Good afternoon and welcome to Peraso Inc.'s Third Quarter 2022 Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. As a reminder, this conference call is being held today, Monday, November 14th, 2022. I would now like to turn the call over to Peraso's CFO, Jim Sullivan. Please go ahead.

Good afternoon and thank you for joining today's conference call to discuss Peraso's third quarter 2022 financial results. I'm Jim Sullivan, CFO of Peraso. And joining me today is Ron Glibbery, our CEO. This afternoon we issued a press release and related Form 8-K which was filed with the Securities and Exchange Commission. The press release and Form 8-K are available on Peraso's website at www.perasoinc.com under the Investor Relations section. There is also a slide presentation that we will be using in conjunction with today's call that may be accessed through the webcast link on the IR website. As a reminder, comments made during today's conference call may include forward-looking statements. All statements other than statements of historical fact could be deemed as forward-looking. Peraso advises caution and reliance on forward-looking statements. These statements include, without limitation, any projections of revenue, margins, expenses, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, adjusted EBITDA, non-GAAP net loss, cash flows, or other financial items. Also, any statements concerning the expected development, performance, and market share or competitive performance of our products or technologies. All forward-looking statements are based on information available to Peraso on the date hereof. These statements involve known and unknown risks, uncertainties, and other factors that may cause Peraso's actual results to differ materially from those implied by the forward-looking statements including unexpected changes in the company's business. More detailed information about these risk factors and additional risk factors are set forth in Peraso's public filings with the Securities and Exchange Commission. Peraso expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additionally, the company's press release and management's statements during this conference call will include discussions of certain measures and financial information in terms of GAAP and non-GAAP. Included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items which provide additional details. For those of you unable to listen to the entire call at this time, a recording will be available on the Investor Relations section of Peraso's website. Now, I would like to turn the call over to our CEO, Ron Glibbery, for his prepared remarks.

Thank you, Jim. Good afternoon and welcome to everyone joining us over the phone and via webcast. As outlined in today's press release, Peraso had a solid quarter with total revenue growing at 63% year-over-year. Although product revenue came in lower than what we had previously expected as a result of not being able to recognize revenue on certain orders shipped in the quarter, overall we continue to experience strong customer demand for our mmWave solutions. We also achieved noted sequential improvement in our gross margin, which combined with lower operating expenses due to the realized gain from the technology license to Intel contributed to significant improvement in our bottom-line results for the third quarter. One of the key contributions to our continued growth in the third quarter was the expected commencement of shipments to fulfill an initial portion of the previously announced purchase orders we received earlier this year. As a reminder, these orders included a combination of Peraso's mmWave IC and module products for fixed wireless applications, and we anticipate continued shipments in support of these orders through the first half of 2023. More broadly, fixed wireless access continues to demonstrate solid momentum with fixed wireless access services dominating subscription net adds among the top six broadband providers in the United States. In spite of increased macroeconomic uncertainty, the global adoption of mmWave has remained strong and increasingly strategic for carriers to maximize bandwidth limitations. I previously highlighted multiple leading carriers that have announced mmWave deployments including NTT DOCOMO, KDDI, SoftBank and Rakuten. Additional carriers such as NBN Australia, T-Mobile in North America, as well as carriers in India and France have acknowledged initiatives to add mmWave-based solutions to their existing networks. During the quarter, we showcased demos of Peraso's new 5G mmWave product at both the European Microwave Week in Milan and Mobile World Congress in Las Vegas. Having personally attended MWC, I can tell you that we received significant interest in our mmWave technology from a series of existing and prospective customers and partners. Further underpinning the very strong reception and interest in our highly integrated 5G beamformer is the device's extraordinary performance, which continues to exceed our internal targets. Although these engineering graphics are fairly technical, I wanted to share them because they represent a few of the crucial KPIs achieved by our fully integrated dual-band antenna. This unique dual-band capability with a single antenna provides carriers and operators with numerous benefits including more flexible and lower-cost deployment. However, using our antenna customization resources, we can also provide an operator a version of our 5G module with an antenna that's fully optimized for a single band. In either of these configurations, the power consumption of our solution is highly competitive. We're poised to expand sampling of our 5G beamformer over the coming months and currently expect to achieve production silicon in the first quarter of next year. Although Peraso has been in the business of developing and shipping mmWave solutions for more than 12 years, we historically have been focused on a relatively small number of core customers. In October, we took an important step to begin expanding our commercial reach with the appointment of Mark Lunsford as Chief Revenue Officer. Mark brings a deep understanding of leading-edge technologies and has demonstrated success across companies at various stages of growth including SiTime Corp, NXP Semiconductor, Micrel Semiconductor, and Pivotal Technologies. Highly applicable to Peraso is his prior experience at emerging growth companies where he has helped convert groundbreaking technology into large multimillion-dollar sales pipelines. He's also led sales efforts with responsibility for global customer bases and secured an impressive lineup of Tier-1 customers at prior companies. The addition of Mark to the management team will support our customer expansion efforts in both 5G licensed and 60 gigahertz unlicensed segments of the marketplace. Finally, acknowledging cross currents and a weaker macro environment, to date, we have not seen measurable impact on our business. We exited the quarter with a record product backlog and very good visibility for the first half of 2023. As previously mentioned, we're focused on driving expanded commercial engagements and targeting a broader group of prospective customers across a larger portion of our served markets. Today, we're actively pursuing engagements with a large series of new customers and partners. Among those are more than one Tier 1 carrier, a leading network system designer, as well as a global telecom software solutions company. In addition to achieving increased market penetration with the existing products, we're constantly thinking about advancing our future product and technology roadmap. This activity includes ongoing discussions with multiple companies on prospective NRE development projects targeting areas such as support design for a high-frequency radio band and the development of next-generation 10-gigabit baseband technology. With that, I'll pass the call back to our CFO, Jim Sullivan, to review the financials and provide guidance for the fourth quarter.

