Earnings call transcript: Allegro Microsystems Q1 2025 beats forecasts amid stock dip

Allegro Microsystems Inc. reported a stronger-than-expected start to its fiscal year 2026, with both earnings and revenue surpassing analyst forecasts. According to InvestingPro data, the company currently appears overvalued based on its Fair Value analysis, with a market capitalization of $5.87 billion. Despite the positive earnings news, the company’s stock saw a significant decline in pre-market trading, dropping by 6.05%. The earnings per share (EPS) came in at $0.09, exceeding the forecasted $0.08, while revenue reached $203.4 million, surpassing expectations by 2.77%.

Key Takeaways

• Allegro Microsystems reported a 12.5% EPS surprise, beating analyst expectations.
• Revenue for Q1 FY2026 increased by 22% year-over-year.
• Despite strong earnings, the stock fell 6.05% in pre-market trading.
• The company continues to focus on debt reduction, repaying $35 million voluntarily.
• Strategic wins in e-mobility and data center markets were highlighted.

Company Performance

Allegro Microsystems demonstrated robust growth in the first quarter of fiscal 2026, with sales increasing by 22% year-over-year and 5% sequentially. The company attributed this growth to strong demand in its strategic focus areas, including automotive and industrial markets. Allegro’s continued investment in research and development and its innovative product launches, such as the ACL-C current sensor for XEV inverters, have positioned it well against competitors.

Financial Highlights

• Revenue: $203 million, up 22% year-over-year
• Earnings per share: $0.09, exceeding forecasts by 12.5%
• Gross margin: 48.2%, up 260 basis points sequentially
• Operating margin: 11.1%, compared to 6% a year ago
• Cash flow from operations: $62 million

Earnings vs. Forecast

Allegro Microsystems exceeded expectations with an EPS of $0.09 against a forecast of $0.08, marking a 12.5% surprise. Revenue also surpassed projections, coming in at $203.4 million compared to the forecasted $197.92 million, a 2.77% surprise. This performance reflects the company’s successful execution of its strategic initiatives and strong market demand.

Market Reaction

Despite the earnings beat, Allegro’s stock declined by 6.05% in pre-market trading, with the price dropping to $31.82. This movement contrasts with the company’s 52-week high of $38.45, suggesting that investors may have concerns about future growth or external market conditions. InvestingPro analysis indicates that ALGM has shown significant price volatility, with a beta of 1.75, while maintaining strong momentum with a 40.6% return over the past six months. The trading volume was notably high, indicating significant investor activity.

Outlook & Guidance

Looking ahead to the second quarter, Allegro Microsystems provided guidance for sales between $205 million and $215 million, representing a 12% increase year-over-year. The company expects a gross margin between 48% and 50% and a non-GAAP EPS ranging from $0.10 to $0.14. Analysts tracked by InvestingPro maintain a strong buy consensus with a price target range of $23-$45, suggesting potential upside. The company operates with a moderate debt level, with a debt-to-equity ratio of 0.4, and remains committed to reducing its debt and enhancing operational efficiency.

Executive Commentary

CEO Mike Dude expressed optimism, stating, "We are encouraged by the positive momentum we are seeing across the business." CFO Derek emphasized the importance of debt reduction, noting, "The most accretive thing we can do right now is continue to repay debt." These comments highlight the company’s strategic focus on financial stability and growth.

Risks and Challenges

• Potential tariffs could impact cost structures, although minimal effects are expected.
• Supply chain disruptions may pose challenges in meeting demand.
• Competitive pressures in the automotive and industrial markets could affect market share.
• Macroeconomic uncertainties may influence customer spending and investment.

Q&A

During the earnings call, analysts inquired about the impact of potential tariffs and the company’s inventory management strategies. Allegro’s leadership indicated that they expect minimal tariff impacts and are seeing positive demand signals from customers. The company also highlighted its continued efforts to reduce inventory in distribution channels.

Full transcript - Allegro Microsystems Inc (ALGM) Q1 2026:

Conference Operator: Good morning, and welcome to the Allegro Microsystems First Quarter Fiscal Year twenty twenty six Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You’ll then hear an automated message advising your hand is raised.

To withdraw your question, press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Jaylene Hoover, Vice President of Investor Relations and Corporate Communications.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems: Thank you, Haley. Good morning, and thank you for joining us today to discuss Allegro’s fiscal first quarter twenty twenty six results. Will review our quarterly financial performance and share our second quarter outlook. We will follow our prepared remarks with a Q and A session. Our earnings release and prepared remarks include certain non GAAP financial measures.

The non GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release, which is available in the Investor Relations page of our website at www.allegromicro.com. This call is also being webcast and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are based on current expectations and assumptions as of today’s date and as a result are subject to risks and uncertainties that could cause actual results or events to differ materially from projections.

Important factors that can affect our business, including factors that could cause actual results to differ from our forward looking statements, are described in detail in our earnings release for the 2026 and in our most recent periodic and other filings with the Securities and Exchange Commission. Our estimates, expectations or other forward looking statements may change, and the company assumes no obligation to update forward looking statements to reflect actual results, changes to assumptions or other events that may occur except as required by law. It is now my pleasure to turn the call over to Allegro’s President and CEO, Mike Dude. Mike?

