ALGM - NASDAQ

Good morning, and welcome to the Allegro MicroSystems Second Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Thank you, Corey. Good morning and thank you for joining us for today’s call to discuss Allegro’s second fiscal quarter 2025 results. I’m joined today by Allegro’s President and Chief Executive Officer, Vineet Nargolwala; and Allegro’s Chief Financial Officer, Derek D’Antilio. They will provide highlights of our business, review our quarterly financial performance and share our third quarter outlook. We will follow our prepared remarks with the Q&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. Reconciliations 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 second quarter of fiscal 2025 and in our most recent periodic or 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, Vineet Nargolwala. Vineet?

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our third fiscal quarter conference lineup with you. We are attending UBS's Global Technology Conference on December 3rd at the Phoenician Hotel in Scottsdale, Wells Fargo's 8th Annual TMT Summit at the Terrain Resort in Rancho Palos Verdes on December 4th and Barclays 22nd Annual Global Technology Conference at the Palace Hotel in San Francisco on December 12th. I would also like to direct you to an updated investor presentation located in the Events and Presentations section of the investor website section of our website. We will now open the call for your questions. Corey, please review Q&A instructions.

Thank you very much. [Operator Instructions] Our first call comes from Blayne Curtis of Jefferies. Blayne, you, line is open.

Hey, good morning and thanks for taking my question. Vineet, I just want to ask, obviously you had a very sharp correction in June. I think you felt comfortable at the time that that was such a big correction that you could kind of grow off of that, and you did in September, but then the sequential down again. So I'm just kind of curious, was that you're going to be back to kind of those June levels which you thought were way below where they should be. So I'm just kind of curious what changed? And can you walk us through also for December? I'm assuming a big part of that correction is auto, but industrial was up strongly. Is that back down in December as well?

Hey Blayne, this is Vineet. So thanks for the question. So our at midpoint, our guide for the December quarter will be higher than where we were in June. And when we looked at our trends back in that timeframe, really the biggest challenge was the inventory digestion. And as I said in my prepared remarks, we made some really good progress in bringing that down into normal levels. I will tell you that when I look at the automotive sector, we're seeing some great momentum in China. Our shipments or sales in China in the second quarter were up 54%, okay, and the inventory rebalancing is all behind us in China, and we see some great momentum there. Where we see still some lingering effects of the inventory digestion is North America and Europe, which has been compounded by further reduction in production totals by the North American OEMs and the European OEMs. So I think that's the new piece of data that we're layering in as we think about the next quarter.

Thanks. And then I just want to ask, you mentioned a gate driver win with a China OEM.

That's right.

Can you just expand on that? Obviously a new product for you, and there's a big discussion about Chinese silicon carbide. And is your gate driver paired with Chinese silicon carbide? I'm just trying to understand obviously there's a bundle situation for some of the vendors. You're kind of breaking that bundle with a better performing chip. Just kind of curious what drove that win and expand on maybe the gate driver pipeline?

Sure. Blayne. So the win was actually on our GaN isolated gate driver. And you're exactly right, we bring a unique value proposition with our isolated gate drivers where we combine essentially three functions into one chip. There is almost 30% to 35% space savings and overall system cost savings. And for OEMs who are really astute and are looking at ways to reduce overall system cost while also regaining flexibility and sourcing power as they look at different GaN FETs or silicon carbide FETs, our gate driver is a great option. And so we're getting some really good traction with our GaN drivers that have been released into the market, that win was related to that, and we'll be shortly sampling our silicon carbide drivers as well, which are – we've got a long line of customers waiting to sample that. Thank you for the question.

Thanks

Thank you. One moment for our next question. Our next question comes from Thomas O'Malley of Barclays. Thomas your line is open.

Good morning guys. Thanks for taking the question. Mine's a little bit broader. So if I look at just the general auto space from kind of calendar year 2021 on just before the pandemic and to today, like you've grown pretty much lock stop and barrel with, with the auto group. And if I look at 20, 24, obviously not everyone has reported yet, but it looks like you're seeing a much sharper correction than your peers this year where like just based on your guidance, you're kind of down 20-ish percent on the year versus the peer stuff that's just down modestly. So could you maybe just describe one, do you think that you are just earlier to the correction where you're taking this cut before others and have a little bit more of a lean supply chain given your product type and would see a recovery more quickly or maybe any sort of statistics around inventory work down or where the channel is today or where direct customers are today? That would explain that difference, I guess that's the first question.

Helpful. And can you just give us a metric on weeks of inventory at [indiscernible]? Like where is that normally? Where did that kind of peak and where is it now? And just kind of in line with that question, if things are more normalized, do you expect that kind of looking into the March and June quarter, obviously you're describing some seasonality in December that you would see some accelerated growth off of the bottom there?

Yes. So I'm not going to provide the exact weeks on hand, but what I have provided in the past, that typically in the aggregate we like to be within eight to 12 weeks. At one point a couple of years ago, we were well below that. We don't want to be there either. Some regions are getting much closer to that right now. Other regions like North America and Europe are still above that. Japan is historically above that, kind of in the 14, 15 weeks and it stays there. China is moving much closer to that. We're actually seeing small pockets of behavior where we're seeing orders within lead time and maybe people dipping too deep in inventory. So those kind of things are good indications that we might start to see some acceleration in 2025.