Thank you, Ron, and good afternoon everyone. It's great to be speaking with you again today. During my comments, I will make several references to non-GAAP numbers. Unless otherwise indicated, referenced amounts exclude stock-based compensation expense, amortization of reported intangible assets, business combination transaction costs, and the change in fair value of warrant liability. These non-GAAP financial measures and the reconciliation of the differences between them and comparable GAAP measures are presented in our press release and related current report on Form 8-K, which was filed with the SEC today. Turning now to our third quarter 2022 results. Total revenue was $3.3 million compared with $4.3 million in the second quarter of 2022 and $2 million during the same quarter a year ago. Product revenue from the sale of our integrated circuits and modules was $3.1 million, compared with $4.1 million in the prior quarter and $1.4 million in the third quarter of 2021. The sequential decrease in product sales was attributable to approximately $1.1 million of product shipments late in the third quarter for which the company was unable to satisfy the revenue recognition criteria. The growth in revenue year-over-year was primarily driven by increased demand in shipments of our memory IC products as the prior year included no sales of such memory products due to the timing of our December 2021 business combination. Royalty and other revenue for the third quarter of 2022 was $0.2 million and comprised non-recurring engineering services and royalty revenues from licensees of our memory technology. GAAP gross margin was 39.3% in the third quarter, compared with 34.7% in the prior quarter, and 54.4% in the year-ago quarter. On a non-GAAP basis excluding amortization of reported intangible assets, gross margin for the third quarter was 50.2%, compared with 43% in the second quarter of 2022 and 54.4% in the year-ago quarter. The increase in gross margin over the previous quarter primarily reflected an increased mix of memory IC products, which generally carry higher gross margins than our mmWave products. Product gross margin was 34.6% in the third quarter, compared with 32.1% in the prior quarter and 33.8% in the third quarter of 2021. The sequential and year-over-year increases in product gross margin were largely a function of revenue mix in the third quarter. As we progress through 2022 and into next year, our corporate gross margin target continues to approximate 50%. We expect revenue growth will contribute to higher levels of scale and enable us to capture additional production cost reductions on our mmWave modules while also realizing benefits from anticipated, ongoing sales of our higher-margin memory IC products. GAAP operating expenses for the third quarter were $5.3 million and included a $2.6 million gain related to an exclusive license and asset sale, accounted for as a reduction of operating expenses in accordance with GAAP. For comparison, operating expenses were $8.5 million in the prior quarter and $4.4 million in the year-ago period. Total operating expenses for the third quarter of 2022 on a non-GAAP basis, which excludes stock-based compensation and amortization of reported intangible assets were $3.3 million compared with $6.6 million in the prior quarter and $3.1 million in the same quarter a year ago. GAAP net loss for the third quarter of 2022 was $4 million or a loss of $0.20 per share compared with a net loss of $7 million or $0.36 per share in the prior quarter and a net loss of $3.8 million or a loss per share of $0.73 in the same quarter a year ago. On a non-GAAP basis, net loss for the third quarter of 2022 was $2 million or a loss of $0.10 per share, which excludes stock-based compensation and amortization of reported intangibles. This compared with non-GAAP net loss of $4.8 million or a loss per share of $0.23 in the prior quarter and a net loss of $2.5 million or a loss per share of $0.47 in the same quarter a year ago. The weighted average number of basic and diluted shares outstanding, for purposes of calculating both GAAP and non-GAAP EPS for the third quarter of 2022 was 20 million shares, which excludes 1.8 million shares of our common stock and exchangeable shares that are escrowed pursuant to the terms of an escrow agreement and subject to an earnout, based on achievements of certain stock price targets. In terms of adjusted EBITDA, which we define as GAAP net income or losses reported excluding stock-based compensation, amortization of reported intangibles, interest expense, depreciation and amortization, and the provision for income taxes. Adjusted EBITDA for the third quarter of 2022 was negative $1.8 million compared with negative $4.5 million in the prior quarter and negative $1.4 million in the prior year period. We entered the fourth quarter with significant backlog that extends well into the first half of 2023 and positions us for continued growth. Specific to the fourth quarter of 2022, the company expects total net revenue to be in the range of $3.8 million to $4.1 million, which excludes approximately $1.1 million in anticipated revenue recognition associated with previous product shipments to an existing customer. This concludes our prepared remarks, and we will now open the call to questions. Operator, please initiate the Q&A session.

