Allegro Microsystems at TD Cowen Conference: Strategic Growth in Focus

On Thursday, 29 May 2025, Allegro Microsystems (NASDAQ:ALGM) shared its strategic vision at TD Cowen’s 53rd Annual Technology, Media & Telecom Conference 2025. The company outlined its growth strategy, focusing on the automotive and industrial markets, while navigating industry challenges. Allegro is optimistic about its long-term prospects, despite acknowledging current market downturns.

Key Takeaways

• Allegro is expanding its footprint in the e-mobility sector and industrial applications like data centers and robotics.
• The company is working on a China-for-China supply chain to reduce geopolitical risks.
• Allegro aims for a 58% operating margin through volume growth and cost efficiencies.
• New CEO Mike Duig focuses on execution, cost management, and commercializing technologies.

Financial Results

• Revenue Distribution:

- Auto: 75% of sales, with e-mobility accounting for half and legacy auto for the other half.

- Industrial: 25% of sales, with a 35% decline during inventory corrections.

• Geographic Sales:

- China: 27% of sales, with domestic exposure slightly above half.

- Japan: 20%, North America: 15%, Rest of Asia (Korea): 16%, Europe: 13%.

• Margin and Inventory:

- Targeting a 58% gross margin.

- Distributor inventories reduced by 25% exiting March.

Operational Updates

• Inventory Management:

- Finished goods inventory decreased by 13% in March.

- Distributor inventories decreased by 25% exiting March compared to the beginning of the fiscal year.

• Manufacturing Footprint:

- 50% of wafer production from UMC in Taiwan, with additional production in Minnesota and China.

• Product Development:

- Released 50% more new products this year.

Future Outlook

• Content Expansion:

- Targeting $100 content per XEV with new technologies.

- Data center content opportunity increases to $425 per AI server.

• Product Focus:

- Prioritizing TMR sensors and gate drivers to improve gross margins above 50%.

Q&A Highlights

• China Market Strategy:

- Developing a China-for-China supply chain to meet local demands.

• CEO Transition:

- Mike Duig emphasizes execution and cost management.

• Inventory Strategy:

- Allowing order adjustments to manage overstock.

For more details, readers are encouraged to refer to the full transcript below.

Full transcript - TD Cowen’s 53rd Annual Technology, Media & Telecom Conference 2025:

Josh Buchalter, Semiconductor Analyst, TD Cowen: Alright, good afternoon. Welcome to one of the afternoon sessions at TD Cowen’s fifty third annual TMT conference. I’m Josh Buchalter, semiconductor analyst at TD Cowen. Very pleased to be joined by Derek and Jeline from Allegro Microsystems. Thank you for joining us.

I’ve got a bunch of questions lined up, but if if anyone in the audience has questions as well, please feel free to raise your hand and then we’ll certainly get get your question asked. But Derek, Jalene, thank you for joining us again this year. I think many in the audience are familiar with with the Allegro story, but maybe you could spend a couple minutes just introducing yourselves and the company.

Derek D’Antelio, CFO, Allegro Microsystems: Sure. Good afternoon, everyone. Thank you, Josh, and thank you, TD Cohen, for having us here. So I’m Derek D’Antelio, the CFO at Allegro Microsystems. I’ve been here for about four years.

I’ve spent this summer will be thirty years kind of either auditing or in and around semiconductor companies. So been through about five of these cycles, and we can talk about a little bit of that later. Allegro Microsystems, maybe I’ll let Jalene introduce herself, then we’ll talk about Allegro.

Jalene Hoover, Allegro Microsystems: Sure. Jalene Hoover. I’ve been with Allegro about two and a half years. I’ve been in semis nearly thirty as well, including Cirrus Logic and Silicon Labs. And thank you for having us here.

It’s always a pleasure.

Derek D’Antelio, CFO, Allegro Microsystems: So a little bit about Allegro Microsystems. The company went public almost five years ago. It’d be five years in October on the NASDAQ. But the company’s been around, actually, in 2026, would be one hundred years. It was Sprague Electric.

And why that’s important is because Allegro has been in power semiconductors, said Sprague Semiconductor in 1965, ’3 years before Intel was founded, right? So there’s a lot of incumbency, a lot of IP, lot of know how. We’re the market share leader in magnetic sensing, is for automotive and industrial applications. We also have a very strong power franchise. Yep.

