Earnings call transcript: Allegro Microsystems Q3 2025 misses EPS forecast

Allegro (WA:ALEP) Microsystems reported its financial results for the third quarter of fiscal year 2025, revealing a miss on its earnings per share (EPS) forecast. The company posted an EPS of $0.07, below the forecasted $0.0644. Revenue came in at $178 million, slightly above the expected $176.36 million. Despite the revenue beat, the stock price fell by 4.2% in pre-market trading, reflecting investor concerns over the earnings miss and a challenging market environment.

Key Takeaways

• Allegro Microsystems’ Q3 EPS of $0.07 missed the forecast.
• Revenue slightly exceeded expectations at $178 million.
• Stock price dropped by 4.2% in pre-market trading.
• Automotive sales declined significantly year-over-year.
• The company is focusing on cost optimization and new product introductions.

Company Performance

Allegro Microsystems faced a challenging third quarter, with sales declining both sequentially and year-over-year. Automotive sales, a significant segment for Allegro, fell 33% compared to the same period last year. However, the company has been proactive in its approach, doubling new product introductions over the past two years and focusing on innovation in automotive and industrial applications.

Financial Highlights

• Revenue: $178 million (-5% sequentially, -30% YoY)
• Earnings per share: $0.07 (compared to a forecast of $0.0644)
• Gross margin: 49.1%
• Operating margin: 10.8%
• Automotive sales: $130 million (-8% sequentially, -33% YoY)
• Industrial and other sales: $48 million (+5% sequentially, -21% YoY)
• Cash position: $149 million

Earnings vs. Forecast

Allegro Microsystems’ EPS of $0.07 fell short of the forecasted $0.0644, marking a minor miss. Revenue slightly exceeded expectations at $178 million versus the forecast of $176.36 million. Despite this revenue beat, the earnings miss and declining automotive sales likely contributed to the negative market reaction.

Market Reaction

Following the earnings release, Allegro Microsystems’ stock fell by 4.2% in pre-market trading. The stock’s performance reflects investor concerns over the earnings miss and broader market conditions. Allegro’s stock remains within its 52-week range, but the decline highlights market sensitivity to earnings performance and sector challenges.

Outlook & Guidance

Looking ahead, Allegro projects Q4 2025 sales between $180 million and $190 million, with a gross margin of 46-48%. The company expects non-GAAP EPS to range from $0.03 to $0.07. Allegro is optimistic about inventory normalization and reports that bookings are up 50% year-over-year, with a book-to-bill ratio above 1.

Executive Commentary

"We believe Allegro is poised for significant value creation," stated Vineet Naghawala, CEO. He emphasized the company’s progress in reducing inventory levels and highlighted innovation as a core value. The focus on new product development and market adaptation is central to Allegro’s strategy moving forward.

Q&A

During the earnings call, analysts inquired about inventory levels in the automotive sector and the anticipated gross margin headwinds in Q4. Discussions also covered pricing dynamics and regional market variations, providing insight into Allegro’s strategic priorities.

Risks and Challenges

• Declining automotive sales pose a challenge to revenue growth.
• Macroeconomic pressures could impact market demand.
• Supply chain disruptions may affect product availability.
• Competitive pressures in the semiconductor industry remain significant.
• Currency fluctuations could influence financial performance.

Full transcript - Allegro Microsystems Inc (NASDAQ:ALGM) Q3 2025:

Kevin, Conference Call Operator: Good morning, and welcome to Allegro Microsystems Third Quarter Fiscal 2025 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. Session. Please be advised today’s conference is being recorded.

I would now like to hand the conference over to Julie Hoover, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Julie Hoover, Vice President, Investor Relations and Corporate Communications, Allegro Microsystems: Thank you, Kevin. Good morning and thank you for joining us today to discuss Allegro’s 3rd fiscal quarter 2025 results. I’m joined today by Allegro’s President and Chief Executive Officer, Vineet Naghawala and Allegro’s Chief Financial Officer, Derek Dantilio. They will provide highlights of our business, review our quarterly financial performance and share our Q4 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 to differ 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 Q3 of fiscal 2025 and in our most recent periodic filings and other filings with the Securities and Exchange Commissions. 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, Vineet Nargawala. Vineet?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Thank you, Jalene, and good morning and thank you for joining our Q3 fiscal year 2025 conference call. We delivered on our commitments with 3rd quarter sales of $178,000,000 and non GAAP EPS of $0.07 both above the midpoint of our guidance. Beyond that, we continue to see positive trends across a number of leading indicators in Q3. Increased in quarter orders, which is an indication of lower channel inventory, cancellations have largely abated and bookings are the highest they’ve been in the past 8 quarters and up 50% year over year. In addition, we continue to make good progress on the localization of our supply chain in China.

We have begun shipping from our local OSAT partners and we expect volumes to expand throughout the calendar year. We continue to make progress reducing inventory in direct and distribution channels. And as we enter the 2025 calendar year, industry estimates project automotive production to be flat and we are encouraged by the projections for continued double digit growth in XEVs and ADAS adoption. Allegro’s content is meaningfully higher in hybrids and BEVs, which enables us to grow even if there is no growth in auto production. In our industrial and other end markets, we’re encouraged by increasing signs of activity and we are cautiously optimistic that an easing monetary and regulatory environment could fuel a demand recovery later in the year.