Mike Dude, President and CEO, Allegro Microsystems: Thank you very much, Jalene, and good morning, and thank you all for joining our first quarter earnings conference call. We are encouraged by the positive momentum we are seeing across the business, including continued strong bookings, increasing backlog and strong design win activity in our strategic focus areas. This momentum has enabled us to deliver strong first quarter results with sales and gross margin above the high end of our guidance ranges at $2.00 $3,000,000 and 48.2% respectively. We also delivered non GAAP EPS of $09 above the midpoint of our guidance range. EMobility led our automotive sales growth in the first quarter with particular strength in current sensors for XEV applications like high voltage traction inverters and onboard chargers.

We expect this positive e mobility trend to continue as a result of tailwinds from ADAS related safety feature adoption and the continued electrification of vehicle powertrains. In our industrial and other end markets, we were encouraged by continued growth in Q1 sales, data center, as well as robotics and automation, both strategic focus areas for Allegro were significant contributors to our industrial growth in the first quarter. On our May call, I spoke about my strategic priorities as CEO, and as a reminder, one of our top priorities is to demonstrate relentless innovation that drives performance leadership in new and existing markets and applications. To that end, I’m proud of the team for releasing an innovative new ACL C current sensor this quarter. This IC is specifically designed to meet the safety, efficiency, and commercial needs of XEV inverters.

These inverters are power electronic systems that power the main traction motor in a hybrid or fully electric vehicle, And with this newly released IC, Allegro offers a market leading device that enables customers to use two current sensors and an inverter, whereas most competitor solutions require three sensors. This new IC optimizes our customers’ bill of materials while still achieving rigorous automotive safety standards. During the quarter, the team also released our first UCOR current sensor ICs that enable customers to use smaller magnetic cores or coreless inverter current sensor systems, thereby reducing the cost, size, and weight of the vehicle traction drive while extending vehicle driving range. Together, these innovative new current sensor ICs support our leadership position in XEV inverters. Our teams have already demonstrated an ability to gain market share with these new ICs, highlighting the value of relentless innovation with purpose.

During the quarter, we also released a new 48 volt motor driver IC that results in more efficient, quieter, and more reliable cooling fans for use in AI data center installations. Moving to design wins. More than 75% of first quarter wins were in strategic focus areas, including e mobility, data center, robotics and automation, clean energy, and medical applications. E mobility and data center wins led our first quarter design win activity, and these wins highlight the breadth of our portfolio and our strong product and market positions that can ultimately drive future growth. In automotive, notable wins included a sizable traction inverter win with a leading Chinese automotive OEM, demonstrating our ability to secure new business in China as a result of our differentiated current sensor technology.

We also secured multiple wins with a leading automotive OEM in the APAC region across electronic power steering, onboard charger, and in various vehicle cooling applications. Moving now to industrial wins. We continue to capitalize on opportunities in high growth sectors and data center, motor drivers for cooling applications, and current sensors for server power supplies led significant first quarter design win activity. It’s a promising sign to see increasing sales momentum from our industry leading high bandwidth current sensors. These ICs enable higher switching frequencies and higher power density in space constrained data center power supplies.

We also secured several wins in robotics and automation with both our magnetic current sensor ICs and our advanced motor driver ICs. In addition, our TMR technology continues to gain traction in a growing number of applications, and we secured several global Q1 design wins with TMR ICs across applications at data center, robotics and automation, medical, and clean energy. And finally, we are also seeing strong interest from leading customers as we sample them with our high voltage isolated gate drivers for silicon carbide based power systems in e mobility, clean energy and data center applications. Sampling activity for our isolated gate driver ICs increased significantly in recent months. In our May call, I also spoke about the importance of cost innovation as a means of increasing gross margins.

For example, in the June ending quarter, we optimized our manufacturing flow and increased test yield for certain high volume TMR devices resulting in a tangible COGS reduction for TMR devices acquired from Crocus. In summary, we continue to execute on our strategic priorities and we are seeing positive momentum across the business. I’d like to thank Allegro’s employees, partners, customers and investors for their continued support across all aspects of our business. I’ll now turn the call over to Derek to review the Q1 twenty twenty six financial results and provide our outlook for the second quarter.

Derek, CFO, Allegro Microsystems: Thank you, Mike, and good morning, everyone. As Mike mentioned, we continue to see positive forward looking metrics for the business, including continued strong bookings, in fact, to levels we haven’t seen since our fiscal ’twenty three, as well as orders within lead times and further reductions in our customers’ inventories. Now, I’ll turn to our first quarter results. Sales were $2.00 $3,000,000 and non GAAP earnings per share were $09 Gross margin was 48.2%, operating margin was 11.1%, and adjusted EBITDA was 16.4 of sales. Q1 sales increased by 5% sequentially and 22% year over year.

Sales to our automotive customers increased by 3% sequentially, led by e mobility sales, which increased by 16% sequentially. Auto sales increased by 13% year over year, and e mobility increased by 31% year over year. Industrial and other sales increased by another 11% sequentially, and for the fourth consecutive quarter, led by continued growth in data center, robotics and automation, and a resurgence of clean energy. Industrial and other sales increased by 50% year over year. Sales into the distribution channel were about flat sequentially and increased by 19% year over year.

POS was the highest it’s been in nearly two years, and we continue to see reductions in our distributors’ inventories. Our distributor inventory dollars declined by another 13% sequentially and 28% year over year, and we are beginning to prioritize shipments to address low inventories levels for specific parts. From a product perspective, magnetic sensor sales increased by 10% sequentially, led by e mobility and increased 12% year over year. Sales of our power products declined by 2% sequentially, and increased 43% year over year. Sales by geography were 28% in China, 24% in the rest of Asia, 17% in Japan, 16% in The Americas, and 15% in Europe.

