Earnings Call Transcript - PRSO Q3 2024

Operator, Operator

Good afternoon, and welcome to Peraso Inc.'s Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded today, Tuesday, November 12, 2024. I would now like to turn the call over to your host for today's conference call, Mr. Jim Sullivan. Please go ahead.

Jim Sullivan, CFO

Good afternoon, and thank you for joining today's conference call to discuss Peraso's third quarter 2024 financial results. I'm Jim Sullivan, CFO of Peraso, and joining me today is Ron Glibbery, our CEO. Today, after the market closed, we issued a press release and related Form 8-K, which was filed with the SEC. 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 Investor Relations 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 forward-looking. Peraso advises caution in 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, including anticipated cost savings, 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 SEC. 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 statements during this conference call will include discussions of certain measures and financial information in terms of GAAP and non-GAAP. With respect to remarks on today's call involving non-GAAP numbers, unless otherwise indicated, referenced amounts exclude stock-based compensation expense, amortization of reported intangible assets, severance costs, and the change in fair value of warrant liabilities. These non-GAAP financial measures, definitions, and the reconciliation of the differences between them and comparable GAAP measures are presented in our press release and related Form 8-K, 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 page of our website. Now, I would like to turn the call over to our CEO, Ron Glibbery, for his prepared remarks. Ron?

