available in prior generations, providing far greater capacity to support new service offerings. While the high-speed, low latency connectivity made available by 5G is expected to accelerate digital transformation across industries, the low hanging fruit for wireless service providers is the expansion of basic broadband connectivity. Whereas 4G networks were dedicated to smartphone data plans due to capacity constraints, the greater availability of spectrum in 5G deployments allows service providers to offer internet connectivity to homes, businesses and other sites traditionally served (or underserved) by wired network providers. By leveraging unlicensed mmWave spectrum, several upstart WISPs like Starry (STRY) and WeLink Communications are already targeting cable and DSL subscribers in high density urban markets with many more focused on consumers in rural and other communities where fiber is difficult to deploy. Peraso has already proven its mettle in unlicensed mmWave applications, and with T-Mobile and Verizon also focused on adding FWA subscribers, we expect the company to land new design wins for customer premise equipment supporting licensed 5G mmWave spectrum.

Bridging the Digital Divide. In early 2020, the Federal Communications Commission (FCC) established the Rural Digital Opportunity Fund (RDOF) to provide greater access to high-speed internet services in rural areas. The RDOF provides for up to $20.4 billion in funding over a ten-year period to service providers committing to offer voice and broadband services to locations in unserved blocks. In the first phase of the RDOF auction, four WISPs were among the top ten in funding awards: LTD Broadband, which was awarded $1.3 billion; Nextlink, which was awarded $429.2 million; Resound Networks, which was awarded $310.7 million; and Starry, which was awarded $268.9 million. However, LTD Broadband’s application has since been rejected, while the other three WISPs are still awaiting approval of their applications and the associated funding. We believe that final approval and release of RDOF funding to any of the WISPs will result in significant spend on the PtP and PtMP solutions required to build out FWA networks, which in turn is likely to benefit Peraso given its early focus on the WISP market. We further note that the Infrastructure Investment and Jobs Act (IIJA) passed by the U.S. Congress in late 2021 included $65 billion in funding for broadband infrastructure and government programs designed to expand access to affordable and faster internet services. Given the lower cost to deploy wireless networks versus fiber and the gigabit speeds delivered by mmWave networks, we surmise FWA providers – and Peraso by extension - will also benefit from the IIJA funding.

Riding the 5G Wave. Although the Tier-1 mobile service providers in the U.S. have been slower to activate 5G mmWave spectrum thus far, we believe it is only a matter of time. Per management, industry forecasts suggest mmWave device shipments could see an inflection point as early as 2023. We note that mmWave spectrum is ideal for use cases requiring high bandwidth, low latency and a clear line of sight. These characteristics are part and parcel to the 5G enabled digital transformation expected to bring about autonomous vehicles, the Internet of Things and the metaverse to name a few much hyped examples. Although not a core focus of Peraso’s today, the company has landed customers utilizing its products for Industrial IoT use cases as well as virtual reality (VR) applications. Given that industry estimates suggest IoT connected devices could increase from 12 billion in 2020 to over 70 billion by 2030, and IDC’s projections for VR shipments to more than double by 2026 from an estimated 13.9 million units in 2022, we see substantial growth opportunities for Peraso even beyond its core FWA business.

Significant Room for Margin Expansion. In 2021, Peraso shifted its focus to developing mmWave modules that integrate its chips, antenna and software in a single package. As shipments of these modules are just beginning to ramp, costs related to testing, yield and other inefficiencies during the early stages of production have pressured gross margin. Our back-of-the-envelope analysis suggests gross margin on mmWave sales in Q2 ’22 was below 30% versus the 40%+ product margins seen in 1H ‘21. Given that the company’s memory products boast a gross margin in excess of 60% and management’s expectations for mmWave products to approach a gross margin in the mid-40% range at least, we anticipate significant gross margin expansion going forward, which in turn should move the company towards positive earnings and cash flow by FY ’24.