I will now discuss key product highlights and achievements in the quarter. Innovation with purpose is a core value and integral to serving our customers. 1 of the most powerful ways that we meet and exceed our customers’ expectations is by addressing the design challenges through new product innovations. And we have doubled the number of new product introductions over the past 2 years. In the quarter, we further strengthened our magnetic sensing portfolio with a slew of new and innovative new products, including new inductive position sensors featuring integrated high accuracy and advanced diagnostics that perform consistently across a wide temperature range and excel in noisy environments.

Our newest sensors are ideal for motor position sensing in demanding applications such as XCV traction motors, steering and braking systems as well as robotics. Additionally, our new micro power magnetic switches and latches are redefining position sensing by using 50% less power than existing solutions. These products open up new markets for battery powered applications in IoT, home automation and consumer applications. And earlier this month, we announced a fully integrated current sensor IC offering the industry’s fastest response time for protection of wideband gap SiC and GaN devices. Our innovative packaging enables a product which is 5 times faster and 40% smaller than existing solutions.

This offers unparalleled space savings and protection of expensive electronics in solar energy equipment, AI and cloud data servers, industrial machinery and XEV powertrain systems. Our technology leadership also extends to power applications that leverage our automotive grade technology. In the quarter, while at Elektronika in Germany, we introduced a groundbreaking series of power products poised to redefine performance and efficiency across the landscape, including cutting edge 48 volt motor drivers featuring a code free industrial product and an automotive SoC solution designed to address the thermal management needs of hybrid electric vehicles and AI data service. We were honored to receive a best in show award from Embedded Computing Design for the solution. Complementing these new motor drivers, we also introduced a 48 volt pre regulator designed for superior EMI performance in dual voltage hybrid electric vehicles.

Our ever expanding portfolio of 48 volt solutions positions us well to support the transition to 48 volt architectures in automotive and industrial markets. Our focus on innovation and the increasing velocity of new product introductions is further enabling design win momentum across our strategic focus areas. And this quarter, we continued our winning ways across key new opportunities. We secured multiple wins leveraging our power and steering power and sensing solutions with a top Chinese OEM. This included multipart wins for steering, electrified powertrain and in cabin applications.

Our power motor solution secured multiple wins with customers in Taiwan, China and Japan for data center cooling applications. Our high voltage isolated gate drivers continue to gain traction in the market, garnering multiple wins across many industrial applications, especially clean energy and automation. And finally, our TMR solutions continue to gain momentum securing wins in smart metering and medical applications. I will end by thanking our teams around the globe who are embodying our values while executing our strategies and going above and beyond to serve our customers. I’ll now turn the call over to Derek to review the Q3 financial results and provide an outlook for the Q4.

Derek?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Thank you, Vinit, and good morning, everyone. Starting with a summary of our Q3 financial results. Sales were $178,000,000 and non GAAP earnings per share was $0.07 both at the high end of our guidance range. Gross margin was 49.1%, operating margin was 10.8% and adjusted EBITDA was 17% of sales. Total (EPA:TTEF) Q3 sales declined 5% sequentially and 30% year over year.

Sales to our automotive customers were $130,000,000 a decline of 8% sequentially, led by expected declines in the U. S. As our customers continue to reduce inventories at their year ends. Auto sales declined 33% year over year. Within auto sales were 73% of total Q3 sales and eMobility sales were $63,000,000 a decrease of 12% sequentially and represented 48% of total auto sales.

Industrial and other sales were $48,000,000 increasing by another 5% sequentially, largely due to growth in data center and medical. Industrial and other sales declined 21% year over year. Sales through our distribution channel were $94,000,000 a decline of 2% sequentially and represented 53% of Q3 sales. POS was up quarter over quarter and we continue to work with our distribution partners to reduce channel inventory levels. From a product perspective, magnetic sensor sales were $114,000,000 declining 12% sequentially and represented 64% of Q3 sales.

Sales of our power products were $64,000,000 increasing 9% sequentially. Sales by geography were again relatively well balanced with 28% of sales in China, 22% in the rest of Asia, 21% in Japan, 15% in Europe and 14% in the Americas. Now turning to Q3 profitability. Gross margin was 49.1 percent and operating expenses were $68,000,000 Operating margin was 10.8% compared to 11.7% in Q2 and 27% a year ago. The effective tax rate for the quarter was a benefit of 3% and our full year effective tax rate is projected to be 3%.

This favorable tax rate is driven by research and development credits. The 3rd quarter diluted share count was 184,000,000 shares and net income was $13,000,000 or $0.07 per diluted share. Moving on to the balance sheet and cash flow. We ended Q3 with cash of $149,000,000 and in the quarter we made another voluntary principal payment on our term loan of $25,000,000 bringing the balance to $375,000,000 Cash flow from operations was an outflow of $8,000,000 as we continue to build strategic wafer and die bank and CapEx was $14,000,000 in the quarter. We now expect CapEx for FY 2025 to be approximately 6% of sales.