So Allegro is, I think,

Josh Buchalter, Semiconductor Analyst, TD Cowen: you’re best known for for your auto franchise, And, that’s across both your magnetic sensing and your power ICs. I think some investors struggle to conceptualize the content story, in particular on the magnetic sensing side because, know, you’re not necessarily in the high voltage power discretes where you’ve got several hundred dollars of content per inverter or on the ADAS side. So maybe you could spend a couple minutes talking about, you know, why Allegro’s again, the sensing and power side, both benefit from the trends that we know and love to talk about in automotive semiconductors.

Derek D’Antelio, CFO, Allegro Microsystems: Absolutely. So we split our auto is about 75% of our overall sales. And within that auto, about half of that is what we call e mobility. And e mobility for us is ADAS applications and XEV powertrain. XEV includes both hybrid and EV.

The bigger piece of that is by far ADAS applications today, and both of those are growing quite fast. So that e mobility piece of our automotive is growing at mid teens growth rate over the next several years from a projection standpoint, has grown in the 20s. The other half of our auto is what we call legacy auto, so internal combustion engine applications for both power and magnetic sensing and safety, comfort, and convenience things in your car. So the in cabin things like LED lighting, seat cooling, motor drivers. The exciting part on the e mobility side really is in the ADAS side of applications.

We do things like current sensing, measuring current and helping create better loss of the battery, better charging of the battery, faster charging, more mileage on XEV and hybrids. On the ADAS side, we’re doing all critical safety applications, so lane keeping assist, electromechanical steering, electromechanical braking, where there’s four motor drivers around the car, where there’s lots of redundancy and position sensing and those kind of things. And that’s across both of our magnetic sensing portfolio and our power portfolio. Our SAM opportunity right now in a 400 volt battery and a hybrid is about $40 The majority of that is ADAS content. That goes up as high as $100 when we get our isolated gate drivers for driving high power to silicon carbide in the market, are in development right now.

Josh Buchalter, Semiconductor Analyst, TD Cowen: And so how does that $40 I mean, because you’ve supplied the auto market for a very long time. How does the $40 compare to what you were selling on basically a legacy internal combustion engine vehicle? It’s about $10

Derek D’Antelio, CFO, Allegro Microsystems: to $15 on a legacy internal combustion vehicle. Now ADAS, there’s two pieces of our business that are agnostic to powertrain, which is more than half of our overall auto business. ADAS is agnostic to powertrain. That can be on any internal combustion engine car or on a EV or on a hybrid. And the same thing with the safety features or the convenience features you have in a car, whether it’s LED drivers, lane keeping assist, a lot of the other things that are sitting in cabin things, seat cooling, all of those kind of things.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Okay. And given what’s gone on in the auto market recently, I mean, there’s outsized focus on China, certainly. Could you maybe help us understand your exposure to China auto OEMs? And you have a historical relationship with Sanken Electric, or still have a relationship with Sanken, obviously. How does Japan versus China versus rest of world within your auto mix?

Derek D’Antelio, CFO, Allegro Microsystems: Yeah, it’s a great question. So one of the nice parts about our business, and it creates a lot of resiliency, is it’s pretty evenly distributed across geographies. China is our biggest market. 27% of our ship to sales are in China. And a little bit less than half of that actually is re exported back outside of China.

So those are the Volkswagens of the world, the Teslas, the Fords, companies we’ve had as customers for a long time that actually brought us into China over a decade ago. The next tier of customers in China are the Neos, the Geelys, the Cherries, the BYDs, that are also exporting a large preponderance of their product. Right? And then, of course, there’s a long tail of smaller Chinese customers that we service through distribution. So of the 27% shipped to China, a little bit less than half of that’s being re exported, so the actual domestic exposure is about a little bit more than half of that.

Japan is about 20% of our sales. North America is about 15% of our sales. I’ll call rest of Asia is about 16% of our sales, which is largely Korea. And then Europe is about 13% of our sales. So pretty well evenly distributed, and we serve almost all the tier ones in the Western world.