Now turning to Q1 profitability. We also continue to be very focused on improving gross margins and our return on invested capital. Gross margin was 48.2%, an increase of two sixty basis points sequentially, while absorbing foreign exchange headwinds from a weakening US dollar. Operating expenses were $75,000,000 about 3,000,000 above our outlook, due to an increase in variable compensation, timing of R and D spend, and a weakening US dollar. Operating margin was 11.1% of sales, compared to 9% in Q4, and 6% a year ago.

Operating income improved by 128 on a 22% sales increase year over year, demonstrating the operating leverage in the business model. The effective tax rate in the quarter was 9.5%. First quarter interest expense was $5,500,000 And the first quarter diluted share count was 185,000,000 shares, and net income was $16,000,000 or $09 per diluted share. Moving to the balance sheet and cash flow, we ended Q1 with cash of $139,000,000 Cash flow from operations was 62,000,000 CapEx was $11,000,000 and free cash flow was $51,000,000 or 25% of sales. Cash flow from operations included a $30,000,000 tax refund.

From a working capital perspective, DSO was forty days, consistent with Q4, and inventory days were 141 compared to one hundred and forty eight in Q4. Inventory dollars declined by another $10,000,000 sequentially, largely due to a decline in finished goods, as we continue to fulfill some orders within lead times from finished goods. Finally, in Q1, we made another voluntary debt repayment totaling $35,000,000 bringing our debt balance down to $310,000,000 and net debt to $181,000,000 compared to net debt of $224,000,000 at the end of Q4. Finally, I’ll now turn to our Q2 twenty twenty six outlook. We expect second quarter sales to be in the range of $2.00 5,000,000 to $215,000,000 The midpoint of this range equates to a 12% year over year increase.

Additionally, we expect the following all on a non GAAP basis. Gross margin to be between 4850%, OpEx is expected to be approximately $73,000,000 Interest expense is projected to be $5,000,000 inclusive of another $25,000,000 debt repayment we just made this morning. We expect our tax rate to be 10%, reflecting the projected geographic mix of income. We estimate that our weighted average diluted share count will be 186,000,000 shares. And as a result, we expect non GAAP EPS to be between $0.10 and $0.14 per share, up 50% year over year at the midpoint on a 12% sales increase.

Now I will turn the call back over to Jillian for questions. Jillian?

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems: Thank you, Derek. This concludes management’s prepared remarks. Before we open the call for your questions, I’d like to share our second fiscal quarter conference lineup with you. We will attend Needham’s sixth Annual Virtual Semiconductor and Semi Cap one off Conference on August 20, Evercore ISI Semiconductor IT Hardware and Networking Conference on August 26 at The Peninsula in Chicago, and Jefferies Semiconductor IT Hardware and Communications Technology Conference on August 27 at the Four Seasons also in Chicago. We will now open the call for your questions.

Haley, please review Q and A instructions.

Conference Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q and A roster.

Our first question comes from the line of Joe Quatrochi from Wells Fargo. Your line is now open.

Joe Quatrochi, Analyst, Wells Fargo: Yeah, thanks for taking the questions. I was wondering, I think you talked about, starting to see some areas, increasing areas of shortages and needing to refill inventory. Can you talk about just kind of the forward demand picture you’re seeing and the demand pull from your customers and how you’re thinking about the dynamic of potential tariff pull ins versus kind of continued recovery?

Mike Dude, President and CEO, Allegro Microsystems: Yes, thanks for the question, Joe. So just a reminder on some of the strong positives that that’s really the best way to summarize trends in the business. We continue to see the growing book to bill with strong bookings, growing backlog, continuing to see significant orders within lead time and inventory reductions in the disty channel. So we’re seeing a lot of positive signs. But I can say when we start to think about the impact of tariffs and potential pull ins, I personally have been on the road a lot talking with customers, and I found it to be quite valuable.

In almost every meeting, there have been real tangible discussions about potential future component shortages, meaning of Allegro components based on real and growing demand in the marketplace. That’s true both for industrial and automotive customers. Certainly, we acknowledge the uncertainties created by the tariff situation, but we find it to be an encouraging sign to be having more and more conversations with customers about real manufacturing based line tightness, and it’s just another signal that demand is picking up out there.

Derek, CFO, Allegro Microsystems: And Joe, this is Derek, I’ll add to that. It’s something that we have our sales teams in the regions on the lookout for if there’s any unusual bookings activity, unusual sales activity. And so far, we believe the impact of any sort of pull ins is immaterial from tariffs. We obviously don’t get the reasons why a customer is pointing something in, but in general, it’s because they need it because of a potential line down, for example, in places like data center. And from a tariff perspective, right now, there’s no direct impact for Allegro.

We ship about 15% of our products into The United States or into North America. Everything is shipped from The Philippines to all regions. From an indirect standpoint, as far as downstream with our customers, there clearly could be an impact for things like Section two thirty two and steel and aluminum imports as some of the automakers announced yesterday. But the impacts to Allegro on that are yet to be seen in the kind of downstream.

Joe Quatrochi, Analyst, Wells Fargo: Thanks, that’s really helpful. And then as follow-up, was wondering if

Analyst: you can you talk a

Derek, CFO, Allegro Microsystems: little bit more about just the

Joe Quatrochi, Analyst, Wells Fargo: industrial exposure? I think in the past you talked about clean energy, solar being a big piece of that, and I there’s been some changing with the big beautiful bill in terms of subsidies for solar. So any help there and like what those discussions with customers have been like?