From a working capital perspective, DSO was 43 days and inventory days were 182 days. I’ll now turn to our Q4 2025 outlook. We expect 4th quarter sales to be in the range of $180,000,000 to $190,000,000 or up 4% sequentially at the midpoint. Additionally, we expect the following all on a non GAAP basis. We expect gross margin to be between 46% and 48%.

Our Q4 guidance range for gross margin contemplates the expected impact of annual pricing agreements ahead of cost reductions, which typically take 1 to 2 quarters to cycle through inventory. This range also includes higher estimated excess inventory and capacity charges resulting from adjusted production levels in the quarter. Taken together, these items are expected to contribute in about 200 basis point headwind to our Q4 gross margins. Also as a reminder, OpEx is expected to increase by about 5% due to annual payroll tax resets in the March quarter. We expect interest expense to be approximately $6,000,000 We expect our tax rate to be 3% and the weighted average diluted share count to be 185,000,000 shares.

As a result, we expect non GAAP EPS to be between $0.03 $0.07 per share. Before I turn the call back to Vineet, I’d like to review a number of actions we have taken and continue to take to optimize our cost structure and improve profitability and cash flow. We continue to align our back end production levels to anticipated demand, while balancing that with building die bank and high running finished goods to be in a position to maintain excellent customer service levels. As Vineet mentioned, we are making good progress advancing our China for China strategy with local fab qualification in process and shipments from local OSATs already underway. We also continue to reposition our resources to optimize our cost structure and capture high growth opportunities closer to our customers.

We are leveraging global design and shared services centers and using AI and automation to enhance efficiency across the company. We also initiated a repricing of our term loan and we expect the interest rate to decline by another 25 basis points to SOFR plus 200 basis points. And finally, we plan to make another voluntary debt payment of $30,000,000 in Q4. We expect the repricing and planned debt payment to result in annual interest savings of approximately $3,000,000 We believe the actions we are taking will position us well for significant earnings growth as the cycle improves. Now I’ll turn the call back over to Vineet for some closing comments.

Vineet?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Thanks, Derek. Before we open the call for Q and A, I want to leave you with 3 key thoughts. First, we have a strong foundation and a clear strategic focus. We continue to be a market leader in magnetic sensing and possess deep expertise in targeted power ICs. 2nd, we’re encouraged by the progress we’ve made in the Q3 as we delivered on our commitments with results about the midpoint of our guidance.

We’re laser focused on executing our product and technology roadmap with a record number of new product introductions and securing important customer wins with our sensing and power solutions. 3rd, we believe Allegro is poised for significant value creation. We’ve been serving the auto and industrial markets for over 3 decades and we see multiple catalysts for long term growth in these markets as they are transformed by the megatrends of electrification and automation. We’ve taken advantage of the down cycle to expand our portfolio of innovative solutions and reposition our business. This along with the signs of an improving cycle gives us the confidence in our ability to outgrow our served markets, deliver a very attractive financial profile and create an opportunity for significant shareholder returns.

Now I will turn the call over to Jalene.

Julie Hoover, Vice President, Investor Relations and Corporate Communications, Allegro Microsystems: Thank you, Vineeth. This concludes management’s prepared remarks. Before we open the call for your questions, I’d like to share our 4th fiscal quarter conference line up with you. We will attend Wolfe’s Semiconductor Conference on February 12 at the Kimberly Hotel in New York, Morgan Stanley (NYSE:MS)’s TMT Conference at the Palace Hotel in Consumer’s is still on March 4 and also participate virtually in Loop Capital’s 6th Annual Investor Conference on March 10. We will now open the call for your questions.

Kevin, please review Q and A instructions.

Kevin, Conference Call Operator: Thank you. Our first question comes from Joe Cataroche with Wells Fargo (NYSE:WFC). Your line is open.

Joe Cataroche, Analyst, Wells Fargo: Yes. Thanks for taking the questions. Maybe first is just to kind of unpack the gross margin guidance a little bit for the March quarter. How should we think about the mix of the impact from under utilization costs as well as the pricing agreements and just the timing there? And then do we think about the March quarter as being kind of the bottom for gross margin this year for the calendar year?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Hi, Joe. Good morning. This is Derek. Yes, so the 200 basis points, the headwind that I talked about and expected in Q4 includes all three of those things. It includes the pricing resets ahead of the cost reductions that cycle through inventory.

It includes some minor amounts of excess inventory charges and it does include capacity charges as we dial down some production in Q4. And if you look back a couple of years ago, the same dynamic happened in 2022 where we had pricing increases ahead of the cost reset, so we had a higher gross margin. To answer your question about the March, I would take those things out. These are specific to the March quarter and rolling that forward to June. I’m not going to give guidance for the June quarter, but I feel pretty good that the March quarter will be a trough in gross margin percentages.