Ron Glibbery, CEO

Thank you, Jim. Good afternoon, and welcome to everyone on the phone and webcast. We appreciate you taking the time to join us today for our third quarter call. Revenue in the quarter was within a range of expectations, with overall results being highlighted by meaningful improvement in our operating performance. We began to see the benefit of our previous and ongoing actions to reduce costs and increase efficiencies, which resulted in operating expenses decreasing almost 20% year-over-year. Although the broader macro environment and prolonged inventory adjustments remain ongoing challenges, we continue to make notable progress during the quarter to advance existing customer engagements toward new design wins for our millimeter-wave solutions. Much of this recent activity has predominantly focused on our targeted markets of fixed wireless access and tactical military communications, which I will expand on in more detail as part of today's call. Turning to Slide 4, we continue to ship significant quantities of our end-of-life memory IC products. Third quarter shipments increased sequentially to approximately $3.7 million from $3.4 million in the second quarter. We ended the third quarter with a total remaining purchase order backlog of approximately $5.7 million. We remain on schedule to fulfill the total remaining backlog of memory IC orders by the end of the first quarter of 2025. As previously discussed, these shipments against remaining backlog will continue to contribute meaningful revenue and cash flow as we work further to expand our millimeter-wave design win pipeline and continue to support customer ramps of our millimeter-wave products. Next on Slide 5, we are continuing to cultivate a robust and growing pipeline of opportunities for our millimeter-wave solutions. As discussed on past earnings calls, our sales efforts and engagements have been focused on expanding market reach across diverse geographies and end market applications. These include recently announced customer wins in Africa, Asia, and other areas around the globe that can benefit from our millimeter-wave technologies for high reliability and low latency multi-gigabit wireless connectivity. Starting with a few key takeaways from our current pipeline, first, we have consistently increased the number of new funnel opportunities to 82 customer engagements, and we currently have 23 active engagements that are either undergoing hardware evaluation or are in advanced design and engineering stages. To date, we have successfully converted nine prior design engagements into production wins commercialized by our customers. As a reminder, once a program converts to full production, it is no longer included as part of our current active pipeline. To briefly highlight a couple of our recently announced wins, in early November, SAF TEHNIKA released its FreeMile 60 radio, which provides Fixed Wireless Access or FWA services using Peraso's Perspectus millimeter-Wave modules with the X720 chipset. Utilizing the unlicensed 60 gigahertz band and incorporating beamforming coverage and optional antenna kits for enhanced directionality, this radio leverages the power of our Perspectus platform and is expected to be deployed in fixed wireless networks in Europe and North America. In another recent win, Miliwave announced its MWC-932 product at WISPAPALOOZA, adding to its existing AirPath 60 product line. This new product utilizes Peraso's Perspectus millimeter-Wave modules in the X720 chipset. The MWC-932 provides a wireless Ethernet Bridge for applications that require multi-gigabit throughput and utilizes the unlicensed 60 gigahertz band to overcome the frequently encountered interference from Wi-Fi, while also providing a robust link at distances up to five kilometers. Lastly, we also recently announced an initial purchase order for our newly integrated High-Velocity Roaming or HVR Technology for applications in South Korea. More specifically, this unique application is expected to leverage Peraso's millimeter-wave technology to enhance high-speed Internet connectivity on moving trains and subways. Turning to Slide 6, I want to review the recent traction with our unique DUNE millimeter-wave platform for Dense Urban applications. The DUNE platform implements intelligent media access control features, which, along with the prospective series of millimeter-wave modules, enables Wireless Internet Service Providers or WISPs to deploy low-cost, low-power, long-range point-to-multipoint fixed wireless solutions in dense networking environments. These advantages are particularly crucial in regions such as Africa, where reliable low-power connectivity is essential for economic growth and social development, particularly as this market is heavily reliant on battery backup systems due to frequent power outages. Last month, we announced a $1.4 million follow-on purchase order from a South African WISP for our DUNE solution. This additional order for Peraso's innovative millimeter-wave enabled solution builds on the initial production order secured and shipped in the first half of 2024. We believe the rapid growth of Internet users in Africa presents a huge opportunity to bridge the digital divide, and this recent follow-on order is another early indication of this market's future potential. In addition to South Africa, we are actively seeking to partner with WISPs worldwide with a goal of delivering high-quality wireless connectivity that empowers individuals and businesses alike. As further evidence, we also recently announced another DUNE order from a WISP in Kenya. As this WISP replaces its existing technology with Peraso’s DUNE system, the customer expects to significantly improve the quality of Internet services across its existing network. With an estimated 22.7 million Internet users in Kenya, Peraso believes the potential impact of this project could be substantial. Finally, we are also engaged with several other prospective customers targeting future deployments in dense urban environments and have made multiple shipments of DUNE proof-of-concepts in support of trials and ongoing evaluations with other WISPs in Africa. Moreover, members of the Peraso team are currently participating in the ongoing 2024 Africa Tech Festival in Cape Town, South Africa. They are there this week to promote the capabilities of our millimeter-wave products and technology and collaborate with leading experts in the telecom industry. This includes exchanging insights, fostering new connections, and advocating for the adoption of millimeter-wave fixed wireless solutions in densely populated areas across the continent. Turning to slide 7. We also continue to focus on expanded opportunities for our millimeter-wave technology in tactical defense and military applications. With the growing demand for stealth communication platforms used on the battlefield, we believe Peraso’s 60 gigahertz millimeter-wave technology is uniquely poised to meet the rigorous demands of the military and modern defense markets. Our technology ensures secure, high-speed transfer in challenging environments while simultaneously avoiding any potential interference with licensed spectrum. As a recent proof point, we secured an initial purchase order from a military customer for our prospective module products. Again, our proprietary and narrow beamforming technology is ideally suited for battlefield applications. This particular configuration is intended to enhance situational awareness and communications for deployed soldiers engaged in combat operations. We currently anticipate initial shipments in fulfillment of this order during the first quarter of 2025. Based on the rapid expansion of recent engagement activity, we fully expect to announce additional wins leveraging our millimeter-wave technology for mission-critical, tactical communication applications over the coming year. Moving to slide 8. I wanted to take a moment to highlight other emerging developments that we believe could contribute to expanded customer adoption and market opportunities for our millimeter-wave solutions. Although, we've discussed BEAD on previous calls, new information continues to be made available to influence the potential strategic direction of service providers and the technology solutions deployed. As a brief reminder, the US government's BEAD program is a significant initiative meant to improve access to high-speed Internet by providing grants totaling up to $42 billion to fund infrastructure and adoption programs. The head of the National Telecommunications and Information Administration, or NTIA, which is a government agency that oversees the BEAD program, recently provided formal updated guidance that makes high-speed Internet using unlicensed spectrum, fixed wireless access, including the millimeter bands eligible for program funding. Now that we are eligible for funding, we believe the superior value of our proposition and significant cost advantages compared to the cost and disruption of trenching fiber will lead to millimeter-wave fixed wireless access playing a key role in bringing high-speed broadband access across America. New engagements with customers and partners supported by BEAD program funding could increase and potentially significantly accelerate the market opportunities for our millimeter-wave technology, and we are continuing to closely monitor all related new developments. In closing, I remain pleased with the progress that we continue to make across our business, especially on expanding our sales funnel in more diversified geographies and applications. We remain focused on advancing and converting existing customer engagements into production orders for our millimeter-wave products, and we also expect that our ongoing shipments to fulfill the remaining backlog orders for our end-of-life memory IC products will continue to contribute meaningful revenue and cash flow through early next year. Taken together, we continue to anticipate total revenue for the second half of 2024 to increase over the first half of the year, as well as represent double-digit growth over the comparable prior year period. With that, I'll turn the call back to Jim to review the third quarter financials, as well as our revenue outlook for the fourth quarter of 2024.