In The United States, we sell the tier one automotive makers in Europe and in Japan.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Okay. And as we think about that content expansion story, you mentioned the isolated gate drivers as a big component. But you also have both organic and inorganic investment in XMR sensors. What can that do for your content story and how important is specifically the TMR sensing piece that you bought with Crocus? Great question.

So, the TMR piece we

Derek D’Antelio, CFO, Allegro Microsystems: have for our business today is relatively small. It’s about $5,000,000 a quarter. Large majority of that is medical business for continuous glucose monitoring, DexCom. So it’s an interesting new part of our business that came with that Crocus business. We also had a TMR business.

We put that together today with the Crocus business. It’s rebranded as ExtremeSense. And the real big opportunity for us is to bring that into inverters within XEV. We think that’s a big content opportunity. Uplift helped us get to that $100 And there’s less competition.

That’s the key part about that there. TMR is far more precise, less noise, less current loss. So we’re really excited about that in automotive and also in some of the industrial applications we’re going to talk about.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Okay. Yeah. And and great segue. Thank you for doing that. You know, industrial has been a weak market for a while, but I think it was one that that we certainly were optimistic was gonna be a meaningful growth driver.

Again, that’s taken it’s been slower than expected because all of industrial semis have been slow. Can you maybe walk through similar types of content and and growth drivers you have on the industrial side? What are the

Derek D’Antelio, CFO, Allegro Microsystems: key end markets there? Where you’re exposed today, and where you see that content moving over time? Sure. So industrial represents about 25% of our sales. Almost all of it is sold through distributors.

And so absolutely, the last six quarters, we’ve had a significant inventory correction that we’re not averse to. And our distributor inventories have come down, exiting the March, have declined 25% compared to the beginning of the fiscal year. Industrial sales came down about 35% during that period of time. So the majority of that was really an inventory correction. What’s in our industrial business historically has been clean energy, which is largely solar.

So we design parts for automotive, current sensors for automotive, position sensors, 48 volt parts. They’re used in the same applications that they have in industrial, so an inverter and a solar inverter would have the same application. Moded drivers for fan cooling within data center. These are historical applications that have made up that 25%. Industrial automation, which is largely factory automation, or cobots.

Those have been the historical pieces of our business. The new pieces of our business are the medical, the AI data center opportunity for us, which is a significant content uptick, which we’ve put some new slides in our investor deck on. That’s liquid cooling. That’s also air cooling. That’s also 48 volt conversions within the data center.

And then the newest market, which is kind of in the nascency phase, but also in the design win phase, past samples into design wins, is robotics, humanoid robotics. A lot of people talk about that, but when we think about a humanoid robotic, the content uplift is quite significant for us. It could actually get as large as automotive for us in terms of content per opportunity. What I mean by that is up as high as $110 per humanoid robotics. And that really all revolves around the joints.

So every single joint in those things needs a motor driver, needs a position sensor, a current sensor. So there’s a huge opportunity for us, something we’re really excited about in the very early innings.

Josh Buchalter, Semiconductor Analyst, TD Cowen: How synergistic I mean, on that note about the the joints of robots, how how synergistic is your sort of beachhead in sensing to your power franchise? Because power I mean, again, most of your exposure is on the sensing side. Power is smaller but growing and and more competitive as well. So I was wondering,

Derek D’Antelio, CFO, Allegro Microsystems: you know, how much does having the auto grade sensing components pull in your power content? It’s less than I would personally like, and that’s across the entire industry. There’s not a lot of bundling going on, particularly in automotive because the tier ones especially are designing subsystems. And the same thing happens within the data center. So the fan manufacturers are designing subsystems, right?

And they’re looking at a board. And so there’s not as much cross selling as we would like. That said, we think there’s a real good opportunity to leverage our distribution channel. I would say, be more efficient in our distribution channel. We have go to market teams now for robotics, go to market teams for data center.

For some of these fast growing markets where in the past, it was sold taking automotive grade parts, putting them in distribution. It was kind of a fulfillment model. We’ve just hired a new SVP of sales who was really focused on industrial, really focused on power, and we think there’s a real opportunity here to drive demand and drive pull through. So today, not as much synergistic as we would like. I think there’s a real opportunity there for that.