Joe Cataroche, Analyst, Wells Fargo: Okay. That’s helpful. And then I guess as we just kind of look forward in demand and you’re talking I can appreciate you’re talking about continue to work down inventory, but I guess like how do you view the shape up for the calendar year and given that you’re talking about some of your end markets growing low double digits or double digits for ADAS and EV production? Do we start to shift to better than in demand here as we look beyond the March quarter?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Hey, Joe, this is Vinit. So one step at a time, right? As I said in my prepared remarks, we’re really focused on the leading indicators that start to give us some conviction. And we see an increase in within the quarter orders. That says that there are pockets of inventory gaps that are starting to merge in the channel.

Our cancellations are at an all time low and bookings are the highest they’ve been in the past 8 quarters and they’re up 50% year over year. So these are the leading indicators that Derek and I look at to say what should we expect over the next quarter or 2. And then over the mid to long term or over the mid term, really we’re looking at what are the projections for automotive growth, what are the projections for XEV production. And I think across the board, those signs are right now encouraging, right? So we’re not guiding for next quarter, but at least the indicators that we look at are all pointing in the right direction.

Various, Analysts: Thank you.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Thomas O’Malley with Barclays (LON:BARC). Your line is open.

Thomas O’Malley, Analyst, Barclays: Hey, guys. Thanks for taking my questions. I have a couple of housekeeping ones and then a broader one. Into the March quarter, could you give us the split between your expectations between auto and industrial and other?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Tom, I won’t give it to you by market necessarily, but I can give you a little bit of regional color. So as you might expect, we expect China to be down single digits in the March quarter with the Lunar New Year. But the good news about our business model being very well geographically balanced, we’re still guiding up 4% at the midpoint of our guidance. And within that, we do expect North America to have a nice rebound as well after coming off of a pretty severe inventory decline here in Q4 Q3.

Thomas O’Malley, Analyst, Barclays: Okay. And if I look at your XEV business, you said it was 48% of revenue. This is the first time since kind of really like June of ’twenty three, I guess. There’s been a couple of times along the way, but you’ve seen a crossover of the other auto business or more of like the SAR tracking auto business get larger. When you looked over the next 4 quarters, would you expect there to be a crossover again where you see more growth on that XEB side?

Or do you think that the trajectory of this year is really growth fueled by the broad based bucket? Just because it looks as though the faster growing stuff is actually down a bit more year over year at this point.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes. Hey, Tom, this is Vinit. So just a correction first. We talk about our e mobility business, which is a combination of our XCV products as well as the products that go into ADAS applications. And that collectively was down a little bit this quarter.

Again, it’s a function of some of the inventory management that is happening in North America and a little bit in Europe, okay? When we take a step back and look at what our business looks like from a mid- to long term standpoint, it’s really our design wins that guide us. And I’ve said this in the past, more than 70%, 75% of our design wins in automotive are in the field of e mobility. So that gives us a lot of conviction that that’s we are aligned to the fastest growing areas within automotive. And we certainly expect that trend to continue as we move forward here in the next few quarters.

So I would just regard this crossover as you call it as a blip just for this quarter and really an artifact of some of the inventory management that’s happening.

Thomas O’Malley, Analyst, Barclays: Got you. And then if I can just sneak one more. And if you look at the trajectory over the last three quarters, the industrial business has tracked pretty closely with your exposure to China. In June, there was a very large step a very large step down, China stepped down from 27 to 2019. You had a really big uptick in September, China stepped up from 19 to 26.

And now with auto down, you’re actually seeing a little bit of China growth. Could you help us understand like as a percentage of your revenue in industrial, is China a bit more outsized there versus the rest

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: of the business? Thank you.

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Tom, this is Derek. Not necessarily. China is not particularly outsized. There’s some solar business that’s been pretty muted that’s in China. The data center business, in fact, most of it’s outside of China in places like Japan and Taiwan.

And there’s a fair amount of industrial in Europe as well. So where we’ve seen the strength in industrial over the last couple of quarters has been our new business at medical that came with TMR. That’s the patches for the continuous glucose monitoring. That’s an exciting new business for us. In this quarter, we saw some strength in data center.

In the September quarter, we did see a seasonality of consumer products that’s China related. But in this quarter here, it was really data center and medical. And medical continues to be an exciting area for us. And as Vineet mentioned, many of our industrial markets have continued to sort of bounce along the bottom. We are encouraged by some of these what I’ll call green shoots and we’re watching that very closely and we’re focused on the industrial areas as well.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Gary Mobley with Loop Capital. Your line is open.

Various, Analysts: Hi, everybody. Thanks for taking my question. I want to ask just a very, I guess, direct and focused question. 1, do you believe in S and P Mobility’s forecast of flat light vehicle production in calendar year 2025? And given where your inventory levels are in the automotive channel, do you think you can grow in line or better than light vehicle production unit growth in 2025?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Hey, Gary, this is Vinit. You broke up a little bit, but I think I got the gist of your question. So I think the first question was do we believe the S and P forecast for 2025? It’s one data point. We have direct conversations with OEMs.