Jim Sullivan, CFO

Thank you, Ron. Turning to the results for the third quarter of 2024. Total net revenue was $3.8 million compared with $4.2 million for the prior quarter and $4.5 million for the third quarter of 2023. Product revenue from the sale of our memory integrated circuits and millimeter-wave products in the third quarter was $3.8 million compared with $4.1 million in the prior quarter and $4.3 million in the third quarter of 2023. Royalty and other revenue for the third quarter of 2024 was $30,000 compared with $100,000 in the prior quarter and compared with $200,000 in the same quarter a year ago. GAAP gross margin decreased to 47% in the third quarter from 55.5% in the prior quarter and 45.4% in the year-ago quarter. On a non-GAAP basis, which excludes amortization of acquired intangible assets, gross margin for the third quarter was 61.7% compared with 68.8% in the prior quarter and compared with 58% in the third quarter of 2023. The sequential decrease in both GAAP and non-GAAP gross margin was primarily attributable to a $300,000 write-down of millimeter-wave inventory, as well as lower royalty and other revenue. GAAP operating expenses for the third quarter of 2024 were $4.5 million compared with $6.8 million in the prior quarter and $5.6 million in the third quarter of 2023. Non-GAAP operating expenses, which exclude stock-based compensation, amortization of intangible assets, and severance costs, were $3.3 million in the third quarter compared with $4.9 million in the prior quarter and $4 million in the third quarter of 2023. The year-over-year decrease in third quarter operating expenses on both GAAP and non-GAAP bases was primarily attributable to a combination of previously implemented cost reductions and the company's ongoing cost containment initiatives. GAAP net loss for the third quarter of 2024 was $2.7 million or a loss of $0.98 per share compared with a net loss of $4.4 million or $1.88 per share in the prior quarter and compared with a net loss of $600,000 or $0.87 per share in the same quarter a year ago. On a non-GAAP basis, which excludes stock-based compensation, amortization of acquired intangibles, and severance costs, net loss for the third quarter of 2024 was $900,000 or a loss of $0.34 per share. This compared with a non-GAAP net loss of $2.1 million or a loss of $0.88 per share in the prior quarter and a net loss of $1.1 million or a loss per share of $1.56 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 2024 was approximately 2.8 million shares. Adjusted EBITDA, which we define as GAAP net income or losses reported, excluding stock-based compensation, amortization of acquired intangibles, severance costs, change in fair value of warrant liabilities, interest expense, depreciation and amortization, and the provision for income taxes was negative $800,000 in the third quarter compared with negative $1.9 million in the prior quarter and negative $900,000 in the prior year period. As of September 30th, 2024, we had $1.3 million of cash and equivalents, representing a cash burn of approximately $600,000 from the prior quarter. As recently announced, subsequent to the end of the third quarter, the company entered into inducement offer letter agreements with certain holders of Series B warrants of the company for the holders to purchase 2,246,030 shares of the company's common stock. The holders exercised their Series B warrants for cash at a reduced exercise price of $1.30 per share and in consideration, the company issued new common stock purchase warrants. These exercised Series B warrants resulted in aggregate gross proceeds to the company of approximately $2.9 million. Please see the Form 8-K the company filed on November 5th with the Securities and Exchange Commission for a detailed description of the offering. Immediately following the closing of this offering, the company had 3,517,144 shares of common stock and exchangeable shares outstanding, which excludes an additional 1,759,790 shares of common stock that were not issued at the closing of the offering and are held in abeyance pending receipt of issuance instructions from the warrant holders, although the company received payment for such shares at the closing. Now turning to our outlook. As Ron highlighted in his remarks, we have a diverse pipeline of customer engagements utilizing our millimeter-wave solutions in multiple target markets, including fixed wireless access, tactical military communication, and transportation applications. Our team remains focused on converting these opportunities into design wins and new production orders for our millimeter-wave products. Additionally, we continue to have a meaningful backlog of non-cancelable purchase orders for our end-of-life memory IC products. For the fourth quarter of 2024, the company currently expects total net revenue to be in the range of $3.6 million to $4 million. This concludes our prepared remarks. And I'll now turn the call back over to the operator to assist with the Q&A session.