High Margin Memory Business. Peraso’s reverse merger with MoSys brought the company an established memory product line that has historically generated gross margins above 60%. The company’s memory products have been deployed by network equipment vendors requiring high-speed, low latency routing and packet inspection for security and other applications. Although the memory products are no longer the focal point of development efforts, we expect them to remain a stable source of high margin revenue for the next few years as Peraso scales its mmWave business. Additionally, the company’s extensive memory IP provides potential avenues for generating non-dilutive capital. Case in point, Peraso recently reached a licensing and patent assignment agreement with Intel for its Stellar packet classification platform, which will add $3.5 million to the balance sheet.

Valuation. PRSO shares trade at just 2.4x and 1.3x our FY ’22 and FY ‘23 revenue estimates, respectively, a significant discount to the multiples afforded to other high growth semiconductor companies and established players leveraged to 5G. Our price target of $4.00 represents a FY ’23 EV/Sales multiple of 3x, a discount to the peer group median and that of its primary competitor, Qualcomm (QCOM). Although a higher valuation consistent with other early-stage semiconductor companies is certainly attainable, we believe a discount is appropriate at this juncture given Peraso’s current scale and financial position.

Investment Risks

Cash Burn. Peraso has invested significantly to develop its mmWave devices and modules and is in the early stages of adoption. As such, the company is unprofitable and requires additional working capital to support its ramp in sales. Although a recent licensing transaction with Intel should limit cash burn in Q3 ’22, we expect the company to exit FY ’22 with just $1.0 million in cash absent another influx of capital, and we estimate cash usage in FY ’23 to be $10.8 million. Should the company consume cash more rapidly than we anticipate or face challenges in raising additional capital, a range of negative outcomes including significant dilution or insolvency could come into play.

Competition. We believe Peraso’s mmWave products for unlicensed 60 GHz spectrum primarily faces only limited competition from Qualcomm (QCOM) and Renesas (TSE: 6723), but the company’s competitors have significantly greater scale and brand recognition. Additionally, Peraso’s expansion of its product set to encompass licensed 5G mmWave applications could further increase the number of potential competitors. Any resulting pricing pressure or competitive losses could hamper the company’s ability to meet its growth and profitability expectations.

Customer Concentration. Peraso derives a substantial portion of its sales from a small number of customers. In Q2 ’22, four customers comprised over 80% of revenue, and in each of the past two years, the company has had three customers account for over 10% of revenue. Specifically, Ubiquiti (UI), XCOM Labs and Alltech Technology comprised 55%, 27% and 12% of revenue, respectively, in FY ’20, while CEAC International, WeLink Communications and Alltech Technology accounted for 48%, 19% and 11% of revenue in FY ‘21. The loss of a significant customer would have a negative impact on operations and create concerns among investors.

Dilution. With only $6.0 million in cash and investments on the balance sheet at the end of Q2 ’22 and our expectations for free cash flow usage of approximately $3.7 million per quarter in 2H ’22, we believe Peraso will need a capital infusion to support its growth aspirations through FY ‘23. While the company may have non-dilutive options, we surmise an equity raise is the likely course of action.

Economic Conditions. A downturn in the economy could cause network equipment vendors and internet service providers to curtail spending, which in turn could reduce demand for Peraso’s products.

Intellectual Property (IP). Peraso is dependent on its IP, including its patents, copyrights, trademarks and trade secrets, to compete effectively against others. An inability to protect its IP against infringement or other misuse could adversely affect the company’s business. In addition, the company could be accused of infringing upon the IP of others, which would be costly to defend against.

Missed Expectations. Peraso’s sales are transactional in nature and may be lumpy from quarter to quarter. Should the company miss its own guidance or consensus estimates, shares of PRSO could decline.

Supply Chain. Peraso relies on a limited number of third-party manufacturing partners to produce its devices and modules. The company’s existing products are manufactured outside of the U.S. in France and Taiwan, which also exposes the company to geopolitical risk, supply chain disruptions and higher freight costs.

Company History

Peraso was founded in 2008 and is a fabless semiconductor company based in Toronto, Canada. During the company’s formative years, revenue was largely derived from engineering services as Peraso focused on the development and commercialization of 5G mmWave integrated circuit (IC) products. After identifying its niche serving PtP and PtMP vendors targeting outdoor broadband applications, Peraso began producing 60 GHz mmWave phased array devices in 2017 and has steadily improved the performance of its products over time.