We have direct conversations with the tiers and contract manufacturers that serve them. And so we sort of triangulate into what we think is the right estimate with some guard bands and then we have our own planning scenarios around it. As we said before, we actually don’t need auto production to grow for us to grow because we see the tailwinds from content growth in XEVs, in increased ADAS penetration. And frankly, even the other side of our business, which is largely in cabin, whether it’s thermal management, whether it’s LED drivers, whether it’s switch and latch for a variety of applications in the automobile. All of that content is growing as consumers seek more tech heavy content within the cars.

So we feel really good about our ability to grow. And I’ll bring you back to the model that we put out. We should expect to see inventory digestion put aside, we should expect to see SAAR plus or production plus 7% to 10% growth. That’s our model and we feel really comfortable with that sort of growth going forward.

Vijay Rakesh, Analyst, Mizuho (NYSE:MFG): Okay. My follow-up, I want

Various, Analysts: to ask about pricing on both sides. So pricing to your customers, we think about that as being once a year distinct event or is it more dynamic real time adjustments and what sort of pricing trends are you seeing from your various foundry partners?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes, Gary, I’ll take the pricing question and I’ll have Derek talk a little bit about what we’re seeing from a cost trend standpoint. So pricing within our largest market, which is automotive, is back to what I would call normal pricing environment, right? And I think we’ve got there maybe 3 quarters, maybe 4 quarters ago. And by normal, what I mean is typically when you win a program, your pricing is high because volumes are low and as volumes ramp, you share some productivity with your customers and those are built into the program or long term agreement contracts. That tends to be in the 2% to 3% range, and we are back in that range across the majority of our automotive customer base and across the geographies.

Derek, do you want to talk a little bit about cost?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Sure, Gary. So as you know, wafers are our highest piece of the BOM and within cost of goods sold. We continue to negotiate and we have successfully negotiated price reductions on wafers and the trade off for that is volume. We give them more volume. So we’re building some strategic die bank and strategic wafer bank on our balance sheet.

And that’s okay because it’s pretty fungible downstream until it’s packaged and it can sit for a couple of years. So we’re okay with that. We’re good. We’re going to turn that pretty quickly. But we’re negotiating those costs down, but it takes 1 to 2 quarters for that to cycle into the P and L.

So we’ll start to see that benefit as we move into FY ’twenty six. And it’s not just wafers. We’re working with our OSATs. We’re using our own internal facility more efficiently and we continue to bring cost down across the hemp price.

Various, Analysts: Thank you both.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Chris Caso with Wolfe Research. Your line is open.

Various, Analysts: Yes, thank you. I guess just another question with regard to kind of pricing and margins. And it sounds like what you said was there was a 200 basis point impact from this pricing ahead of cost reduction and some of the other charges. I guess question 1 would be, are we do we expect that we recapture that as we go into the second half when the cost reductions come back? And then secondly, and perhaps more importantly, what do you think is the right gross margin structure for the company?

And coming out of the pandemic when prices were going up, perhaps that’s not the best way to look at it. What’s the right way to look at the company’s margin structure as we go forward?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Yes. So Chris, that 200 basis points, which equates to nearly $4,000,000 in total in Q4 here, that includes the pricing resets ahead of the cost reductions. That includes some obsolete inventory charges as well as capacity charges specific to Q4. So those items are specific to Q4. And to answer your question directly, the cost reductions that were negotiated and continuing to be negotiated will start to roll as a benefit in ’twenty six.

So some of that stuff will start to normalize and we continue to look for those cost reductions. Getting past this Q4, that 60% to 65% drop through that I’ve talked through in the past, that still holds pretty true and that’s actually held true since we’ve been a public company. If you look at it year over year, it’s been right in that 65% range. And that’s what we target is that 65% drop through. So long term targets haven’t changed 58%.

There’s a lot of work to get there. First step is get back to 50% pretty quickly, then back to the mid-50s and then head towards that long term target.

Various, Analysts: Okay, understood. As a follow-up, you had spoken, I think it was last spring where you had taken some price actions and I think at that time it was in the industrial business. There was some price support you provided to the channel to move some inventory. Has the pricing in that segment now normalized? And I guess our assumption at the time was that was sort of a one time short term thing in order to move some inventory.

With the channel business, what’s been the trend in pricing there?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Yes, Chris, I should clarify. That wasn’t a one time thing. I mean, in the channel, what happens is it’s real time pricing, right? So back in 2022, we had the same dynamic on the opposite end, meaning that pricing in the channel goes up immediately because it’s market based pricing and sort of off the shelf in many cases. So that pricing goes up and down pretty quickly with the market.

I started talking about exactly a year ago, not actually a year and a quarter ago in November, of what we started seeing pricing come down in our channel and that’s been ongoing for the better part of the year. The good news is that stabilized, right? And so usually when the cycle comes back, that’s where you start to see pricing stabilize and then pricing even start to increase when things get a bit tighter in the channel. That’s still our expectations.

Various, Analysts: Okay, got it. Thank you.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Quinn Bolton with Needham and Company. Your line is open.