Jalene Hoover, Allegro Microsystems: I think it’s also worth mentioning, though, as well in terms of the power technology, our isolated gate driver technology. You touched on this earlier, provides a meaningful content uplift opportunity in automotive, driving that. It’s about $30 to $40 content opportunity, As well as in our data center, we just, again, created a new slide for that opportunity that increases that opportunity from about $110 to up to $425 with that gate driver technology. That’s early innings here, but longer term, a great revenue driver.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Is the $425 is that your data center content opportunity? Yes. Per server rack?

Derek D’Antelio, CFO, Allegro Microsystems: AI server. Okay.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Correct. Got it. And and I guess, Derek, you touched on this with Crocus and the TMR sensing, but the gate drivers, I believe, was was through an acquisition of HayDay. That was, I believe, a year or two before Crocus? It was.

Jalene Hoover, Allegro Microsystems: 2022.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Yeah. So, you know, how far along are we in in that roadmap of getting heyday into the Allegro sales and distribution network and manufacturing network? Like, when’s a reasonable time which we could start to see some some meaningful benefit in the model from those, you know, I

Derek D’Antelio, CFO, Allegro Microsystems: think that’s probably your highest per socket opportunity. It is. So that business was purchased in late twenty twenty two. It was a pre revenue business. We bought it.

Really good, efficient, isolated gate driver that packages essentially three functionalities into one package. So 50% smaller than the competitors, about a third cheaper than the competitors, and much more efficient. That product is now in the market, past sampling, getting design wins on it. We’ve got our first automotive design win in isolated gate drivers. We have a GaN win in data center.

That’s the isolated gate driver for gallium nitrate. The isolated gate driver for silicon carbide is scheduled to come out later this year.

Josh Buchalter, Semiconductor Analyst, TD Cowen: And I guess following up on that, I mean, lot of the gate driving market has been owned by companies that also sell power discretes. Is that a disadvantage? And maybe you could talk about the competitive set that you go after on the power side, the magnetic sensing side, and in particular, the gate driving side, given how big that opportunity should We don’t see it as a disadvantage. In fact, we’re packaging those things together on the same board, so it’s a

Derek D’Antelio, CFO, Allegro Microsystems: much smaller board, real estate for folks, right? So we don’t see it as a disadvantage. In fact, we can work with multiple gallium nitrate device providers, multiple silicon carbide device providers. So not providing the actual devices is actually an advantage. You’re allowed to be a lot more interoperable.

In terms of competitors on the sensing side, our competitors have traditionally been we’re the market share leader at about 24% market share. Our competitors, number two and three, are Infini and Melexis, and then there’s kind of a long tail after that. On the power side, it’s a far more fragmented market. It depends on where you go in the power side. We have chosen to compete in areas that we think we have specific advantages, in motor drivers, in regulators, in LED drivers, in those kind of areas.

And so we’re not competing in GPUs and CPUs. We don’t have that capability and don’t want to do that. But in the areas we compete in, we can typically win on specifications.

Josh Buchalter, Semiconductor Analyst, TD Cowen: And and I think on the last earnings call, you mentioned that you’re you’re released 50% more new products this year than last year. How what’s the ASP uplift you can get even on your core franchise from these new products? And can you maybe talk to the go to market and potential contribution from this?

Derek D’Antelio, CFO, Allegro Microsystems: Sure. So we haven’t talked publicly about the ASP uplift, which is competitive information. But generally speaking, there’s a higher ASP for two reasons on the new products. One, the specifications are better. And two, particularly in auto, every year there’s kind of a 2% or 3% cost down just productivity.

So the fact that you start the clock running again at the beginning of the year helps with an ASP reset. So our goal is to have approximately 20% to 25% of our sales come from what I’ll call new products, which are products released in the last four years. In the last few years, we’ve had a really focused effort of being much more efficient within ROI, within our R and D organizations. We put metrics in our PSU plans, we put metrics in our annual compensation plans to drive that, and that’s really starting to show that fruit by taping out 50% more products with not that much more investment within that R and D space. And as we talked about earlier, we’re designing the majority of our products for automotive, which can be leveraged to the industrial space without significant R and D dollars or even significant sales dollars at this point.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Got it. You guys also recently had a CEO change that I think surprised a lot of people. You named Mike Dug, who’s absolutely no stranger to Allegro as the new CEO. Could you maybe provide some background on the timing of the change and also what any changes that we should be expecting from the outside looking in and why the board chose Mike?