In December 2018, Peraso entered into a License and Development Agreement and a Subscription Agreement with Ubiquiti, paving the way for Ubiquiti to become a shareholder and the company’s largest customer. However, a dispute between the two companies over Peraso’s achievement of a development milestone in late 2019 led Peraso to terminate the licensing agreement. Subsequently, Ubiquiti filed a lawsuit against the company, alleging that Peraso had wrongly terminated the agreement as exclusivity provisions were complicating Peraso’s efforts to sell itself to a U.S.-based hardware company. In response, Peraso stated that Ubiquiti had already failed to confirm an earlier development milestone and make a corresponding investment required under the agreement. Furthermore, the lack of confirmation for the third milestone in question forced Peraso to pursue financing in the form of a convertible note. Interestingly, Peraso claimed that Ubiquiti’s actions had diminished the value of its business by at least $100 million. Worth noting, the licensing agreement with Ubiquiti and subsequent dispute arose prior to current CEO Ron Glibbery taking the helm. In June 2020 with Mr. Glibbery now charting Peraso’s path forward, the company filed for relief under the Companies’ Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice. Several months later, Peraso and Ubiquiti reached a settlement agreement in which the two companies entered into a new License and Development Agreement, and Peraso was paid $5 million. With the litigation behind the companies and sufficient liquidity to continue its business as a going concern, Peraso concluded its CCAA proceedings. Importantly, the relationship between the two companies remains strong, and Ubiquiti is still a major customer.

In September 2021, Peraso agreed to a reverse merger with MoSys, a publicly traded memory IC company that was in the process of evaluating strategic alternatives. Terms of the transaction called for MoSys to issue 14.2 million shares of common stock or exchangeable shares, of which 1.8 million shares remain in escrow subject to certain conditions. Following approval of the transaction by MoSys’ shareholders in December 2021, Peraso’s shareholders owned 61% of the newly formed company, which adopted the Peraso name and began trading under the ticker symbol PRSO. With the company’s growth aspirations now levered to mmWave and 5G opportunities, Peraso’s co-founder and CEO Ron Glibbery was appointed CEO of the combined company. Two other Peraso co-founders, Brad Lynch and Alex Tomkins, were named COO and CTO, respectively. MoSys’ CEO Dan Lewis was initially named President of the combined company and has since moved into the role of Vice President, General Manager of Memory Products. MoSys’ CFO Jim Sullivan was appointed CFO of Peraso.

Thus far in its short stint as a public company, Peraso has announced key wins with China Unicom, a global distribution agreement with Richardson RFPD and $6.4 million in orders from multiple FWA customers. The company has also continued to advance its product roadmap, introducing its PERSPECTUS family of 60 GHz modules and its PRS1520 mmWave beamformer IC targeted at end-user equipment requiring support for licensed 5G mmWave bands in the 24 GHz to 43.5 GHz range.

Accelerating the Promise of 5G

Peraso’s mmWave devices and modules enable customers to deliver the high speed, low latency connectivity expected from the deployment of 5G networks. Key performance characteristics include mmWave support for links over 25 km, download speeds in excess of 1 Gbps and upload speeds of over several hundred Mbps. The company also offers software packages to ensure compliance with IEEE 802.11ad specifications and to optimize applications such as FWA and real time audio and video streaming. Peraso’s 60 GHz chipset products include the X720, which combines a baseband IC with a 60 GHz radio IC designed for outdoor applications such as FWA, and the X130, which combines a baseband IC with a 60 GHz Phased Array RFIC to power applications such as wireless AR/VR, wireless displays, wireless docking and wireless access to the cloud. In an effort to accelerate its customers’ development efforts, Peraso has introduced mmWave modules integrating its chipsets with on-board antennas and supported by its software packages. The Perspectus family of products is designed to support FWA deployments whereas the Versatus series will be targeted at enterprise, industrial and consumer applications. As for licensed 5G spectrum, Peraso recently introduced the PRS1520, a mmWave Beamformer IC with support for bands from 24 to 43.5 GHz. The product is expected to begin sampling with potential customers in Q3 ’22 and is targeted for applications such as Customer Premise Equipment (CPE) for FWA deployments, small cell nodes and personal hotspots.