Mike Dude, President and CEO, Allegro Microsystems: Yeah, absolutely. So, if you look at our investor deck, you’ll see in our focused industrial area, it’s about a $3,000,000,000 SAM growing at a double digit growth rate, and it really spans data center, robotics and factory automation, and yes, of course, clean energy and also the medical market. So, I bring that up, Joe, just to say clean energy is one leg of the stool, but we have a lot more legs on that stool. And in particular, we’ve been seeing an uptick recently in the data center portion of the industrial business. So, as we go out, if I paint with a broad brush talking to our industrial customers, we’re seeing strong recovery in the business.

We have four quarters of growth and the clean energy piece is just one piece of that business. There is a little bit of softness there, but it’s more than being made up by the strength in other areas like data center.

Participant: Thank you.

Conference Operator: Thank you. Our next question comes from the line of Vivek Arya from Bank of America Securities. Your line is now open.

Vivek Arya, Analyst, Bank of America Securities: Thanks for taking my question. The first one is on gross margin. So they exceeded the high end of your outlook. And I’m curious what helped to drive the upside? And if you could help differentiate between utilization, pricing and mix what was specifically different than your initial assumptions?

And then as we look forward, how do you see these three drivers as you kind of march towards your goal of 50% over the next few quarters?

Derek, CFO, Allegro Microsystems: Vivek, thank you. In terms of our Q1 gross margin being at 48.2%, which was 20 basis points above our guidance range, revenue was about $1,000,000 above that guidance range. So with that revenue level, it was within our expectations. And we expected a fairly good drop through going into Q1. I’ve talked in the past about a 60% to 65% drop through.

That’s a number you can use post Q2. For Q1, though, we expected the drop through to be in that 90% range, because as you may remember on the May call, we talked about how many of our pricing negotiations with our customers occur in the March. So we have a timing dynamic where pricing comes down pretty immediately, but the cost benefits from negotiating cost downs with suppliers take about a quarter or two to cycle through our inventory with one hundred and fifty days in inventory. So we start to get that benefit here in the June, and that moves into the September as well. So our guidance at the midpoint for the September from 48% to 50%, at the midpoint of 49%, that equates to about a 75% drop through, where we continue to get some of those benefits of the costs rolling forward on a FIFO basis.

Post that quarter, you can continue to use that 60% to 65% drop through. The majority of that really is utilization or leverage in the business. The other levers that could put some upside to that is mix. And in the June, we sort of had two, I would call it headwinds. One was foreign exchange with the Philippine peso, which was kind of noise, but it was still a headwind.

The second piece of that was direct sales were higher than distribution in the quarter. So as distribution starts to come back from a sell in standpoint, the majority of that is industrial, and we get some tailwinds from that. So that could be some upside to that 65% going forward.

Vivek Arya, Analyst, Bank of America Securities: Thank you, very happy, Zach. Then maybe Mike, one for you. Maybe your views on the automotive demand recovery, because there’s been some mixed messages from some of your, you know, larger peers, Texas Instruments, SC Micro, and others. And I’m curious, how do you see the demand environment now versus what you thought, you know, ninety days ago? And and to be more specific, how are you looking at automotive sales growth going into your September against what is probably just a flattish auto production environment globally?

Thank you.

Mike Dude, President and CEO, Allegro Microsystems: Yeah, and we can start with that auto production forecast. I was pleasantly surprised to see S and P revised their automotive production forecast up over the past quarter. Now that is a forecast change that goes from a slight decline in production to generally a flat vehicle production landscape. But nonetheless, that’s a positive movement of the forward looking automotive forecast. And that lines up with what we’re seeing when we go out and talk to customers.

I mentioned earlier these discussions about automotive tightness, where a lot of our auto customers are looking for expedited delivery of material to keep their lines running at maximum efficiency, both through direct customer discussions, but also through discussions with our sales teams. We’re just seeing a pretty marked increase in those types of situations out there in the marketplace. So I’m not saying that the recovery in auto is very strong at this point in time, but Derek and I, when we look at the situation, we’re seeing all the right signs to indicate that we’re staring at a recovery in front of us.

Participant: Thank you.

Conference Operator: Thank you. Our next question comes from the line of Gary Mobley from Loop Capital. Your line is now open.

Gary Mobley, Analyst, Loop Capital: Good morning, everybody. Thanks for taking my question. Derek, that revenue guide for the September of $210,000,000 would you say that represents shipping to true end demand or are we still seeing some reduction in the distribution channel that holds the quarterly revenue back?

Derek, CFO, Allegro Microsystems: Gary, it’s not yet shipping to end demand. In the past, I’ve provided a number of between $220,000,000 and $230,000,000 was sort of the last time that we calculated, I guess, off of our sales in ’4, what the end demand looks like. We still think that number holds about true right now, that $220,000,000 to $230,000,000 And we under ship the distribution channel again in Q1. We might come back to parity in Q2 when I net out the fact that some distributors actually need select parts for inventories. There is some regions of the world like Europe that still have a ways to go on the downside of things.

But we are now starting to see distributors need select parts. So the net of those two things could make selling flattish in Q2. So we’re not quite shipping to demand there. And even with our direct customers, we’re still not shipping to demand. And the guide for Q2 is up about three percent.

We’d expect the majority of that to be auto.

Gary Mobley, Analyst, Loop Capital: Got it, appreciate that color Derek. Mike you just highlighted the mixed data points in the automotive market. On the negative side clearly we’ve seen a number of leading Western automotive OEMs revised down their profit forecast because of tariffs and whatnot. Has that had any sort of impact on the, design RFQ activity with many of those Western automotive OEMs? In other words, are they sort of trying to plug the dike, so to speak, because of the tariff environment?