Operator, Operator

Thank you. The floor is now open for questions. The first question today is coming from David Williams from Benchmark. David, your line is live. Please go ahead.

David Williams, Analyst

Hey, good afternoon, gentlemen, and thanks for taking my questions. Maybe first, Ron, it sounds like you've got a lot of traction here, and congratulations on the design wins that you've announced. When do you think we should start seeing maybe an inflection coming on the revenue side? Just trying to get a sense of when these design wins could turn into deployment and then eventually revenue?

Ron Glibbery, CEO

Thank you for your question, David, and for joining us today. We believe the sooner we see movement, the better. We have a backlog that extends from late Q4 into Q1, so we expect Q1 to be when we really observe that turning point. As mentioned earlier, we've addressed the inventory challenges and other broader macro concerns. However, I want to emphasize that our design win activity is robust. We're quite confident that by Q1, we'll begin to see those shipments resume as we witness the backlog building up. That's our perspective on the matter.

David Williams, Analyst

Okay. Perfect. Thanks so much for that color. It sounds like maybe the inventory is largely getting worked through. Are you seeing that in your North America, maybe your largest customer from their inventory as well? Or is most of this maybe the positive more from outside of that largest customer?

Ron Glibbery, CEO

I would say both. To rewind a bit, Dave, in the last few quarters, we found ourselves relying heavily on a couple of customers. We've worked diligently over the past two years to address that issue. Currently, we have around 100 customer engagements, which I find quite remarkable. We're beginning to see some positive signs in Q4 with our existing customers, and we expect new customers to come onboard in Q1. So, it's really a combination of both. We're witnessing an increase in volume. One notable statistic I recently learned about is from our design win process, which includes Evaluation kits that customers purchase for testing. We sold 28 of those in the third quarter, marking the highest number we've ever sold in our history. Each quarter, we've seen an increase in design wins and customer cases, and people are starting to test their products early. I'm really encouraged by the progress we're making in this area, and I'm optimistic that by Q1, we'll start to see those orders coming in.

David Williams, Analyst

Great. Yes, it's certainly good to see the traction there. I guess if you're thinking about kind of your WIP deployments and the lift care. How heavy a lift is it for these wins to deploy the fixed wireless access? Are you seeing it more from existing providers in the marketplace? Are these startups that are looking to get involved in fixed wireless access? Can you provide any color there on that customer and what those look like in terms of your design engagement?

