Q1 Results Beat But Uncertainty Looms

Peraso (PRSO) reported Q1 ’23 results slightly ahead of our estimates and consensus. Relative to our model, the revenue upside was driven by modestly higher memory IC sales. Gross margin on a reported basis was below our assumption due to a non-cash inventory charge but was above our estimate excluding this item. Operating expenses were lower than we projected, which combined with the solid top line performance drove the adjusted EBITDA beat. Overall, Peraso’s Q1 results held few surprises and marked a strong start to the year. Moreover, management highlighted continued expansion in the pipeline, which now comprises 75 potential engagements from 60 just a quarter ago. Included in the total are 16 prospects in various stages of designing and testing Peraso’s mmWave products with two already in pre-production.

While we were encouraged by the progress in Q1, Peraso’s ability to sustain that momentum in the near-term has been clouded by a few factors. First, like many other semiconductor companies, the company has begun to see signs of an inventory correction with some customers pushing out orders. Second, Peraso has been informed that Taiwan Semiconductor Manufacturing Corporation (TSMC) will be discontinuing the foundry process used to produce wafers necessary for the manufacture of Peraso’s memory IC products. As TSMC is the sole foundry for production of these products, Peraso has notified its own customers of plans to end-of-life its memory IC products with final shipments to be made in 2024. Although we believe Peraso’s future is grounded in the success of its mmWave products, we had anticipated at least a few more years of cash flow from the memory business. Perhaps the one silver lining here is that the end-of-life is likely to pull forward demand for Peraso’s memory ICs, which could boost both revenue and cash flow later this year and into next year.

On a more positive note, management also indicated that two significant transactions may be secured in Q2. However, it is unclear at this juncture how much revenue may be recognized immediately and how much may be deferred into future periods. As such, no guidance was provided for Q2. We believe at least one of these opportunities is likely to close in the near future and would ease the company’s capital constraints, but we have opted not to include any such contribution in our model at this time. Our revised estimates therefore reflect only the industry-wide inventory correction headwinds anticipated in the near-term, leaving room for upside should these deals be secured. Our price target declines from $2.00 to $1.25 based on a FY ’23 EV/Sales multiple of 2x and an increase in our dilution assumptions. We note that our prior target was based on an EV/Sales multiple of 3x, but we believe a discounted multiple is warranted until Peraso bolsters its balance sheet.

Exhibit I: Reported Results and Guidance Versus Expectations

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

Q1 net revenue of $5.0 million (+47.9% Y/Y) was slightly above our estimate of $4.8 million and consensus of $4.6 million. Relative to our model, the upside was driven by higher than anticipated memory IC sales, while revenue from mmWave products were in line with our estimate. As noted earlier, Peraso has provided notice to its customers that its memory products will reach end-of-life in 2024. For context, memory sales have hovered around $2.0 million per quarter in recent periods, and we were previously projecting $7.0 million in revenue for this year. While our long-term assumption was that memory sales would ultimately trend towards zero over time as Peraso is only investing in its mmWave products, we had anticipated a longer tail. That said, we believe a pull-forward of demand into late 2023 and 2024 is likely, which would benefit the company’s margins and cash flow in those periods given the maturity of the products and deposit requirements in place for related purchase orders.

Gross margin on a reported non-GAAP basis was 45.4% but included a non-cash inventory charge of $0.3 million. Excluding this item, non-GAAP gross margin would have been 52.6%, exceeding our estimate of 50.0% due to the higher mix of memory products. Total operating expenses also compared favorably with our estimate, primarily due to lower SG&A expenses than we modeled. Due to the combination of higher revenue and lower expenses, adjusted EBITDA of $(1.8) million beat our estimate of $(2.1) million and consensus of $(2.2) million. Non-GAAP EPS of $(0.09) also topped our estimate and consensus of $(0.10), benefiting in part from a change in the fair value of warrant liabilities.

Cash and investments at quarter-end totaled $1.4 million. In Q1, Peraso used $1.4 million in cash for operations and just under $0.1 million for capital expenditures. Per management, the company is on the cusp of closing two significant transactions, which could provide additional non-dilutive funding once secured. However, the size and complexity of these deals also create uncertainty over the amount of revenue to be recognized in Q2 versus future periods, prompting management to refrain from providing specific guidance in the interim.

Exhibit II: Estimate Revisions

Source: K. Liu & Company

Reflecting expectations for a pullback in orders as customers work through their existing inventory, we lower our revenue estimates for this year and next. Importantly, our revised estimates exclude neither a pull-forward in memory demand nor any potential benefits from the aforementioned non-recurring engineering and licensing agreements that could come to fruition in the near-term. Although our lower revenue estimates were partially offset by a decrease in our operating expense assumptions, our adjusted EBITDA and non-GAAP EPS estimates also decline. Regardless, we continue to expect Peraso to approach breakeven adjusted EBITDA early in FY ‘24.

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.