Various, Analysts: Hey, Derek. I guess I

Chris Caso, Analyst, Wolfe Research: wanted to follow-up on the gross margin question. You’ve talked about the 65% incremental fall through for a while now and it sounds like that still holds. But I guess, obviously, you’re taking a step back in March. It sounds like some of that are charges like obsolete inventory. And so I guess if I looked at a 65% incremental fall through off the December base versus a 65% fall through from the March base, that’s a pretty different outlook.

And so I know you’re not guiding beyond the March quarter, but is there an opportunity at some point in calendar ’twenty five to see better than a 65% fall through as one you start to see these lower costs cycle through inventory. You obviously won’t have inventory charges I hope every quarter. It just kind of feels like if we’re only modeling 65% fall through off that March base, it’s a pretty big reset to margins throughout fiscal ’twenty six and probably into fiscal ’twenty seven. So just wondering if we might be able to make back some of that margin over the next several quarters?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Yes. Quinn, that’s a good question. And that’s why I quantified the 200 basis point headwind for these quarter specific items, which is approximately $4,000,000 All else being equal, I don’t expect those to recur necessarily in the June quarter. So you should use a higher drop through for from March to June for your gross margins. I don’t expect those to recur.

Various, Analysts: Got it. Okay, great.

Chris Caso, Analyst, Wolfe Research: And then maybe just a sort of question what you’re seeing from customers. One of your peers Mobileye on their call this morning talked about given some of the slower growth in EVs, they’re seeing some customers reemphasize ICE vehicles that have just sort of obviously they’re ICE vehicles, not EVs. They also have perhaps lower ADAS content. Wondering if you’re seeing any of this kind of shift back to ICE vehicles with lower ADAS? And if so, does that have a what kind of impact might that have on your business over the next couple of years?

Or are you just not really seeing any major push to reemphasize ICE among your customer base?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Quinn, this is Vinay. I’ll take that. I just came back from meeting customers in North America, our customers in Detroit as well as the one large company in California. And I will tell you that in with our legacy customers, nobody is talking about introducing new ICE platforms. Now they might keep an existing ICE platform a little bit longer, but really in order to meet their own portfolio requirements and some of the emissions requirements globally, they are introducing more hybrid solutions.

And I think it’s a good reminder that for Allegro, the hybrid content is very similar to that on battery electric vehicles. We gain from really 2 bites of the apple, which is the ICE powertrain content as well as the electric content even if the battery size is smaller. You really still need all of the same sensing and power control modalities and products that you would in a full bev. So it still feels like people are moving forward with hybrid and battery electric programs. And the tech content regardless is continuing to be really high.

So nobody is going backwards in terms of the tech content, so we’re not really seeing it.

Chris Caso, Analyst, Wolfe Research: Thanks, Vadhi. Thank you, Derek.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Blayne Curtis with Jefferies. Your line is open.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Hey, guys. Thanks for taking my question.

Chris Caso, Analyst, Wolfe Research: I had 2. First, just going back into gross margin, I want to understand, obviously, you said higher underutilization charges. So, Derek, just what do you expect to do with absolute value of inventories with these moves that you made? Will that start to come down into March? And I’m just trying to use that as a gauge as the recovery into the next fiscal year.

I know you don’t want to give absolute numbers, but I also want to know is there any interplay between your different fab options that kind of lost track you went during the pandemic back to more polar because it ended up being cheaper. There was a storyline about using TSMC and UMC at one point to be cheaper. Can you just kind of level set us on that as well as it impacts your utilizations and whether there’s any swing factor there?

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: Yes, Blaine, good morning. It’s kind of a lot to unpack there. When I think about the gross margin interplay with inventory, so we do expect to continue to build a little bit of inventory at the wafer and die bank in the March quarter. And as I said, that’s the trade off for getting price reductions with our wafer fab. So that’s okay with us.

We will be bringing down our finished goods inventories and those are the high run of finished goods inventories that we’ve been building the last couple of quarters. And as a result, we adjust some of our assembly and test production in our back end facility and we’ll adjust cost as well. So that’s kind of some of the quarterly based items. In terms of the fabs that we use, about a little bit more than half is UMC. That hasn’t changed over the last couple of years.

Polar is about 35% of it and then TSMC is 10% or 12% and there’s another small one. But we’re also qualifying a fab in China. So we’ll continue to optimize our fab strategy based on quality, cost, technology and more increasingly geopolitics.

Joe Cataroche, Analyst, Wells Fargo: Perfect. And then I

Chris Caso, Analyst, Wolfe Research: wanted to ask you on bookings. You mentioned some improvement. You probably don’t want to give us book to bill, but kind of directionally just kind of trying to understand between these segments, auto and industrial, whether they’re above 1, like I guess kind of just any color you can provide as to where it is today?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes. Blayne, this is Vinit. So we as I said in my prepared remarks, we’re encouraged by what we’ve seen in our set of leading indicators, right? So increased within the quarter orders, cancellations at an all time low and then bookings have been at the highest level and up 50% year over year. Book to bill has stayed above 1 for a few months now, which again is very encouraging for us.