Derek D’Antelio, CFO, Allegro Microsystems: Sure. So Mike Duig has been at Allegro for going on twenty eight years. Mike was our first ever chief technology officer and probably the best chief technology officer I’ve ever seen at commercializing products, which is really good. Mike ran all of our business units, and the last couple of years ran operations. When Ravi Vigg retired almost four years ago, Mike was considered a candidate for the CEO.

He’d been at the company for twenty five years, but he needed some more seasoning, I would say, in various different aspects of the business. We brought in Vinit Nagawala, who came from our biggest customer, Sensata, one of our biggest customers, Sensata. Vinit and myself also have a lot of public company experience at the time. Mike really didn’t. So Mike was a candidate then, but needed a little more seasoning.

I think Vinit, myself, and others, and Jalene have put in place a lot of public company practices over the last two and a half years, and the board felt like Mike was ready for that role right now, I think it’s a good time to do that. Very well received internally. Mike’s an engineer’s engineer, has about 75 patents, really understands how to commercialize our technology. I don’t think you’ll see any marked changes in strategy. Mike ran strategy, so Mike and I developed the strategy.

That won’t change very much. I think the execution might be a little bit more pointed in certain areas. So taking some of these new technologies like TMR and gate drivers, accelerating those things, accelerating the cost roadmap might be accelerated. Things like, for example, switching from gold to copper, with gold being at all time highs on lead frame wires. So Mike just knows where to look for those things, and Mike knows the industry really, really well.

And quite frankly, he’d be here right now, but he’s in Japan with customers. So customers love Mike as well.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Yeah. I mean, was surprised on the earnings call, you know, given his background, he seemed as focused on operations and costs as he did CTO, traditional CTO role and commercialization. I mean, what are his, I guess, initial priorities? Is he more focused on sales? Is it is it on ops?

I mean, how will, I guess, he define success in his first year and any meaningful changes that he makes?

Derek D’Antelio, CFO, Allegro Microsystems: Sure. So Mike and I and the rest of the management team are absolutely focused on execution over the next six, nine, twelve months. Execution means coming out of this downturn that we’ve painfully been in for a number of quarters, you know, with the sales side of things, executing on the new product sales, right? Our sales team now has whole bunch of new products they go and sell, so selling those products that we have, expanding that content. And then we’re ultra focused on getting those gross margins back above 50% in the near term, right?

And all of us are focused and rolling in the same direction. Our compensation plans are based on those things. So those are the things here in the near term. And we’ll continue to optimize our balance sheet as well. We’re paying down debt pretty fast.

We’re doing all those things you’d want to do to improve both profit margins and sort of return on capital.

Jalene Hoover, Allegro Microsystems: And I would layer into that too. It’s something you touched on, Josh, is that Mike has this really unique combination of having that design background, but also the appreciation for the fractional pennies that comes with running operations. And so he’s really committed, you see it in what he speaks to, innovating within a spending envelope. Awesome.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Thank you. And I I guess on that note, he became CEO at a very interesting time to be running a public semiconductor company and, you know, immediately jumped into the tariff chaos. What are you guys seeing in behaviors from your customers? Any changes? I mean, for the most part, there have been some exceptions.

I’ve been surprised that most companies are saying they’re not seeing any meaningful changes in order patterns or customer behaviors. What are you guys seeing on both the autos and industrial side? I would echo that. We said

Derek D’Antelio, CFO, Allegro Microsystems: it on a public call, we’re not seeing any meaningful changes. So we ship all of our products from The Philippines, from our back end facility in The Philippines. We ship about 15% of our products into North America, a little bit less than that in The United States. All of those are exempt anyways as semiconductors, at least today, ship about 27% into China. So we’re not seeing any meaningful changes in order patterns.

Certainly in the March, we did a good scrub to see, do we have any pull ahead in that March? We didn’t see any in the revenue numbers. In my guidance for the June, we don’t see any pull aheads. We have customers requesting things for pull aheads, we’re talking about that now and negotiating how that might work. But that’s not in our numbers right now.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Got it. And I mean, on that note, how do you feel you took some proactive measures last year to get inventory in check. It feels like you guys have gotten a good handle on inventory for a while. Now, you’ve just been kind of waiting for end demand to improve. Is that a fair characterization?