Mike Dude, President and CEO, Allegro Microsystems: Good question. I’ve not seen any of that activity as a result of tariffs. If there is any press out there about delays in R and D programs in automotive, the ones I’ve seen perhaps a quarter ago were more related to companies trying to sort out exactly how to balance their platforms between EV powertrains and ICE powertrains. We’ve seen a little bit of that dynamic, but nothing related to the tariff situation in terms of program pushouts or R and D program changes in plans.

Gary Mobley, Analyst, Loop Capital: Appreciate it. Thanks everybody.

Conference Operator: Thank you. Our next question comes from the line of Quinn Bolton from Needham and Company. Your line is now open.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems0: Hey, Mike, Derek, congratulations on the nice results and outlook. I guess my question is, is this auto recovery and looking into the second half of the calendar year, I know you give guidance only one quarter out, but historically, you’ve seen some seasonality in the December quarter. Certainly, it sounds like the growing backlog, the increasing bookings, the chance to potentially start refilling the channel could all align for a better than seasonal outlook in December. But just wondering if you might be able to comment on whether you would expect normal seasonality in December or whether you think the cycle can sort of overpower typical seasonal trends as that cycle starts to kick in?

Derek, CFO, Allegro Microsystems: Yeah, Quinn, you’re right. We went back and looked at the last fifteen years or so. And generally speaking, for the majority of that period of time, the December has had a 5% down seasonality. Where it’s actually been is what I’ll call an industrial and other. In fact, some of that’s been consumer.

So for example, the September usually has a little bit of a pickup in consumer heading, I’m talking a couple of million dollars. So that 5% down has traditionally been in industrial and other, although last year that was in auto. This year, it’s interesting because we’re not quite sure if the secular trends of where we are in the cycle will trump that seasonality dynamic. And in ’twenty three and ’twenty four, it did in fact, right? So there’s a lot of strong headwinds right now going towards that.

So it’s a little hard to guide to that December, but historically it’s been down 5%. With the secular tailwinds, it could be in that range of down five percent to plus 5%.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems0: Got it. Thank you for that. And then I guess just a second question. You’re seeing increasing expedites, sounds like both from OEMs and potentially distis. You’ve talked about disti inventories coming down.

Mean, what point do you think you start to restock the channel? I know September sounds like you’re expecting sort of flattish disty or selling to Matt’s sell out in that disty channel. But would you expect to be in a positioning, just sort of exiting this year to start refilling the channel?

Mike Dude, President and CEO, Allegro Microsystems: Or are going to kind of

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems0: take it one quarter at a time? Thanks so much.

Derek, CFO, Allegro Microsystems: Yes, we take it one quarter at a time, right? But we get pretty good visibility into our top distributors, of course, and that’s all contractual. We get their POS data, we get the inventory data. So we watch that very closely, and we’ve been actively working with our distributors for over a year now to bring down that inventory. And for example, in the June, China declined, sales for us declined 55%, because we really helped drive down an inventory in the channel.

And that was a good thing. We had a North America reset in the December, a little bit of Europe reset in the March. And so we still have pockets of inventory in parts of Europe and North America. I think Asia is in really, really good shape. But what we’re starting to see right now is for select parts, we actually have to restock that channel.

So what I said earlier was the net effect of those two things, we expect the distribution sales into the channel to be about flat in the September.

Mike Dude, President and CEO, Allegro Microsystems: Got it, thank you.

Conference Operator: Thank you. Our next question comes from the line of Chris Casos from Wolfe Research. Your line is now open.

Gary Mobley, Analyst, Loop Capital: Yes, thanks. Good morning. I guess the first question is regarding China. And I guess we’ve heard, you know, different things from different suppliers with regard to China. It looks like a 28% of revenue.

It’s not terribly different than what you’ve seen in the past, but could you talk to specific trends of what you’re seeing for both the direct customers and the distribution customers within China?

Mike Dude, President and CEO, Allegro Microsystems: Yeah, Chris, I’ll take that one. So first of all, as you stated, we’ve built a robust business in China. And when I look at that business, it’s across a broad portfolio of devices, each of which have their own strong levels of differentiation. Additionally, in the prepared remarks, I brought up a singular win with a Chinese OEM for an XEV current sensor application. But when I look at the wins within the quarter, I actually see pretty strong momentum in terms of new wins in e mobility, in particular in China.

So, what we’re seeing in China is a continued ability to win. We also have customers who are responding quite positively to our China for China supply chain. So, in general, we feel good. That being said, I talked in last quarter’s call, there is stiff competition in China. It tends to be at the lower end of the market.

We don’t have much business at the lower end of the market today, and our strategy is to continue to release differentiated products to compete more on the higher end of the China market. And there’s also the geopolitical concerns existing in China. So net net, I talked about a lot of the tailwinds that we have through innovation in our products, a couple of headwinds on competition and geopolitics, but net net, we’re feeling good about our ability to grow in China in the short term. Got it.

Gary Mobley, Analyst, Loop Capital: As a follow-up question, I’d like to discuss pricing and we’re probably in the early stages of recovery right now. So it’s probably early to see pricing trends. But I know, last year, you had to make some pricing moves to move some inventory. You’ve got you’ll be starting soon the annual price negotiations with your auto customers. What’s your view with regard to pricing as you head into the end of the year and into next year in the context of maybe supply gets a little bit tighter?

