Good afternoon, and welcome to Peraso Inc.'s First Quarter 2024 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Monday, May 13, 2024. I would now like to turn the call over to the host for today's program, Mr. Jim Sullivan. Please go ahead.

Good afternoon, and thank you for joining today's conference call to discuss Peraso's first quarter 2024 financial results. I'm Jim Sullivan, CFO, 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, and 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 as forward-looking. Peraso advises caution and reliance on forward-looking statements. These statements include, without limitation, any projections of revenue, margin, 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 and 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 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'd like to turn the call over to our CEO, Ron Glibbery, for his prepared remarks. Ron?

Thank you, Jim. Good afternoon, and welcome to everyone on the phone and webcast. We appreciate you joining us. I want to start with a few brief comments on the first quarter and our current outlook, then I'll get into more detail on the key developments and progress we've been making since our last conference call. First quarter revenue increased sequentially and was above the midpoint of our guidance as customer demand for mmWave products improved and we had increased shipments of our memory IC products in fulfillment of our backlog and end-of-life orders. Combined with positive market indicators, we began to see our mmWave business, we're increasingly confident in our expectation for 2024 to be a year of solid growth for Peraso. Turning to Slide 4. I want to provide a brief update on the end-of-life of our memory IC products. Shipments against backlog orders increased to $2.4 million in the first quarter. We also received an additional $2.9 million end-of-life order late in the quarter, which increased our total remaining purchase order backlog to approximately $12.6 million at March 31, 2024. We anticipate shipments of our memory IC products to increase sequentially in the second quarter, and we expect to fulfill the total remaining backlog by the end of the first quarter of 2025. Collectively, these shipments will contribute meaningful revenue and cash flow in support of the continued execution of our growth initiative to expand our mmWave customer base. Flipping to Slide 5. As I've stated in the past, one of our key strategic initiatives continues to be building a larger and more diversified customer base for our mmWave business. And again, we're approaching this both from a geographical perspective and in terms of end market applications. Although it's been a relatively short period since our last…

Thank you, Ron. Turning to the results for the first quarter of 2024. Total net revenue was $2.8 million and above the midpoint of our guidance compared with $1.8 million in the prior quarter and $5 million during the same quarter a year ago. Product revenue from the sale of our memory integrated circuits and millimeter wave integrated circuits and antenna modules in the first quarter was $2.7 million compared with $1.5 million in the prior quarter and $4.9 million in the first quarter of 2023. Royalty and other revenue for the first quarter of 2024 was $0.1 million compared with $0.4 million in the prior quarter and $0.1 million in the same quarter a year ago. GAAP gross margin increased to 46.4% in the first quarter compared with a negative 147.3% in the prior quarter, which reflected the impact of $3 million of inventory write-downs and gross margin of 38.3% in the year ago quarter. On a non-GAAP basis, excluding amortization of acquired intangible assets, gross margin for the first quarter was 66.4% compared with negative 116.6% in the prior quarter, which again reflected the previously mentioned inventory write-down and non-GAAP gross margin of 45.4% in the first quarter of 2023. The improvement in gross margin for the first quarter of 2024 was attributable to increased revenue contribution from memory IC products. GAAP operating expenses for the first quarter of 2024 were $4.9 million compared with $5.5 million in the prior quarter, which included $0.2 million of asset write-downs and $5.7 million in the first quarter of 2023. Non-GAAP operating expenses, which excludes stock-based compensation and amortization of the tangible assets were $3.5 million compared with $4 million in the prior quarter and $4.3 million in the same quarter a year ago. The sequential and year-over-year reduction in first…

[Operator Instructions] First question today is coming from David Williams from Benchmark.

Congrats on the progress here. It's really great to see the development on the millimeter wave side and the memory side. So congrats. Yes. So I guess, Ron, maybe first, if you think about the magnitude of demand that's being generated within millimeter wave and kind of the proof of concepts that you're shipping through today and maybe what you have coming up the pipeline, what do you think the volumes could look like as you get ramped here? Just trying to think about maybe not even this year, but maybe more so for next year, what should we think about those volumes looking like?