Is there more inventory digestion I mean, how would you categorize on books, channel, and then end customer inventory levels right now? Sure.

Derek D’Antelio, CFO, Allegro Microsystems: So I’ll talk about the on books, which is kind of disconnected from the end market, right? The on books inventory, we brought down our finished goods the last two quarters. We’ll continue to bring down our finished goods. And that’s good. We’re using those finished goods that we’ve built ahead a little bit to supply some of the in quarter order rates, and that’s been helpful.

We brought down finished goods by about 13% in the March, able to dial down production a little bit, able to fulfill some orders out of finished goods. The preponderance of our on books inventory is wafer or die bank, which is quite helpful to have on books because three years ago we didn’t have that, and many people didn’t have that. And it was difficult to supply in quarter orders. In terms of distributor inventories, our distributor inventories came down 25% exiting the March this March compared to the beginning of the year. So while sales dropped 31%, twenty five % of that was a decline in inventories with our distributors and then a decline in inventories at our auto customers.

So we feel like we’re in pretty good shape in most regions of the world with distributors, and we get direct information there from all the large distributors. On the auto side, the direct side of things, I think we’re in really good shape in North America. We took a lot of our inventory out of the channel in the June quarter of twenty twenty four. Very early in the cycle, we started allowing customers to cancel, to push out orders out of LTAs. We think that was the right thing to do for us, least.

China was down 50% that quarter, rebounded pretty strongly. We think we’re shipping to demand there in most regions of the world. The area that probably has a little bit of excess inventory still is Europe and maybe a little bit in Japan where they carry inventory.

Josh Buchalter, Semiconductor Analyst, TD Cowen: And, okay, so I were to summarize, basically everywhere is back to normal shipping to end demand and consumption other than North America and Japan. Is that a

Derek D’Antelio, CFO, Allegro Microsystems: In pockets of industrial as well.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Okay, yeah. Was my things like that. Is that that’s an auto comment? That’s an

Derek D’Antelio, CFO, Allegro Microsystems: auto comment.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Okay. In industrial, there’s still some pockets. Correct. Okay. Got it.

I wanted to ask about your manufacturing network as well. So you historically had a primary partnership with Polar Semiconductor in The United States. And then over the last several years, you you’ve qualified UMC and TSMC and also more recently partnering with Chinese foundries. What portion of the mix is is serviced today by each of your respective foundry or foundry partners? And how does that need to does that need to change over time?

Like, are your plans for your manufacturing roadmap?

Derek D’Antelio, CFO, Allegro Microsystems: Sure. So all of our wafer manufacturing is outsourced. 50% of it approximately comes from UMC in Taiwan, about a third from Polar Semiconductor in Minnesota, about 10% to 15% from TSMC. Wafer production just coming off the line in China in qualification lots not yet in production and not yet shipping to customers, and then a little bit with towel from the Crocus acquisition, small amount, couple of percentage points. So I don’t expect that to change significantly in the short term, but we do expect to ramp up that China for China supply chain with product coming out of the complete China supply chain by the end of this fiscal year.

We already have had OSATs in China for a number of years. And from a back end standpoint, we do all of our probe, all of our tests currently in The Philippines at our own facility. We do about half of our assembly at our facility in The Philippines, which is proprietary packaging, small lots, customized things. Most of the standard packaging is done at the large osats in Malaysia, Taiwan, and The Philippines.

Josh Buchalter, Semiconductor Analyst, TD Cowen: And, you know, how does the China for China strategy play in? What’s your vision there? Is that proactive on your part or are you seeing the legitimate pull from Chinese customers already to have your parts sourced at least from a manufacturing basis locally? So it’s actually both,

Derek D’Antelio, CFO, Allegro Microsystems: but it started three years ago, essentially when customers were having a request. And before it became a sort of demand, it was a request to have a plan to do something in China. And so we started this process about three years ago. As you know, it’s a long process to qualify a wafer, particularly for automotive. But we’ve also used OSAT in China for assembly for the past several years.