Mike Dude, President and CEO, Allegro Microsystems: Yes, it’s a dynamic situation as we all know. Anytime we enter the year, we start thinking about can we land at a low single digit price reduction year over year. In many cases in automotive, we have certain contractual obligations to land there. And we’ve sat down as a team and looked at this year. We think we’re still landing in that space, right?

I mean, I’m just going to preempt the question. Sometimes people say, because of tariffs, our customers asking you for bigger price reductions. When supply gets tight, we might be able to demand some price increases. But net net, we feel like we’re going to land in a normal year over year price reduction environment as we enter the next calendar year. Thank you.

Conference Operator: Thank you. Our next question comes from the line of Tom O’Malley from Barclays. Your line is now open.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems1: Hey, guys. Thanks for taking my question. I wanted to dive into the sequential on the industrial and other side, which was very strong in June, think up 14%. That kind of coincided with a bit of a pickup in China and then a bit of a pickup in Europe as well. Could you map for us where you were seeing that strength?

Is that industrial side more isolated on China? Are those correlated at all? Or was that kind of broad based strength across the different geos?

Derek, CFO, Allegro Microsystems: Tom, it was fairly broad based. A lot of it was other Asia, which is places like Taiwan, a lot of it’s data center. In fact, China, our industrial business in China is a relatively small piece of the overall business. So it was Europe, it was The Americas in some places. Data center really led the strength in terms of dollars.

Mike can give some examples of what we’re selling into the data center, but it was data center, a small resurgence in clean energy, and then an uptick in robotics and automation. And most of that is actually in other Asia.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems1: Helpful. And then when I look at the e mobility versus your other auto businesses, there’s a pretty big divergence over the last couple of quarters where you’re seeing kind of mid teens growth on the e mobility side and then some declines in your more star tracking business. When you look at what’s growing within that e mobility bucket, is that related to EVs more specifically? Just because like when you look broadly right now, you’re seeing some news around potentially EV credits, some pull forwards there being a bit better. Like could you help me understand how much of that’s being driven by EV?

And like do you have any fears around any sort of order patterns changing just because you’re having some change in the rules? Thank you.

Mike Dude, President and CEO, Allegro Microsystems: Yes, so we’re pleased to see the strong growth rates in our eMobility business. That’s what we want to see. And just as a reminder for everyone, in our eMobility business, which includes ADAS and EV areas of the automotive sector, most of our dollars in that space come more from the ADAS side of the application space. So when we see growth in e mobility, there’s often a decent balance of growth in the ADAS portion of the business, as well as the EV portion of the business. A lot of the growth in EV comes from new wins.

So we continue to secure new wins both in ADAS and EV. So as we look at that e mobility number, we won’t split out the actual numbers between ADAS and XEV, but the majority would be coming from ADAS, and we see a robust future for the XEV dollars that we have growing as well.

Derek, CFO, Allegro Microsystems: And Tom, in terms of The US changes in regulation, one data point I’ve given in the past is currently today, about 15% of our sales are US, and The US is at about 10% adoption of ePureEV, it is hybrid in there as well. That means that US EV, pure EV, is about 1.5% of our total sales. So it’s not necessarily impactful, it’s great when it grows. And the other data point that you’ve probably seen is that S and P actually has EV in The United States growing as a percentage faster than many other regions except for Europe, because it’s coming off a very small number.

Mike Dude, President and CEO, Allegro Microsystems: Thank you.

Conference Operator: Thank you. Our next question comes from the line of Blayne Curtis of Jefferies. Your line is now open.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems2: Hey, good morning, guys. I was wondering on the e mobility side, you mentioned a few drivers in the script. Maybe you could just highlight as so terms of curious on the future drivers, you mentioned TMR pricing coming down. I know that’s kind of a more future one to insert that technology into auto. And then I don’t think I’ve heard gate drivers.

Can you maybe just walk us through some of the as you look out the next year or two, the timing of some of these kind of new products within e mobility?

Mike Dude, President and CEO, Allegro Microsystems: Yeah, I think thanks for the question, Blaine. I think I understand it. So, when we look at e mobility in general, what are some of the growth drivers? We continue to see increases in dollar content. We started talking about that in steering systems where we have fairly large chipsets across our different product areas in a steering system.

That’s now carrying over into braking systems, whereas previously there was a fairly small amount of semiconductor content in a braking system. They’re adopting more electric motors and other things in the braking system, including higher safety standards that give us an increasing dollar content opportunity in the ADAS space. That’s already starting to unfold and has many years to come. When we think more about in the EV space, our number one area of growth there is in the current sensor space. And we’ve had those products for a long time.

We’re leaders in that space. But here is where our isolated gate drivers come into play driving a large SAM expansion and really some strong growth opportunities as we move forward. As a reminder with that business, when we bought it, the first products to go to market were driving gallium nitride transistors and has a lower market penetration than silicon carbide, which is why in the prepared remarks, we were intentional in calling out the fact that we are now broadly sampling our silicon carbide based isolated gate drivers. That’s where most of the SAM is. We have strong resonance with customers.

Pretty much, I would say the majority of that business being in the EV space, but a close second to that is activity in the data center space. So we’re feeling good about the isolated gate drivers in terms of the uplift we’ll see both in EVs and also in the industrial and data center space.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems2: I do want to ask you on the data center because that was a segment you broke out a while back and it kind of fell off as spending the data center went down. You mentioned a few times, is within that industrial other, has data center become more material? Or is it the largest segment? Maybe kind of I think someone asked this before, but in terms of this industrial business that have gone up a bunch, can you just walk us through maybe what are the some of the bigger segments within that?