Ladies and gentlemen, the floor is now open for questions. The first question today is coming from Kevin Liu. Kevin, your line is live. Please go ahead.

Hi, good afternoon, guys. I wanted to start first with the $1.1 million in product revenue that wasn't recognized in Q3 here. Could you talk a little bit about why that wasn’t recognized even though it was shipped? And then I just wanted to clarify for Q4, it sounds like you didn't include that in your range, but are you assuming that you are able to recognize that revenue in addition to your guidance for the quarter?

Hi, Kevin, let me start on a LIFO basis on your question. The guidance for the quarter – for the fourth quarter does exclude that revenue recognition amount. We did keep that out of the number. So that would be potential upside when that is recognized, so that answers the first question. The second question there was basically a collectibility issue. And given there were some extended payment terms on that sale, when we looked at the requirements of ASC 606 and then particularly with the focus right now of the macroeconomic environment, we just felt it was prudent to defer the revenue and let that settle ideally in the fourth quarter. As we believe we said in the press release, we do expect to recognize that in the fourth quarter. We did have additional revenue recognition from that customer during the third quarter. But there were some facts and circumstances around it, and happening late in the quarter that we just felt it was prudent to defer that shipment.

Yes. Understood. And I appreciate the color there. And then just in terms of your backlog, can you just talk a little bit about whether that customer represents any significant portion of the product backlog you're carrying today? And then more so beyond that you talked about a fairly strong backlog heading into Q4, and then the first half of next year. Just wondering how you see those revenues or how the weighting looks currently. Does most of that come out within the fourth quarter, or is it fairly evenly spread over the next few quarters?

Yes. I'll start off first and then let Ron add some color. For the fourth quarter, I will say that the customer is a meaningful piece of backlog but the revenue guidance I gave for the quarter does not include that customer. So we were being specifically conservative in the guidance. We wanted to be ultra-cautious looking at the fourth quarter. So while that customer is not in the guidance, they're in our backlog. Right now we've obviously made a large shipment to them at the end of September. We expect to start shipping to them again later this month or early next. But if we don't, we're very comfortable with our guidance number, and we would just kind of move it into Q1. I would say the backlog is like I said, we have Q4 covered and we had a substantial amount of Q1. Kind of looking back to I guess time flies with weeks ago now, we had announced a meaningful increase in orders, and that's really what's driving our visibility, particularly on those orders that came in on mmWave. But since then we've really firmed up our backlog on the memory IC products as well. So we feel kind of very good looking ahead to the next couple of quarters? Ron, did you want to chime in and clarify anything?

Yes, I think that covers it. I mean, I think we should make it clear that this particular customer is getting a little diluted in terms of the percentage of the backlog that they represent as we move into the first half of 2023.