About 10% of our assembly has been done in China. We also last year qualified another OSAT for a probe assembly and test, so we can have some turnkey in China. So that’s expected to start shipping at the end of this fiscal year. Luckily, this process started three years ago for us because it’s a multi year process, and it’s starting to bear fruit right now, especially when you start to deal with some of these geopolitical issues.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Got it. I actually wanted to circle back to your comments on the auto and tier one inventory levels. I think given the shortages and how painful they were in 2021 and 2022, I’ve at least been surprised at how quickly and aggressively the tier ones have wanted to move back to pre COVID inventory levels, and in some instances, even below that. I’d just be curious to hear your perspective on, like, what’s the right move for the industry? Like, could you maybe provide perspective on on on why they’re thinking that’s the right level?

Yeah.

Derek D’Antelio, CFO, Allegro Microsystems: I could I could tell you why they think it’s the right level. It’s because if, you know, sitting in a CFO seat, I think if you’re managing working capital and you’re managing single digit operating margins and you know your suppliers have capacity, I would absolutely try and push some of that inventory back onto my suppliers. That’s why your suppliers have capacity, right? But as we all know, this all tightens up at the same time, generally speaking, that’s what causes these supply chain crunches. So I think they think that’s the right move right now, but that’s what causes these large oscillations between supply crunches and sort of gluts in inventory.

Josh Buchalter, Semiconductor Analyst, TD Cowen: And, I mean, how much how much let’s say there was a 5% increase in SAAR or 10% increase in SAAR. I mean, how much better does it would it need to get before we would get to a period where you would expect to see some pockets of shortages?

Derek D’Antelio, CFO, Allegro Microsystems: So we’re already starting to see pockets of shortages on the wafer side in certain raw materials for quick turn items, particularly in things like data center. Not seeing that in auto. I think many of us on the semiconductor side have stocked up on wafers. But there are other parts, whether it’s magnets, whether it’s rare earth minerals and those kind of things, where there could be supply shortages, you know, if all that happened at the same time.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Okay. Wanted to shift a little bit on gross margin. So you mentioned earlier that you’re currently, you know, you’re below 50%. You’re laser focused on getting back into the 50% range and you have a higher target longer term. How much of that is utilizations?

What are other levers do you have at your disposal to bring gross margins higher, including even are many of the new products we talked about, are they gross margin accretive? Yeah, sure.

Derek D’Antelio, CFO, Allegro Microsystems: So in the short term, the sort of largest lever is volume. So every dollar of revenue generally translates into 65¢ of gross margin because we have the fixed costs already in The Philippines. So if it’s manufactured in The Philippines, a probe assembled test, we get 65¢ on the dollar, so that’s accretive to gross margins. That’s the biggest lever in the short term. The other pieces are as industrial comes back and distribution comes back, that has a better gross margin than auto because of the volumes.

The volumes are just significantly smaller serving a tail of 10,000 customers versus a concentrated auto space who are buying millions of parts. So that’s better gross margin. New parts help. And then there are two sort of cost dynamics. One is in the March, our gross margins troughed, as I said.

The reason for that is pricing largely comes down in the March, particularly in automotive. That hits the P and L right in that quarter. Even while we’ve negotiated cost reductions with OSATs and wafer suppliers, that takes about a quarter or two to cycle through inventory into the P and L. So there’s some timing there. You’ll see that most years.

And the second piece is we did a modest restructuring, which will start to phase into the P and L in the second half of fiscal ’twenty six. So those four things, coupled with the new products, really helped drive those gross margins to at least 65% accretion on the gross margin side and possibly above that with those tailwinds.

Josh Buchalter, Semiconductor Analyst, TD Cowen: Yeah. I want to get back to the restructuring. But first, mean, it was obviously, as we talked, it was a very strange time for the industry where everyone took advantage of not took advantage, but benefited from pricing uplifts a couple of years ago. What’s the right through cycle margin profile for you guys?

Derek D’Antelio, CFO, Allegro Microsystems: Yeah. We still think our target operating model is 58%, right? And back when we put that out, it was in March of twenty twenty three, we had an Analyst Day put out the 58%. We were at 58.3%. And I got asked, wow, isn’t that a bit conservative?