Mike Dude, President and CEO, Allegro Microsystems: Yes, maybe I’ll just talk directionally. But we had a robust data center business that certainly got caught up in the inventory cycle. What’s most promising to me now as we’re coming out of the cycle, not only are the fan driver ICs that we’ve been talking about for years and really that we’ve been successful with for years coming back in a robust way, but now we have a lot more of our current sensors in the power supplies in the data center, so we’ve expanded our dollar content footprint. And then the next chapter in that story is the one I just spoke of where the isolated gate drivers will offer up another dollar content expansion in the data center. So, we believe it’s a key strategic area for us in terms of future growth, and we’ll continue to highlight it and inform you how it’s going in future calls.

Vivek Arya, Analyst, Bank of America Securities: Thanks.

Conference Operator: Thank you. Our next call comes from the line of Vijay Rakesh from Mizuho. Your line is now open.

Analyst: Yeah, hi, Mike and Doug. Just a quick question, just to follow-up on Blaine’s question. When you look at the e mobility side, I know you’ve kind of laid out the different products that are driving it. Can you also give us some color on what as you look at your traction XTB in China and APAC, how the customer pipeline looks like? What the big OEMs, where are you seeing increased penetration and where are the big wins that you’re seeing across APAC, China, etcetera?

And what the complete landscape looks like? And I have a follow-up. Thanks.

Mike Dude, President and CEO, Allegro Microsystems: Yeah, thanks Jay. I can’t really talk in-depth about OEM activity. They frown upon that or sometimes we’re contractually not allowed. But what I can say is that in recent quarters, I actually went to the APAC region, signed an important development agreement for a next generation current sensor in very popular EV. And this is the type of activity we have with a lot of our partners where we are bringing innovative solutions to the table and becoming a partner of choice.

In China, I already mentioned a sizable win in an inverter with a local China OEM. In the e mobility space in China, we did actually secure a sizable number of wins across numerous OEMs in China, and they’re all local OEMs. The activity we’re seeing on a design win perspective is with these local OEMs providing vehicles to the local China market. And then if we expand it to Japan, we’ve always had a very robust e mobility and EV story in Japan. It’s a good opportunity to remind everyone we actually have a solution set in terms of products for an electrified powertrain where we have significant dollar content in a hybrid and a battery EV.

In Japan, we’re having great success on the hybrid side of things with strong dollar content and market share in some of those EV systems.

Analyst: Got it. And then on your China for China strategy, does that support all your China revenues now? And are the margins there attractive with the China for China allowing you the 75% drop through that Derek mentioned? Thanks.

Mike Dude, President and CEO, Allegro Microsystems: Yeah, so the in China for China, like I said, strong resonance with customers. It’s gonna be a significant amount of work to roll out our products to run on the China for China supply chain. And what I mean by that as an analog mixed signal company, we have lots of product SKUs that we need to move over and we’re in the process of doing that. I will say that when we work with vendors in China, there’s two things going on. They’re actively pursuing our business and I think the cost base for producing semis in China is a bit lower than other regions of the world.

So the way I look at it, what we find is a cost environment that allows us to compete better in China. And I wouldn’t start talking about it at China being an area of margin uplift for the company, but through the China for China supply chain, it’s an important part of us staying competitive in China while sustaining margins.

Analyst: Got it. Thank you.

Conference Operator: Thank you. Our next question comes from the line of Tim Arcuri from UBS. Your line is now open.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems3: Thanks a lot. So Derek, gross leverage is down to about 2x for September based on your guidance. So when will capital deployment shift from debt pay down to capital return, maybe some share repo? Basically, the question is kind of like, when do you consider the balance sheet to be fixed and you’re kind of happy with it?

Derek, CFO, Allegro Microsystems: Yeah, right now, the most accretive thing we can do is continue to repay debt. And so we just made another $25,000,000 payment this morning. So we’re not worried about the leverage level per se, but it happens to be the most accretive thing we can do right now and the debt markets are available for us if we chose to do something else. In terms of capital deployment, our CapEx is down to below 5% of sales. It will continue there as gone through the investment cycle the last couple of years.

We will continue to invest organically in R and D and sales where we think that makes sense in the high growth areas. We continue to look at M and A that makes sense. Don’t expect to do anything soon. And then in terms of capital returns, we don’t plan to do a dividend anytime soon. We did do a share buyback from Sanket last summer as anyone knows, but that was for a specific reason to return capital.

And it was structured such that it was really favorable to Allegro shareholders. And right now there’s no plans for any additional broad based share buybacks.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems3: Okay, thanks. And then I also wanted to ask on China for China. I think you are getting chips from SMIC maybe at the end of this year. I think you’ve taped out, I don’t know, maybe ten, fifteen products in that fab. And then you’re taking wafers from other existing fabs and you’re routing them through OSAT in China.

So can you just talk about like, is that on track with SMIC? And does that change your competitive position in China? I know only you report 26% or mid-20s revenue into China roughly and only I think only about half that remains in China. But does the China for China like, is it on track and do you see it changing your competitive balance in China? Thanks.

