Peraso Inc.

Good afternoon and welcome to Perosso Inc.'s Third Quarter 2024 conference call. At this time, all participants are in a listen-only mode. If anyone needs assistance at any time during the conference call, please press the star key followed by the zero on your touchtone phone. 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.

Good afternoon and thank you for joining today's conference call to discuss Perosso's Third Quarter 2024 financial results. I'm Jim Sullivan, CFO of Perosso, and joining me today is Ron Glibery, our CEO. Today, after the market closed, we issued a press release and related Form 8K, which was filed with the SEC. The press release and Form 8K are available on Perosso's website at .perossoinc.com under the investor relations section. There is also a slide presentation that we will be using in conjunction with today's call. They 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 as forward-looking. Perosso 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, 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 Perosso on the date hereof. These statements involve known and unknown risks, uncertainties, and other factors that may cause Perosso's actual results to differ materially from those implied 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 Perosso's public filings with the SEC. Perosso 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 conciliation of the differences between them and comparable GAAP measures are presented in our press release and related Form 8K, 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 Glebrey, for his prepared remarks. Ron?

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 our 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, resulting 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 towards new design wins for our millimeter wave solutions. Much of this recent activity has predominantly focused with 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 four, we continue to ship significant quantities of our -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 for millimeter wave products. Next on slide five, 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 in-market applications. These include recently announced customer wins in Africa, Asia, and other 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 at advanced design and engineering stages. To date, we have successfully converted nine prior design engagements to in-production wins commercialized by customers. As a reminder, once a program converts to full production, we no longer include it as part of our current active pipeline. To briefly highlight a couple of our recently announced wins, in early November, SAF Technica released its free mile 60 radio which provides fixed wireless access or FWA services using Prospectus millimeter wave modules with X70 chipset. Utilizing the unlicensed 60 GHz band and incorporating beamforming coverage and optional antenna kits for enhanced directionality, this radio leverages the power of our Prospectus platform and is expected to be deployed in fixed wireless networks in Europe and North America. In another recent win, MillaWave announced its MWC 932 product at WISPA Palooza adding to its existing AirPath 60 product line. This new product utilizes Prospectus millimeter wave modules and X2720 chipset. The MWC 932 provides a wireless Ethernet bridge for applications that require multi-gigabit throughput and utilizes the unlicensed 60 GHz band to overcome the frequently encountered interference from Wi-Fi while also providing a robust length of distances up to 5 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 Paras's millimeter wave technology to enhance high speed internet connectivity on moving trains and subways. Turning to slide six, 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 Prospectus series of millimeter wave modules, enables wireless internet service providers or WISPs to deploy low cost, low power, long range, point to multi-point 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. Just last month, we announced $1.4 million dollar follow-up on purchase order from a South African WISP for our Dune solution. This additional order for Paras's innovative millimeter wave enabled solution builds on an 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 Paras'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, Parasa 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, the members of the Parasa 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 also 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 seven, 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 Parasa'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 battlefield environments while simultaneously avoiding any potential interference with the spectrum. As a recent proof point, we secured initial purchase order from a military customer for our prospective module products. Again, our proprietary narrow beam forming 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 and fulfillment of this order during the first quarter of 2025. Based on a rapid expansion of recent engagement activity, we fully expect to announce additional leverage in our millimeter wave technology for mission critical tactical communication applications over the coming year. Moving to slide eight, I wanted to take a moment to highlight other emerging developments that we believe could contribute to expanded customer adoption and market opportunities from 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 U.S. government's bead program is a significant initiative meant to improve access to high-speed internet by providing total grants 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 formally updated guidance that makes high-speed internet using unlicensed spectrum fixed wireless access, including the millimeter wave bands, eligible for program funding. Now that WISPs are eligible for funding, we believe the superior value of our proposition and significant cost advantages when compared to the cost and disruption of trenching fiber will lead to middle of the 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 would 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 and more diversified geographies and applications. We remain focused on advancing 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.