Exhibit I: Perspectus Series Modules

Exhibit II: Versatus Series Modules

Turning to Peraso’s memory business, the company offers Accelerator Memory products under the Quazar and Blazar brands, and LineSpeed products. The Accelerator Memory products are SRAM devices that attach to Intel, Xilinx and Achronix FPGAs to enhance system performance, while the LineSpeed products are typically used on line cards or inside modules to support the aggregation and disaggregation of data. In terms of the relevance of these solutions to 5G, as more and more traffic moves across the User Plane Function, attaching Peraso’s accelerator engine ICs to FPGAs enables low latency, high-speed classification and inspection of packets, which is critical for security applications and other network operations.

Eliminating 5G Network Bottlenecks

The deployment of 5G networks across the globe has the potential to dramatically expand the availability of high-speed, low latency internet connectivity, and is expected to be a critical enabler for the Internet of Things (IoT), autonomous vehicles and the metaverse. Although initial 5G deployments relied upon sub-6 GHz spectrum that was shared with 4G LTE services, this spectrum has largely been exhausted and has generally been allocated to mobile data plans. As a result, Tier 1 service providers in the U.S. are increasingly focused on activating their mid-band and mmWave spectrum holdings to expand 5G coverage and launch new service offerings. Through its acquisition of Sprint, T-Mobile (TMUS) accumulated mid-band spectrum that allowed the company to take the pole position in rolling out 5G coverage nationwide and aggressively market new FWA service plans for homes and businesses. Both AT&T (T) and Verizon (VZ) bolstered their mid-band spectrum holdings via the Federal Communications Commission’s C-Band spectrum auction last year and are now racing to expand coverage as well. While much of the focus is on mid-band spectrum today, that too may not be sufficient to support all the use cases of tomorrow.

Given the higher speeds and lower latency afforded by high-band mmWave spectrum, we believe it is only a matter of time before services leveraging these bands are deployed more broadly. That said, many WISPs are already leveraging both licensed 5G and unlicensed 60 GHz mmWave spectrum to provide FWA services to consumers. According to The Carmel Group, there were at least 2,800 fixed wireless ISPs at the start of 2021, and the number of subscribers served by these providers is expected to increase from 6.9 million at the end of 2020 to 12.7 million by the end of 2025, representing a CAGR of 13%. Peraso latched onto this opportunity early, landing key wireless equipment suppliers like Ubiquiti and WISPs developing their own products like WeLink Communications as customers. With the U.S. federal government intent on expanding broadband internet connectivity to underserved areas, we believe a portion of the funding available through the RDOF and IIJA will be awarded to WISPs, which in turn should benefit Peraso and other vendors serving this market. Of course, T-Mobile and Verizon have also highlighted grand ambitions for growing their respective FWA subscriber bases but will do so using their licensed spectrum holdings. With Peraso’s introduction of its mmWave Beamformer IC with support for bands from 24 to 43.5 GHz, the company could find itself designed into Customer Premise Equipment (CPE) for use in FWA networks deployed on licensed 5G mmWave spectrum. In other words, Peraso’s opportunity in FWA may expand well beyond the markets targeted by WISPs to include those served by the Tier 1 carriers in North America.

Exhibit III: 5G mmWave Device Shipments

*Source: Mobile Experts; 5G mmWave Outlook, June 2021*

Financial Summary

As Peraso was deemed the accounting acquirer following its reverse merger with MoSys, the financial statements filed since Q4 ’21 reflect the results of the combined company but the comparable historical periods now reflect only Peraso’s results as a privately-held company. Our model also follows this convention although we note that historical results for the memory business are available in MoSys’ prior SEC filings. At present, Peraso derives over 90% of revenue from product sales, which includes sales of mmWave ICs and modules as well as memory devices. Revenue from product sales is typically recognized at the time of shipment and is transactional in nature. As Peraso remains in the early days of mmWave module sales, the associated product gross margins are considerably below those of memory sales, which have historically generated gross margins north of 60%. As mmWave module sales begin to ramp and initial inefficiencies are resolved, however, we expect the company’s mmWave products to generate a gross margin in the 40% range and to potentially approach 50% over time. The remainder of Peraso’s revenue is derived from high margin royalties arising from the company’s memory IP and to a lesser extent, non-recurring engineering services.