Mike Dude, President and CEO, Allegro Microsystems: It is on track and we do believe it changes our competitive positioning. When it comes to wafer technology transfers, they take a long time and they are progressing. What’s interesting, you hear from a lot of companies in the world that we all need to move at China speed. What that’s turned into for some companies, they wanted to jump right to exercising our China back end using wafers from whatever source the wafers may come from, meaning they don’t need to come from China those wafers. So we’re seeing an increase in the number of customers wanting to exercise the back end, and that’s what’s actually happening right now as we sample and start to ramp with more customers with our CFC supply chain.

There is value even in just the back end only part of the supply chain. But yes, to answer your question, we feel like it’s going well and differentiating our business in China.

Gary Mobley, Analyst, Loop Capital: Okay, thank you.

Conference Operator: Thank you. Our next question comes from the line of Nicole Kuzhikov from Morgan Stanley. Your line is now open. Nicole Kujicov, your line is now open.

Participant: Sorry. This is Joe Moore. I’m not there might be some confusion. Can you hear me?

Conference Operator: Yes. Your line is now open.

Participant: Okay. Sorry. I was gonna dial in a different just trying to find. I wanna ask about OpEx. You know, I think your long term plan is 26% of sales.

As your revenue accelerates, do you get there quicker? Do you use that opportunity to invest a little bit more in some of these new markets? Just how do I think about OpEx trajectory?

Derek, CFO, Allegro Microsystems: Yes. Good morning. Thank you for the question. This is Derek. So what you’ve seen over the last two point five years is SG and A has been about flat.

So we’ve been able to offset inflation with doing things like moving a lot of our functions to our new shared services center in The Philippines. And we’ve continued to get good leverage there, and that’s also with 70% of our customers in that region. So it’s also enhanced our customer service, enhanced our team service. We’ll continue to find ways to offset inflation in SG and A with cost reduction opportunities. We will invest though in sales in certain regions and R and D, but I would call that an allocation.

So you’re not gonna see a step up in OpEx. So even at billion dollar levels like we were at two years ago, OpEx is at the same level. So the percentage does get a lot better. You will not see a material step up in OpEx dollars. What we will do is reallocate dollars within OpEx to fast growing strategic areas.

Participant: Okay, that’s helpful. Thank you. And then with regards to China, I know the question has been asked. But in terms of building a pipeline there, can you talk about what that’s like? Do you if obviously you have differentiated technology, but where there’s a tie, do they favor European suppliers over American suppliers?

And do you see any prospect for sort of China organically doing what you guys do on the semi side? Thank you.

Mike Dude, President and CEO, Allegro Microsystems: Yeah, thanks, Joe. So, as I mentioned, we continue to demonstrate our ability to win in China. We had a significant number of design wins this quarter. I want to be clear, as I stated earlier, there is increasing competition in China. There are attempts to localize all kinds of semis in China.

And our strategy to combat that is to continue to differentiate, to have that type of product that can save our customers money at the system level, so that we’re not embroiled in head to head, pin for pin, price for price battles in China every time we try to grow the funnel. Right now it’s gonna be a decade long strategic play. And right now we’re feeling good about where we are both in terms of present day design funnel, but also in terms of the innovations we’re bringing forward for the future.

Participant: Great. Thank you very much.

Conference Operator: Thank you. And just as a reminder, if you’d like to ask our speakers a question, please press 11 on your telephone and wait for your name to be announced. Our next question comes from the line of Joshua Buckhalter from TD and Cohen. Your line is now open.

Participant: Hey, guys. Thank you for taking my question. I wanted to ask about current sensing. So it seemed like in the prepared remarks, maybe I’m overthinking this, but your confidence in the near to medium term contribution from current sensors in autos has increased. It seems like it’s a little early for the TMR IP that you acquired for Crocus to be impacting the auto market.

Is this primarily for hall effect sensors or your legacy GMR sensors? Can you maybe elaborate on what’s driving the near to medium term current sensing side? Thank you.

Mike Dude, President and CEO, Allegro Microsystems: Thanks, Josh. So, we feel very good about our current sensor roadmap. To answer your question directly, the ICs I spoke about in my prepared remarks are using Hall effect technology. There’s lots of reasons for that. We live in an R and D world where it does take a few years to develop a custom product for an application.

So, these products were started roughly two years ago. That being said, as we look at our current sensor roadmap going forward, we’re pivoting much more strongly to TMR. We have product sampling to customers that have much better signal to noise ratios, much higher bandwidth, and we’ve been quite pleased with the progression at an R and D level and from customer response level when it comes to the customer feedback for these upcoming TMRICs.

Participant: Got it. Thank you for the color there. And then I wanted to ask about the legacy auto business. So if I’m backing the numbers, I think the non e mobility auto revenue is down sort of high singles, low double digits sequentially and year over year. Was that some of the inventory dynamic that Derek discussed in his prepared remarks?

Anything else going on there? How should we is that business sort of stabilized or is that just at the point where e mobility is so much greater as a portion of the mix that it should be flat to down here? Thank you.

Mike Dude, President and CEO, Allegro Microsystems: Yeah, Josh, I think there that you nailed it with your first comment. I do think that there’s an inventory component to the numbers outside of e mobility and automotive. They’re small numbers. You’ll see our Japan number quarter over quarter is not robust either. We just believe that’s timing of purchases.

There’s no longer term signal that’s coming out of the quarter over quarters in either that other automotive business or in Japan, both should be fine.

Participant: Got it. Thank you.

Conference Operator: At this time, I’m showing no further questions in the queue. I would now like to turn it back over to Jaylene for closing remarks.

Jaylene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems: Thank you, Haley. We appreciate you taking the time to join us. This concludes this morning’s conference call.

Conference Operator: Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.

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