Well, thanks, Dave. We've got third-party research reports that indicate the overall market, let's say, focus on -- certainly on fixed wireless of about 4 million units a year and we're really trying to ramp our business to at least 1/4 of that. So our goal is to really take a 1/4 of the market share in terms of unlicensed fixed wireless, is really what the simple metric spoils down to, frankly. So this is all just basically based on market research. And so it gives us -- but it gives us some nice metrics in terms of what our goals are over the next 12 to 18 months. I don't know if that helps answer your question.

No, it actually does. I guess, if I look across the landscape, there doesn't seem to be a lot of competitors, at least domestically. What are you seeing in terms of your competitive -- or your competition in these other markets as we think about Africa and India? Are there any others that are out there that you're -- maybe locally that you're competing with?

Well, in the 60 gigahertz specifically, I think we really are taking on a dominant position. And from my perspective, what gives me comfort is the more we win, the stronger we get because people just get more and more comfortable with the technology in the company. And I think, frankly, the Panasonic design win underscores that. I mean, Panasonic is a very conservative, old Japanese company. So for them to go to market with our technology, I think, speaks volumes, I mean, in terms of just the confidence they have. And it took a long time [ to build ] the confidence they have in our technology and the company itself. So I think from a competitive perspective, what you'll find is -- every quarter you're going to find that we really are the absolute dominant player in 60 gigahertz technology. And just, sorry, one final follow-up comment on that. I mean, certainly, over the last year, Dave, what we found is that compared to maybe another competitor, which is like 5 and 6 gigahertz technology, where we're winning there, where we won in places like Africa. And now we've seen 60 gigahertz penetrate Los Angeles is against this concept of dense urban environments, right? Like this idea that in large cities with very, very high, dense populations, 60 gig is a superior technology than traditional Wi-Fi technology because it's ability to handle that density. So I think both on -- within 60 gigahertz market and within the unlicensed market generally, we're really taking on a dominant position, if you will.

And just one last one here, if I may, and then I'll jump back in the queue. But just kind of wondering if you could talk through your go-to-market strategy? It seems like you have a lot of shots on goal here that have developed here fairly quickly, especially thinking about the aerospace and defense, and that's historically been a challenging market to penetrate. But just kind of curious how you're thinking about your go-to-market strategy, how that's developing? And maybe what other opportunities are out there today that may be as an investor we're not yet seeing?

Well, I mean, look, I mean, I think we've talked about fixed wireless. So just basically gigabit broadband internet for a long time, and that's really our bread and butter, frankly, right now. The military, I mean, unfortunately, what's been driving that over the last couple of years is real conflicts where militaries have discovered that traditional wireless technology is easy to triangulate. And so that really has been a function of actual war zone feedback, which says the beauty or the advantage of millimeter wave technology is the very focused transmissions that allow it to be stealthy, if you will, in those environments. So that -- we've always kind of liked military, but now we're really -- the fruit is in the pudding where we're seeing these design wins because of regional -- very specific conflicts. And I think another -- if you will, another aspect to our growth is -- and again, it comes down to the same concept versus Wi-Fi is in consumer electronics we are seeing some really nice traction in video and wireless video. And the problem we're solving there again is congestion. Every [ fold ] in the world has Wi-Fi on it. And so there's a lot of people using Wi-Fi, but when you want to have kind of mission-critical specific applications like video, it's a very challenging environment with traditional Wi-Fi. So we're seeing some -- so I think specifically, high-performance video in consumer electronics is kind of the third pillar, if you will, that we see over the next 12 to 18 months.

The next question is coming from Kevin Liu from K. Liu & Company.

Good to see the sequential improvement in the business here. Maybe just starting on the millimeter wave side, can you talk about kind of the inventory levels you think still persist in your largest customers? Has that largely been absorbed and you're now capable of seeing sequential improvement there? Or is there still some sort of overhang that you have to get through?