Ron Glibbery, CEO

Well, I would say somewhere above 95% of the firms we deal with are experienced. And I would reiterate the same problem, which is we solve the congestion problem on millimeter-wave. The issue with congestion with existing 5 gig and even now 6 gig solutions is that they can only support so much customer density in the marketplace, and we solve that problem. So these are experienced firms that are actually ripping out their 5 gig systems because they just can't support the density. I'm really trying to think if there are any new entrants to the market, but I can't really think of any. I mean they're all very experienced WISPs that really understand the advantages we bring to the marketplace with millimeter-wave.

David Williams, Analyst

Yes, yes. And just one more, if I may. Do you think we'll see that kind of transition from the 5G over to 60 gig with the North American market? Just kind of given the success they've had there and the congestion issues are clearly going to be an issue at some point?

Ron Glibbery, CEO

Absolutely. I think the announcement in Los Angeles of a 60-gigahertz solution is really the bellwether there. It absolutely solves the density problem in the urban market. And again, I would say the beauty of what we bring to the marketplace is what we refer to as fiber-like performance. Our customers are reaching up to 2 gigabits per second, which is equivalent to fiber, and I think the point that I'd like to expand on a little bit is this whole BEAD funding. The $42 billion of BEAD funding is primarily fiber-oriented. I believe that with the change of administration, you're going to start to see a much more tech-neutral stance from the administration, as opposed to trying to architect a fiber-only approach, you'll see a focus on whatever solution solves the problem best. When we offer the ability to provide fiber-like performance while solving congestion issues, it's a significant advantage.

David Williams, Analyst

Great. Thanks so much for the help, and best of luck to you in the fourth quarter.

Ron Glibbery, CEO

Thanks, Dave.

Operator, Operator

Thank you. Your next question is coming from Jon Hickman from Ladenburg Thalmann. Jon, your line is live. Please go ahead.

Jon Hickman, Analyst

Hi. Hey, just two questions.

Ron Glibbery, CEO

Hi, Jon. Thank you.

Jon Hickman, Analyst

One, is any – is BEAD money being spent right now on the fiber side? Or is it like in permitting stage and stuff like that?

Ron Glibbery, CEO

I think it's still early, would be my assessment. I mean, the BEAD process is reasonably onerous. It takes matching funds, and the application process is quite extensive. I think the funds are starting to trickle out but it's probably more of a longer-term process into 2025 and 2026. From our perspective, the only thing we hope to see is a shift from a very fiber-centric approach to a tech-neutral approach that includes our technology.

Jon Hickman, Analyst

So are you seeing any of the risks starting to ask for that money?

Ron Glibbery, CEO

Well, we were at WISPAPALOOZA about a month ago in Las Vegas. Definitely, people are circling around. I don't recall anyone saying to us specifically that they've applied. But I think they are in the background starting to apply for sure because it's a significant amount of money. If I had to estimate, maybe 10% of the customers we see in that marketplace have started to apply. But in general, there's caution as people are waiting to see how things will shake out, and we're starting to see that now.

Jon Hickman, Analyst

Okay. And then my other question is, can you elaborate on the size at all of that military contract and when you might start actually shipping to that customer?

Ron Glibbery, CEO

Well, in terms of the size, I think the most I could say right now, Jon, is that it's a highly sensitive contract. It is material to our business. We're hoping to be shipping in volume in Q2 next year. To clarify, many of the 28 evaluation kits that we shipped out are to military customers, particularly for drones. Stealth, high-speed communications is a significant part of our value proposition. One of the challenges with military contracts is that they take time, but ongoing conflicts increase the desire for immediate solutions. We expect to be shipping in volume by Q2 next year if all goes well, and it is currently going well.

Jon Hickman, Analyst

Okay. Thanks.

Ron Glibbery, CEO

My pleasure.

Operator, Operator

Thank you. I show there are no further questions in queue at this time. That will conclude today's conference call. Thank you for your participation. You may now disconnect.

Ron Glibbery, CEO

Thank you.