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 $0.1 million in the prior quarter and compared with $0.2 million in the same quarter a year ago. Gap gross margin decreased to 47% in the third quarter from .5% in the prior quarter and .4% in the year ago quarter. On a non-gap basis, which excludes amortization of acquired intangible assets, gross margin for the third quarter was 61.7%, compared with .8% in the prior quarter and compared with 58% in the third quarter of 2023. The sequential decrease in both gap and non-gap gross margin was primarily attributable to a write down of millimeter wave inventory as well as lower royalty and other revenue. Gap 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-gap operating expenses, which excludes stock-based compensation, amortization of intangible assets, and severance 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 -over-year decrease in third quarter operating expenses on a gap and non-gap basis was primarily attributable to a combination of previously implemented cost reductions and the company's ongoing cost containment initiatives. Gap net loss for the third quarter of 2024 was $2.7 million, or loss of 98 cents 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 $0.6 million, or 87 cents per share in the same quarter a year ago. On a non-gap basis, which excludes stock-based compensation, amortization of required intangibles, and severance costs, net loss for the third quarter of 2024 was $0.9 million, or loss of 34 cents per share, compared with a non-gap net loss of $2.1 million, or loss of 88 cents per share in the prior quarter, and a net loss of $1.1 million, or loss per share of $1.56 per share in the same quarter a year ago. The weighted average number of basic and diluted shares outstanding for purposes of calculating both gap and non-gap EPS for the third quarter of 2024 was approximately 2.8 million shares. Adjusted EBITDA, which we define as gap net income or loss as reported, excluding stock-based compensation, amortization of required intangibles, severance costs, change in fair value of warrant liabilities, interest expense, depreciation and amortization, and the provision for income taxes, was $0.8 million in the third quarter, compared with negative $1.9 million in the prior quarter and negative $0.9 million in the prior year period. As of September 30, 2024, we had $1.3 million of cash in equivalence, representing a cash burn of approximately $0.6 million 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 ,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 them new common stock purchase warrants. These exercise series B warrants resulted in aggregate proceeds to the company of approximately $2.9 million. Please see the Form 8K 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 ,517,144 shares of common stock and exchangeable shares outstanding, which excludes an additional ,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 abeyance shares at the closing. Now turning to our outlook, as Ron highlighted in his remarks, we have a diverse pipeline of customer engagements to utilize PROS's 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-cancellable purchase orders for our -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?

Thank you. The floor is now open for questions. If you wish to join the Q to ask a question at this time, please press star one on your telephone keypad. Should you wish to remove yourself from Q, you may press star two. We do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, that'll be one. Star one on your keypad at this time. If you wish to join the Q to ask a question, please hold a moment while we poll for questions. And the first question today is coming from David Williams from Benchmark. David, your line is live. Please go ahead.

Hey, good afternoon, gentlemen, and thanks for taking my questions. So maybe first, Ron, it sounds like you've got a lot of questions. 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.

Well, thanks for the question, David, and for listening in today. I appreciate that. Obviously, from our perspective, the sooner the better. We know for sure there's no backlog. They keep forwarding to Q1. So we think Q1 is realistically when it's really going to start to really see that inflection point. As we said in my remarks, we're working through the inventory issues and so on, this kind of general macro issues. But I would continue to stress from our perspective, the design win activity is very strong. And we're really not more than optimistic that by Q1 we're going to start to see those shipments start to resume because we were starting to see that backlog. So that's kind of the thinking from our side.

Okay, perfect. Thanks so much for that, Coler. It sounds like maybe that the inventory is largely at least getting work through. Are you talking about the largest customer from their inventory as well or is most of this maybe the positive more from outside of that largest customer?

I would say both. And just to kind of rewind a little bit, Dave, when we obviously over the last few quarters, we were really caught by a customer concentration with a couple of customers. We've worked so hard over the last two years to really fix that problem. We've got 100, no, really I'd say in the order of 100 customer engagements. It's actually from my perspective quite remarkable. So what we're going to start to see, we're already starting some green shoots in Q4 with existing customers and start to see the new customers come online in Q1. So it's really a combination of both, I would say. And again, like starting to see that volume, but definitely, I mean, one stat that I'll throw out that I think is quite remarkable that I was kind of updated after kind of recently is part of our designing process is what we call eval kits where customers buy eval kits and kind of try things out, test things. We sold 28 of those in the third quarter or in the second quarter. No, it was actually the third quarter and it was actually the most we ever sold in our history. So every single quarter, not only are we seeing the design ones going up and the customer engagement going up, but people are actually really testing this stuff out thoroughly. So I'm really thrilled with, again, the traction we're seeing on that front. And we're really optimistic that by Q1, we're going to start to see those orders start to come in.