Okay. And then just wanted to touch on the hiring of Mark Lunsford as your Chief Revenue Officer. Can you talk a little bit about any sort of changes you plan to make in terms of your go-to-market or even your sales organization? And what we should be looking for in terms of kind of milestones over the next couple of quarters here to see progress on the sales front?

Mark has been with us for two weeks and is still getting acclimated. I can share that the key performance indicators set for him focus on our unlicensed products, where we are seeing strong design win activity and growth. From Mark's perspective, the immediate revenue opportunity lies in targeting this market more effectively. Previously, we were somewhat limited without someone like Mark on board, so his first objective will be to engage several customers in that space that we haven't addressed yet. We aim to disclose some of these customer names in the coming quarters. The second aspect of his strategy revolves around our 5G products, which are receiving positive feedback. I'm excited about the high level of integration and the ability to cover the complete 24 to 43 gigahertz 5G bands, which has impressed many. Our timing is excellent as the wireless carriers in the licensed spectrum are experiencing significant growth in fixed wireless, presenting a great opportunity for us. Additionally, we are seeing promising possibilities for non-dilutive engineering revenue, which involves our customers aiding us with development costs. While we haven't detailed these opportunities yet, we anticipate sharing more in the coming quarters about our ability to leverage our intellectual property to secure funding from customers. Thus, a third focus for Mark will be to secure these non-dilutive NRE deals, which would positively impact our cash flow. Overall, Mark's primary objectives are to aggressively pursue existing unlicensed markets, enhance our 5G designs, and explore non-dilutive financing avenues with our customers.

From the customer side, and another event, the Mobile World Congress, I just wanted to touch on the interest in the 5G beamformer product, and where you think the early opportunities for you guys will be in terms of getting into production?

To clarify for everyone on the call, our beamformer is highly focused on the end user equipment aspect, which refers to what is installed in consumers' homes. We believe most of our competitors are concentrating on infrastructure, such as base stations or small cells. Geographically, we see interest in markets like India, which has recently granted licenses for mmWave bands, especially in the 26 gigahertz range, and Brazil, where mmWave is also available. In the United States, we are collaborating with carriers. Specifically regarding the India opportunity, it concentrates on the 26 gigahertz band. Our antenna design is impressive in its capacity to cover a wide frequency range, but we will tailor our modules for the Indian market to capitalize on this opportunity. This customization of antennas for specific markets is a unique strength we have at Peraso. The ability to address a broad spectrum of frequencies allows us to concentrate on particular customer needs, which sums up our current position in the 5G landscape.

Great. Well, good luck as you execute against these opportunities and appreciate you taking my question.

Thanks a lot, Kevin.

Thanks, Kevin.

Thank you. Your next question is coming from David Williams from Benchmark. David, your line is live. Please go ahead.

Thanks so much for taking the question, Ron. Jim, it's good to hear from you and congrats on the continued execution here.

Thanks, Dave.

So I guess one thing I've noticed more recently is just the demand strength that we've seen on fixed wireless access coming from the US carriers, and it's been a very big area of growth specifically for AT&T and T-Mobile. And just curious what you're seeing there, it seems like this could be reaching an inflection point here in the near future. And just, am I thinking about that right? What do you think the hurdles are? And when will you guys see that revenue inflect do you think?

To summarize our perspective on the US market, our entire business thesis revolves around the capacity challenges faced by carriers. We've observed the emergence of mid-band offerings from these carriers, but in the top 20 markets, capacity appears to be rapidly depleting. Additionally, we've seen impressive growth with 920,000 new fixed wireless additions in Q3 from T-Mobile and Verizon. Two key trends are evident: first, network capacity is becoming increasingly strained, and second, fixed wireless presents a significant growth opportunity. We're deeply engaged in this space and believe that carriers will gradually shift their mid-band capabilities to mobile, particularly in urban areas, concentrating their mmWave capacity on fixed wireless access. This aligns with the capacity challenges we observe within US carriers. Outside the US, we're aiming to begin production in 2023, which may be ahead of our schedule, but realistically we expect to see revenue in the US by the first half of 2024 due to lead times of 12 to 18 months. While it may be ambitious to project revenue within a year, the first half of 2024 seems feasible. The encouraging news is the high demand on carrier networks, primarily driven by video services, as it's reported that 70% of network traffic now comprises video, significantly contributing to the capacity crunch. Therefore, it's logical that carriers will increasingly adopt more mmWave for both fixed wireless and mobile, and we anticipate growth in this area over the next 18 months.