Looking back at Peraso’s results in recent years, we note that FY ’20 benefited from a significant jump in license revenue due to a settlement agreement with Ubiquiti. Aside from that, the results reflect a steady build in mmWave product sales along with increasing investments to support the company’s development efforts. With the inclusion of the memory business in 1H ’22, both revenue and operating expenses have increased commensurately. Although revenue from memory products has comprised over 50% of sales thus far in FY ‘22, we expect mmWave sales to account for the majority of revenue by year-end and comprise even more of the mix thereafter. As for the balance sheet, Peraso exited Q2 ’22 with total cash and investments of $6.0 million and no debt. Subsequent to quarter-end, the company entered into a licensing and patent assignment agreement with Intel, which will add $3.5 million in cash.

Exhibit IV: Pro Forma Revenue Mix (MMs)

*Sources: Peraso’s SEC Filings; K. Liu & Company LLC*

As it relates to guidance, we note that management put forth near, medium and long-term expectations when the merger was first announced. Of most relevance today, the outlook for FY ’22 called for revenue of $18.0-$22.0 million with an estimated gross margin of 55%-60%. Over a two to three-year period, management projected a CAGR of at least 70% along with target gross and operating margins of 60% and 5%-20%, respectively. Long-term, defined as three to five years out, expectations included average annual revenue growth of 30%, gross margin in excess of 60% and an operating margin of at least 20%. Since the closing of the merger, Peraso has provided only quarterly revenue guidance, which currently calls for Q3 ’22 revenue of $4.3-$4.5 million.

Exhibit V: Our Estimates for Peraso

With quarterly revenue currently in the $4 million range, we have taken a more conservative posture and assumed revenue for FY ’22 reaches $17.0 million. Additionally, with inflation running rampant since management first put forth its expectations, we assume gross margin on a non-GAAP basis will be closer to 47% for the year. Beyond FY ’22, we expect revenue growth above 70% in each of the next two years but believe achievement of materially higher gross margin and positive cash flow will likely occur in FY ’24 as opposed to FY ’23. As such, we expect Peraso to explore a range of options to bolster its balance sheet in the coming quarters, thereby ensuring the company has adequate financing to support the anticipated ramp in mmWave sales in FY ’23 and beyond.

Valuation

Shares of PRSO currently trade at just 2.4x and 1.3x our FY ’22 and FY ’23 revenue, respectively, representing a significant discount to peers. As Peraso’s primary competitor, Qualcomm, is significantly larger, we believe emerging micro and small-cap semiconductor companies focused on wireless communications and other high growth markets are more appropriate from a comparison standpoint. For reference, however, shares of QCOM currently trade at a FY ’23 EV/Sales multiple of 3.5x. As illustrated below, Peraso’s peer group currently commands a median FY ’23 EV/Sales multiple of 4.0x and Sivers Semiconductors, which we consider the closest comp due to some competitive overlap and its acquisition of MixComm, trades at a FY ’23 EV/Sales multiple of 4.3x. Like Peraso, MixComm is a mmWave fabless semiconductor company just beginning to ramp its business. In February 2022, Sivers acquired MixComm for $135 million in cash and stock and a potential earnout of $20 million. MixComm had revenue of just $1.3 million in 1H ’21 but is expected to generate $70 million in aggregate revenue from 2022-2024 and another $70 million from a single Tier 1 customer in the 2025-2026 timeframe. This implies $28 million in average annual revenue over the next five years, equating to an EV/Sales multiple of 4.8x. Although PRSO could arguably be valued at a similar multiple, we believe a discount is warranted given its current cash position. We therefore set our price target at $4.00, representing a FY ’23 EV/Sales multiple of approximately 3x.

Exhibit VI: Semiconductor Comps

*Sources: Company Filings; FactSet Estimates; K. Liu & Company LLC*

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.

Initiating Coverage of Peraso