So we continue to build positive momentum. Again, we’re not calling it victory and not hanging up a mission accomplished flag, but certainly feels like we made a lot of progress in clearing things out. And my conversations with leadership across the OEMs is definitely indicating that we’re starting to see now healthy levels and maybe some pinch points from an inventory standpoint, and which is why we’ve heard on the side of caution and actually built up some additional die bank, some additional finish growth, which I think is going to serve us really well as and when the demand comes back.

Joe Cataroche, Analyst, Wells Fargo: Thanks.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh, Analyst, Mizuho: Yes. Hi. Just a quick question on the bookings. I saw you in December quarter bookings had a pretty nice pickup, 50% sequentially. Just wondering how that’s trending into March?

And also, if you can give some more color on the booking sale, is that more on the auto side? Is that spread out between auto, industrial? Thanks.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes. Sorry, Vijay. We’re not going to be able to provide more color than that. I will tell you it’s broad based, so that’s encouraging. And it’s just if you refer back to my prepared remarks, we are seeing encouraging signs in our Industrial business.

As I talk to customers, feels like automotive inventory is getting to healthy levels. Now I will tell you that maybe Europe continues to be an area of concern, where it’s going beyond just inventory digestion. There is enough news around what’s happening with OEMs and tiers in Europe, and so we’re watching that pretty carefully. Europe is one of our smallest geographic regions. So we’re not super exposed to it, but certainly what happens in Europe is important to us and we continue to win with the winners there in Europe.

And so we’re watching that space pretty carefully.

Vijay Rakesh, Analyst, Mizuho: Got it. And then on the gross margin side, can you walk us through just if you look out to the next 4 to 8 quarters, how this should play out between what are the puts and takes to it between pricing and inventory and utilization or demand, etcetera? Thanks.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes. Vijay, as I’ve answered

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: a couple of times, and Quinn asked a good question, there’s about 200 basis points of headwind specific to the March quarter. I don’t expect those to recur in the June quarter. So if you take those 200 basis points out, all else being equal, I’d expect the June quarter to be that much better. So the drop through from March to June will be better than the normal 65%. Going beyond that, the 60% to 65% drop through of variable contribution margin has held really true since we’ve been a public company and expect that to continue.

It might be better than that if we start to have some of those cost reductions come in quicker cycle through inventory. We start to see the pricing in the channel go up a little bit. Some of the new products Vineet talked about around TMR and some of the other interesting products have a higher ASP. Those are all tailwinds to potentially drive that 65% above that.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Got it. Thank you.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Joshua Buckhalter with TD Cowen. Your line is open.

Various, Analysts: Hey guys, thanks for squeezing me in. I wanted to follow-up on some of Vineet’s comments just now. So is it correct, it sounds like you think inventory levels in autos at your Tier 1 partners and OEMs is at levels where you want them to be and you no longer feel like you need to under ship anymore and it’s just waiting on end demand? Like anything, I guess, in fact, risk is more in the other direction that there’s too little than too much right now? I just want to just ask that one pretty directly.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Hey, Josh, Puneet here. So the second part of your question, I do think the risk is now more on hotspots and we’re seeing evidence of that with more sort of increased in quarter order activity. I’ll provide the analogy as such. We put out the fire, but there are still some embers from an inventory standpoint. So there are certain parts, certain customers that are still a little too hot, and we’re watching those very carefully.

But I would say on a broad level, we feel good about the progress we’ve made in helping our customers absorb the inventory. We’ve been pretty clear in past earnings calls as well as various investor conferences. We believe that our demand profile is intact. It’s just being fulfilled through inventory on hand. We’ve been watching our design wins, our secured programs, actual consumption levels.

And so that gives us pretty good conviction that as the inventory digestion gets completed, we’re going to start shipping into normal consumption. I would tell you that in certain regions, we already are, right? As we said last time, North America was lagging. We think this quarter has gone a long way in getting that right size. My conversations last week with customers indicated that we are at healthy levels.

I would say in most of the places, maybe a couple of hotspots. Europe continues to be an area we watch very carefully because the inventory situation there got compounded with sort of more structural issues in the auto sector there. But Asia continues to along really well for us.

Various, Analysts: Okay, got it. Thank you. And I guess just apologize for being the dead horse here on pricing. But I assume that there’s been no material change in the competitive environment that’s driving any of the incremental changes in pricing. You described it as back to normal.

I just wanted to check-in on the competitive front. And also ask, within your product portfolio, how much is current sensing contributing today? And it would just be helpful to hear an update on Crocus. Sorry, I snuck you in there. Bye.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes. So that’s like 3 questions, Josh. So we’ll you got to put a penny in the jar next time. So I think the in terms of new products, we don’t split out current sensing specifically, but I would tell you that we’ve got a lot of momentum, a lot of we’ve really built out the current sensing portfolio, everything from your standard haul to very high speed haul, we’ve got 5 megahertz and now 10 megahertz current sensor, different packages, different form factors and all with a view of serving every niche and every need from a customer standpoint. Our TMR business continues to grow really well.