Yes. I mean there was a lot of inventory buildup. So we're certainly seeing green shoots of improvement. We're starting to get some orders. We really think that momentum, Kevin, will be late third quarter into the fourth quarter this year, just in terms of kind of what we're seeing and kind of what we're hearing from our customers. I mean, I think the good news, again, though, is our historic customers are actually -- it's not -- like it really is an inventory situation. I mean actually, they're seeing terrific sales, which they're feeding back to us. So we really see it as the second half of '24. But I guess what helps our outlook is that the sales of 60 gig from what we're hearing from our customers is actually improving significantly. So that -- so we hope to lead into -- out of that inventory into new orders later this year.

And I mean you alluded to one of your customers winning a deal in L.A. County. I mean, would you assume that's kind of incremental to your business this year? Or is that product that they may have had already that they can ship as they start to ramp up against that engagement?

Well, I mean, that customer is actually -- I mean, there's really no public information on who the chip supplier is for that deal. But speculation -- from a speculation perspective, I would say, certainly later this year and -- but very much so into 2025.

And then maybe just one for Jim. But looking at the gross margin, that improved quite a bit. I know you guys pointed to the memory side of the business there. So I wanted to understand how sustainable the gross margin is as we go into Q2 and the back half of the year given you'll continue to see a high mix of memory sales there?

Yes, Kevin, thank you for the question. Certainly, our gross margin profile will benefit from that. Our corporate target is 50% and higher. Obviously, the memory stuff runs in the high 60s, maybe pop [ 70% ] at times. So that will certainly help keep the margins higher as we look at a higher level as we move forward through 2024. As we've said on the call, we'll see the expect -- current expectation is to complete those memory shipments by the first quarter of '25, but we obviously expect continued ramping in our millimeter wave business. And frankly, on the millimeter wave side, it's just been the stops and starts associated with the inventory correction. Just not having a consistent production flow have made it challenging to kind of get over that 50% level. But we're obviously pushing towards that and obviously have the benefit of the memory stuff for the next year to kind of help us on that front.

And then just lastly, with the ramp-up that you guys will have on the [ memory ] business as well as just the improvements on millimeter wave, I'm just curious if we should expect you guys to start to build more inventory here or if the current inventory levels you have on the balance sheet should be able to sustain your current business or revenue levels?

Yes. We should be able to sustain with what we have. There was a slight increase at March 31, up from December 31, which was all memory related. We obviously have a fair amount of millimeter wave inventory on the books. Some of that's at different stages of production and needs to be built out. On the memory side, we've got some more wafers to order. And the exact number is a function of yields, et cetera. So we are -- we did have a couple -- at least a couple of wafer purchases in Q1. I think we've already done one here in May. There's probably another one coming. So definitely to fulfill those orders we'll be building more on the memory. On the millimeter wave side, it's really -- we build based on the specific order on some of the new customers.

And we did have a follow-up come in from David Williams from Benchmark.

I felt like I should have asked Jim a question on previously [indiscernible]. I just want to come back and get one into you. But just kind of thinking about the cash flow as we work our way through the memory. Is there -- do you expect some of that memory to be maybe more back-end loaded into the first -- maybe into the first quarter? Or will it be more linear, you think, through the year?

I think it will be fairly linear for the rest of '24 and then Q1 '25 will go down. Right now we booked that new order here in late March, the $2.88 million order. Right now, I'd say of that order, 25% to 30% of it will be shipped in the fourth quarter and the rest would -- or at least the dollar equivalent value, maybe it's not that specific customer, would ship in Q1. So I think we'll be pretty linear on the memory side across the next 3 quarters or so and then it will decline in Q1. And right now we're projecting subject to receipt of additional orders, which is still in play, we'll expect a decline in Q1 '25.

And do you think there's -- if you were going to kind of [ handicap ] the potential for additional EOL orders, do you think there is a good chance or just a moderate chance there?