You’re already there, right? But I said the actual margins at that time, excluding all the FX, the pricing was probably in the 55%, fifty six % range. So excluding those things, that’s where we were, right? There’s a whole bunch of things helping us get back to the 58%. It’s going to take some work.

It’s going to take some time. But I

Josh Buchalter, Semiconductor Analyst, TD Cowen: think that’s still our long term target model. And you mentioned the restructuring. What are the actions that you’re taking operationally that are involved in this restructuring? And what’s the ultimate impact you could see on the COGS and OpEx lines? Sure.

So we continue to move our operations closer to our customers, closer to our vendors. What I

Derek D’Antelio, CFO, Allegro Microsystems: mean by that, in The Philippines, where we have our manufacturing facility, we have 2,800 employees. We also opened a shared services center in The Philippines in November of twenty three, and we’ve continued to migrate functions, accounting, finance, IT, HR, logistics, purchasing, to that facility in The Philippines, and it’s working out fantastic. There’s not only a cost advantage, but there’s also an advantage of being closer to our customers. 70% of our customers are in Asia. Majority of our vendors are in Asia.

All the shipping happens out of The Philippines, so it’s just much more efficient. We’ll continue to leverage that. So this restructuring was much more of a repositioning. Had nothing to do with where we were in a cycle. It had to do with the fact that we’re repositioning resources to the regions we’re in.

And we’ll continue to do that even in an up cycle. So we’ll continue to take costs out. That was about $15,000,000 on a run rate basis, about half of which is cost of goods sold, half of that is OpEx. And we won’t stop there. We’ll continue

Josh Buchalter, Semiconductor Analyst, TD Cowen: to find opportunities for efficiencies. So we talked about Crocus and Hay Day, which I think you guys are happy with the turnout thus far of those tuck in M and A deals. Is that still part of your plan? Do you see more room for strategic acquisitions? I mean, you’ve been recently in the news of acquisitions on the other end, but I’d be curious to hear, do you feel like the balance sheet is at a spot where you could add more if you wanted to?

Yeah.

Derek D’Antelio, CFO, Allegro Microsystems: We have a pretty modest amount of debt on our balance sheet. We just made another voluntary debt payment two weeks ago. We’ll continue to make voluntary debt payments to bring you know, that’s the use of our free cash flow right now. We have a lot of opportunity to grow the organic business. Releasing 50% new parts, our sales team has a whole bunch of new products that they can sell today.

We think there’s a lot of opportunity to really stretch that and execute on that, and it’s a lot less risky than doing M and A. That said, we continue to look at things that make sense for us. And when I say make sense, they have to be pretty close to home. They have to be a technology that we understand. Crocus fit that right down the middle.

We understand magnetic sensing. We already had a TMR business. We can assign engineers to it. We can assign management to it. We have to be able to bring it to our customers, and it has to fit with one of our end markets, right?

And of course, there’s some financial profiles. But those first three are critically important. And the most meaningful measure I look at when we buy a company is variable contribution margin from a financial metric, because you can fix OpEx, you can fix fixed costs, but you generally can’t fix what a customer is willing to pay for that product. If they’re not paying for it, they’re probably not going to pay for it even after you buy it.

Josh Buchalter, Semiconductor Analyst, TD Cowen: We’re moving up on time here. But on the earnings call, announced plans to have an Analyst Day. I think, Jaleen, you mentioned after the October call. Can you talk about I think your most recent one was two and a half years ago. Understand you can’t front run the event, but why is now the right

Jalene Hoover, Allegro Microsystems: time to have another Investor So our fifth year anniversary as a public company is in October of twenty twenty five, so we would like to have it following that. It could be in the December or the March TBD. And similar to our March event, we’ve had some changes in our leadership team, so it’s a reintroduction of that team. And then also crystallization of our strategy, which, as we’ve talked today, has not changed significantly, but it’s worthy to walk through. There are still misperceptions about the company, and so this provides an opportunity for us to address those as well as to introduce the general audience to our team.

Josh Buchalter, Semiconductor Analyst, TD Cowen: A bunch of questions lined up, but if if anyone in the audience has questions as well, please feel free to raise your hand and then we’ll certainly get get your question asked. But Derek, Jalene, thank you for joining us again this year. I think many in the audience are

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