Yeah. Thanks for the color there. And it seems like just from an infrastructure deployment or investment CapEx investment, it seems like fixed wireless access would be substantially cheaper than deploying other cellular bands. Is that a good way to think about it, or am I maybe thinking of something different?

Well, yeah, so I think, there are two issues to address there. I mean, the first issue is the cost – the spectrum cost for mmWave is substantially cheaper than other bands. So right off the bat, I mean, you're right the cost to deploy mmWave is substantially cheaper. Now, there's an argument that says, oh, we need to put a lot more small cells or base stations to support mmWave. But again, if you're going after fixed wireless, I would argue that, you just don't need, because you're not really trying to support the dynamics of a mobile environment to be really just focused on fixed wireless, those costs are quite reasonable. Again, now you've got the carriers, who've got pretty inexpensive spectrum, a capacity crunch on their mid-band, and fixed wireless where really the support challenge is quite limited compared to mobility. I really think, the cost of deployment for the carriers for mmWave is substantially lower. And yes, I agree with you in terms of what those metrics look like.

Okay. Fantastic. And then maybe secondly, or another question for me here is, so you've got some pretty good orders and made some good traction, demand is good. From a capacity standpoint, what do you think the restrictions are if you saw a real inflection in revenue? What are your hurdles or challenges? And can you support a 50% increase in order flow? And just kind of given the working capital requirements and your resources you have available today, just anything just help me understand how big the business could be at kind of the existing footprint.

Yes, our budget includes a complete capacity increase. Currently, our main bottleneck is testing, which we've already identified and begun to address. We plan to implement dual-site testing within the next quarter, and potentially quad-site testing in 2023, depending on progress. Testing is crucial to our ability to achieve a significant revenue increase. Interestingly, the cost of testing equipment has decreased dramatically, particularly mmWave test sockets, which were previously very expensive. This reduction is driven by the demands of 5G mmWave technology. As a result, our capital costs for testing equipment have also decreased, allowing us to tackle these bottlenecks in the next couple of quarters. Additionally, as our revenues rise, we will need to secure the necessary capital to support that growth, and Jim may have more insights on this matter.

Yes, I think that's correct, Ron. As we implement our business plan, which focuses on generating higher revenues, improving margins, and reducing our operating loss, we will also have accessible solutions for working capital, like lines of credit against receivables. For a company of our size and current scale, securing these options can be challenging, as lenders prefer to see a reduced burn rate. We are making progress, as our burn rate decreased this quarter, and we will keep you updated on that. This will open another avenue for us, in addition to seeking financing.

Okay. Okay. Fantastic. And I haven't had a chance to read the full report yet so forgive me if I'm wrong here, but it looks like the margins on a non-GAAP basis were up sequentially. And just, kind of, curious if there's anything there that's helping and how you expect that to run? Are there modules that are beginning to help lift that margin, or is it mix? What are the levers? And where can that go?

I think I'll start and then Ron can add his thoughts. We aim for non-GAAP gross margins of 50% or higher, acknowledging that there's a gap with the GAAP figures due to the amortization from intangible assets associated with our business combination. We exclude those from our non-GAAP calculations. In this quarter, our sales mix, particularly a higher percentage of memory IC products, has contributed positively, with margins in that area ranging from 67% to 70%. On the module side, we've also seen enhancements in gross margins, and we're striving to push those toward 50%. It's important to note that we only began selling modules about a year ago, and their production is more complex than simply shipping chips, but we are happy with the progress made. As Ron mentioned regarding capital expenditure, minor improvements in throughput and quad site handlers can impact margins, but we are committed to maintaining them. For this quarter, we exceeded 50% margins, but for the year, we are just over 48%. We are implementing measures to address price increases as we see these trends in our supply chain, and we are optimistic about achieving margins above 50% in 2023.

I would just like to reiterate that the company recognizes the need for margin improvement. There is a clear strategy in place to push those margins above 50%, which includes price increases, reducing test times, and enhancing yields. We are actively working on all of these strategies to achieve that goal.

Okay. Got it. Very good. Thanks so much for the time. I certainly appreciate it and best of luck on the quarter.

Thanks so much, Dave.

Thank you, Dave. Appreciate your time.

Thank you. And there are no further questions in queue at this time. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.