I think there's a good chance, at least in the $1 million range. Right now, the foundry, I think the orders don't need to be in until the end of August or September, somewhere in that late summer time frame. So there's still time here. And obviously, we saw that additional large order in March. And the customer just wants to be certain on its design, and we're optimistic we would see that come in. And that's for -- that one that I'm at least very optimistic on is for our Bandwidth Engine 3 product for which we have adequate inventory to fulfill against. So, frankly, [ tickled ] pink because I wouldn't have to go build it, buy anything, just complete a build out. But we'll wait and see. We've got time.

And the next question is coming from Jon Hickman from Ladenburg.

I might have missed this, and maybe you didn't even say it, but did you break down the product revenue between millimeter wave and memory?

We did not. We generally break that out in the -- there's tables in the 10-Q, which we're going to file probably after market close, maybe before market opens tomorrow. On a high level, we had in the first quarter about $2.68 million of product revenue. About $2.38 billion of that was memory, and the remaining $300,000 or so was millimeter wave IC [ to ] modules.

And then could you give us an idea on the millimeter wave side kind of current number of customers you've shipped to recently and what the pipeline looks like as far as numbers of different WISPs or separate customers?

Yes. I think in the first quarter, we shipped and I want to say, in the range of kind of 8 to 10 customers at different buy, but obviously, none of them were too big based on the revenue number I gave you. And looking forward, I think we'd expect to stay kind of in that range, Ron? Maybe --

Yes.

I mean, we had -- to one of the new DUNE, what I consider kind of on the DUNE front, we had an initial shipment to that customer and/or targeting a larger one in June. But is that kind of a fair way to put it, Ron?

I think we've got 5 DUNE customers that proof of concept. So we expect to be shipping those in the second half. So there's 5 additional there, right? So yes, I mean we hope to grow from 8 to 10, maybe from 10 to 15 in the second half. But yes, I mean, I think we're obviously trying to diversify that customer base for sure.

And then the L.A. thing that you mentioned, is that an RFP? Or did you win that business?

Well, just to be clear, like the -- we can't really say, Jon, but I mean -- but it is public information. I mean, it is available if you want to look it up. It's like highly visible. But what we don't know -- is like the ISP uses various vendors. But one thing that is public for sure is that it's a 60 gigahertz design win. And what's important about that, in our mind, is that it's, again, emphasizing this advantage at 60 gigahertz is in urban environments. It's just this ability to really speak to -- well, I think that what some of the analysts says that the number of past residents is about 280,000. So I mean -- so that's really the advantage of our -- of the 60 gigahertz technology is its ability to provide advantages in those dense urban environment because of the beamforming technology. So I think, first and foremost, that's an important message for that program. But it's not ERP. It's been awarded by the way.

It's been awarded.

Yes.

So I have to do some digging. And then on the military side, is the technology mobile? Like can I put this on a truck and go from one battlefield to the next or 1 mile away and set a [ backup ]?

So the use case that we've described is soldiers connecting to their Humvees. And so typically, the range there is, call it, maybe at the most -- I don't think a soldier is going to be too far away from their Humvees, so call it 100, 200 meters. So -- And then the Humvee itself would probably be backhauled through a satellite link. But there's a lot of information on the Humvee itself in a server on the Humvee. So let's say they want to download maps of an area. The 1 gigabit links that we have with our -- using our technologies can quickly get those maps downloaded to the -- essentially the mobile. So the devices, the soldiers use our mobile actually. So they're mobile and they can lead their Humvee and be within, let's call it, 200 meters of the Humvee. But that is the use case for that application that we've described.

And then are you -- one last question, sorry. The Panasonic deal, are you currently shipping to them or is that to come?

No, we're shipping to them. Yes. No, absolutely. Like we've been working on -- I don't want to say how long we've been working on, but it's been several years, right? And these guys are very, very careful. But we are actually shipping. That's in full production.

There were no other questions in queue at this time, and this does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.