We talked about the success in medical that’s expanding. We’ve qualified in automotive. We’ve got a lot of our leading customers now starting to test and sample TMR in their most demanding applications, including battery management systems, which is a new SAM for us. So feel really good about it. What is the first part of the question?

Pricing. On

Various, Analysts: Scott, any change in competitive environment in the legacy?

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: On the competitive environment. No. So we see the same set of competitors, Josh. In fact, we saw a really nice report coming out of one of our big investors who has done their own checks and it shows that we don’t really have any real competition in China. We are always paranoid and we continue to create more IP.

The tsunami of new products we’ve brought out in the last, call it, 3 to 6 quarters is really a testament to the hard work the team does every single day to meet customer needs and really out innovate our competition when it comes to our core markets.

Derek Dantilio, Chief Financial Officer, Allegro Microsystems: And I should clarify, Josh, the competition in China is still Western competition, right? That’s what I mean by that. We continue to win in China and having our China for China strategy has been really, really helpful. And even while we’ve done things like reposition our business, bring our OpEx down quarter over quarter, We’ve invested in research and development as Vineeth talked about, we taped out twice as many products as we ever have in the past. That’s all while having the lowest OpEx number in 2 years.

And really where it’s come out of is SG and A. We’ve optimized our SG and A structure. That’s the lowest it’s been in 3 years. So we’re continuing to invest in certain places, the high growth areas, the high growth products while optimizing our cost structure.

Various, Analysts: All right. Thanks guys. And noted on the penny, we’ll bring it next time. Bye bye.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Grant Jocelyn with UBS. Your line is open.

Joe Cataroche, Analyst, Wells Fargo: Hey, good morning guys. In the presentation, you called out industrial being led higher by medical and data center. But I was wondering if you could talk about what you’re seeing in your other industrial end markets like clean energy and broad markets. Are we seeing policy uncertainty or macro overhanging on clean energy and how would you characterize broad markets generally? Thanks.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Yes. So we are seeing good strength in medical, in our data center business. And remember data center is coming off historical lows, right? So really the only way it can go is up. We’re also seeing strength in the broad industrial base.

And again, when I say strength, it’s all relative. We are seeing increasing activity. We’re seeing encouraging signs more in quarter orders. Our clean energy business, which is largely solar, it’s still soft. And I don’t want to put it on policy uncertainty just yet.

I think we’re still dealing with over inventory in certain pockets. That’s an area that continues to be a sort of a frustrating area, not just for us, for a lot of the players in this arena where through the pandemic just a lot of inventory was built up. I would say on the whole, I think industrial segment will benefit from easing regulatory, easing monetary environment. And I say that globally, right? It’s not just a U.

S. Commentary. I’ll remind you that close to 80% of our sales are outside the U. S. So we are highly dependent on what happens in every part of the world when it comes to our industrial business.

Vijay Rakesh, Analyst, Mizuho: Thanks.

Kevin, Conference Call Operator: One moment for our next question. Our next question comes from Mark Lipacis with Evercore ISI. Your line is open.

Various, Analysts: Great. Thanks for taking my question. When you talk about the doubling of the product introductions over the past 2 years or 6 quarters, Can you just help us understand where are you in the revenue realization part of that? Maybe if you just step us through the design win process to when you start to recognize revenues from the new products and then when you really hit your stride with those and when do they start to really have a nice impact on the top line? Thank you.

Vineet Naghawala, President and Chief Executive Officer, Allegro Microsystems: Mark, thank you. Great question. And I’ll split it down by behavior in the automotive market versus the industrial markets. Automotive, as everybody knows, has tended to be long cycle. Those cycles are compressing.

But from the time we introduce a new product, we’re still looking at minimum of 2 years, sometimes 3 years to start up production with customers because once we introduce a product, there’s some concurrent sampling that happens, but really it starts happening in earnest. And typically, we are shipping to a tier or a contract manufacturer who does their own validation and then the OEM does their own validation. And typically, in automotive, you have to go through a summer cycle and a winter testing cycle. As I said before, cycles are compressing, but that still is holding true across legacy OEMs and some of the newer OEMs. So typically in automotive, you’re looking at 2 to 3 years from the time you introduce a product to start a production and then you really hit stride probably 4 to 5 years from the time you introduce the product to seeing peak revenue.

In the industrial side, it’s much shorter. Typically, it’s 12 months from the time we introduce a product to start a production, sometimes less, but typically it tends to be in that realm. What’s really important for us here is that, as Derek pointed out, we have maintained our investment in research and development and engineering. We’ve continued to expand our global design centers and we’ve really doubled down on the velocity of new products we’re bringing out, really trying to address every need that our customers have expressed within automotive and now we are creating more derivatives and spends for our industrial customers. So how we think about technology investment is we build a platform for automotive and then we take derivatives from that platform into our industrial sectors and sometimes our consumer sectors as well.

So hopefully that gives you a sense for how we think about our engineering. Very helpful. Thank you.

Kevin, Conference Call Operator: I’m not showing any further questions at this time. I’d like to turn the call back over to Jillian for any closing remarks.

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

Kevin, Conference Call Operator: Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day.

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