Great. Yeah, it's certainly good to see the traction there. I guess if you're thinking about kind of your WISP deployment and the lift there, how heavy a lift is it for these WISPs to deploy the fixed wireless access? And are you seeing it more from existing providers in the marketplace? Are these startups that are coming in that are looking to get involved in the fixed wireless access? Or is this just any color there on that customer and what those look in terms of your design engagement?

Well, I would say somewhere above 95% of the WISPs we deal with are experienced. And I would beat the drum on the same problem, which is we solved the congestion problem on WISPs. And so the problem with congestion is with existing 5G and even now 6G solutions is it can only support so much customer density in the marketplace. And we solved that problem. So these are experienced WISPs who are actually ripping out their 5G systems because they just can't support the density. So I'm really trying to think if there's anybody new on the market, but I can't really think of it new. They're all very experienced WISPs that really get the advantage we bring to the marketplace with millimeter weight.

Yeah. And just one more, if I may. And 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?

Absolutely. I think the announcement in Los Angeles of a 60 gigahertz solution is really the bellwether there. And that is absolutely solving the density problem in the urban market. And again, I would say, so I think in North America, so the beauty of what we bring to the marketplace is what we refer to as fiber-like performance. So now even our customers are cutting up to 2 gigabit per second, which is exactly like fiber. And I think a point that I'd like to actually kind of expand on a little bit is this whole BEEB funding. And of course, the 42 billion of BEEB funding was really fiber-oriented. And I really believe, and don't quote me on this, but I really believe that with the change of administration, you're going to start to see a much more tech-neutral stance from the administration because basically, as opposed to kind of architect a fiber-only approach, you're going to start to see in North America, whatever solves the problem, best approach. And of course, what we bring to the party, besides solving the congestion problem, is the fact that we can reach in the one or two gigabit speeds like fiber. So those are two real benefits that we bring to this marketplace, especially in North America.

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

Thanks.

Thanks, Dave.

Thank you. Your next question is coming from John Hickman from Lattenberg-Palmen. John, your line is live. Please go ahead.

Hi. Hey, just two questions. One is, is any, is BEEB money being spent right now on the fiber side? Or is it like in the permitting stage and stuff like that?

I think it's still early would be my assessment. I mean, the BEEB process is reasonably onerous. It takes matching funds. And I think the application process is quite onerous. So I think the funds are starting to trickle out, but it's probably more of a longer-term process in 25 and 26. Obviously, from our perspective, sorry, sorry, the only thing I wanted to say is from our perspective, the only, I mean, the change we're really hoping to see is to go from a really a very fiber-centric approach to a tech-neutral approach that includes our technology.

Okay. So are you seeing anybody, any of the WISPs starting to ask for that money?

Well, I mean, we were at a WISP show called -A-PALOOZA about a month ago in Las Vegas. And definitely people are circling around. I don't recall anyone saying to us specifically they've applied. But I think they are in the background starting to apply for sure, because it's a significant amount of money. So I would say if I had to handicap it, maybe 10% of the customers we see in that marketplace have been starting to apply. But I think in general, people really want to see how things are going to shake out, and we're starting to see that now.

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?

Well, in terms of the size, I think the most, first of all, I would have to say that it's a highly sensitive contract. I think in terms of the size, probably the most I could say right now, John, is that it's material to our business. It's not like a smaller portion of our business. So it would be a material contract for the company. We're hoping to be shipping in volume in Q2 next year. So just to clarify that point, I mean, we are getting, I mean, again, on the whole military discussion, I think a lot of the 28 evaluation kits that we shipped out are to military people, particularly a lot of it is drones. And I think as everyone knows, in the Ukraine War and the leaf, drones are playing a very significant role. And so the whole concept of stealth, high-speed communications is a big part of that value proposition we bring to the party. But generally, I think one of the knocks against military is it takes long. But I think what we have to keep in mind for our business is that there are ongoing wars that people want solutions now. So we expect to be shipping in volume right now. It all goes well, and it is going well by Q2 next year.

Okay, thanks.

My pleasure.

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