Thank you very much. One moment for our next question. Our next question comes from Josh Buchalter of TD Cohen. Josh, your line is open.

Hi everyone, this is Lani [ph] on for Josh. Can you hear me okay?

Yes.

Awesome. So kind of switching gears a little bit too industrial. I know it's been a bit of a flog to get through the inventory correction, but you posted a pretty healthy sequential growth in the quarter and you mentioned broad based industrial kind of recovery. Where are you seeing some of the green shoots? What are the puts and takes? And looking forward into the next one to two quarters, where do you see the trends lining up? And I have a follow up.

Sure. Hi Lani, this is Vineet. I'll take the question. So you'll recall that last quarter we combined our industrial and other segments. So this is sort of more broad based commentary. We've highlighted success in our medical business that's continuing to perform nicely for us. We're also seeing some consumer – we have very select consumer positions with some major OEMs. We're seeing some nice pickup there. We're hesitant to call it a full broad based recovery in industrial and other. Obviously there's some work to do. We think recovery is most likely in somewhere in 2025. But the initial signs we're seeing in terms of pickup in order patterns, certain segments showing more strength than others gives us some encouraging signs and we're hopeful that the industrial segment – industrial and other segment will recover after what has been a really prolonged inventory transition.

Got it. Thank you.

Thank you. One moment for our next question. Our next question comes from Chris Caso of Wolfe Research. Chris, your line is open.

Okay, understood. I wonder if you could also follow up on some of the comments you made about the China supply chain which you're making some changes there. I mean is that you're going to move some production into China domestic to be able to address some of the local OEMs there, maybe give some color on what the strategy is there and what's the timeline of that?

Sure Chris. This is Vineet. Happy to take the question. So about almost over a year ago we started talking about our plans to localized manufacturing in China as we saw the significant boom in production, especially related to XEVs, both plug in hybrids as well as battery electric vehicles or new energy vehicles as they call in China. And we started the process of qualifying a wafer supplier as well as OSATs [ph]. And the OSATs are obviously on a shorter timeframe. The wafer qualification will take a little bit longer. But we are starting to see the first parts from our OSAT partner roll off by the end of this year and so really excited about that. We are ahead of our schedule, so pleased about that progress by the team and we will endeavor to move a sizable portion of our China revenues into China and that will really be paced by the time taken to qualify different parts as you will remember, all of our parts are automotive grade, so it does take time. But really our focus is to make sure that we are serving our China customers the best way that they want to be served, and increasingly that's local manufacturing.

And just to follow-on to my follow-on, are there any margin implications with that – with moving that production into domestic China?

Chris, over time we do expect that to be positive to gross margins, yes.

Got it. Thank you.

Thank you very much. One moment for our next question. Our next question comes from Grant Joslin of UBS. Grant, your line is open.

Hey, it's Tim Arcuri. Thanks. So can you talk a little bit about what's going on with magnetic sensors versus PMICs? Is the outlook better in one market versus the other?

Thanks, Derek.

Thank you very much. One moment for our next question. Our next question comes from Vijay Rakesh of Mizuho. Vijay, your line is open.

Got it. And then as you look out, let’s say look out to next year, just wondering how the competitive landscape looks. What do you think in terms of your share on the magnetic sensor side and are you seeing any pricing pressure? Or do you expect pricing to be pretty stable into next year if you can give some clarity on that? Thanks.

Yes. So Vijay, there was two questions in one, but I’ll start with maybe the share piece. Look, we’ve talked about our momentum in design wins, our momentum and our engagement with customers and all of that gives me a lot of confidence that we will not only maintain our share in magnetic sensing, but most likely extend it. Okay? And that’s really where our new product introduction focus is really excited about the slew of new products we’re bringing to the market. You’ll hear more about it in the coming weeks and months. I highlighted some in my prepared remarks. We highlighted some in the last quarter. So there’s a lot of momentum in our new product velocity. So excited about that and I think that’s going to help us build, maintain and extend share. From a pricing standpoint, I would say we’re back into the stable environment. So what do I mean by that? In automotive, we are governed by our strategic design wins and the contracts associated with that. So typically, when we launch a part, it starts off at a higher price and then as volume ramps, we get productivity. We share some of that with our customers and that’s very, very typical. And that’s usually in the 2% range. And we got back to that a couple of quarters ago. So no change there. Competitive wise, I think pricing pressure, we talked about some perhaps trying to fill fabs, getting a little bit more desperate. I think that has become more normalized now and certainly people are seeing past that to look at, okay, what is the fit to function and really focusing on value. So I would say it’s stable.

Got it. Thank you.

Thank you very much. One moment for our next question. Our next question comes from Mark Lipacis of Evercore. Mark, your line is open.

Great. Thanks for taking my questions. Vineet, you said you had visited, spent a lot of time visiting customers this past quarter. And I’m wondering if you look past your own distributors to your customers and I guess particularly at the tier 1s, do you have a sense that inventory is there further downstream past the distributors are still above normal and going to normal levels or do you think they’re at normal levels going to below normal levels at that part of the supply chain?

Mark, thanks. That’s a really insightful question. And I think there is a geographical split to this. I would say that in China and broad parts of Asia, we look – as we look at inventory at distributors and beyond the distributors, we feel pretty good about where they are and where they’re trending. In some parts we’re starting to see orders come in within lead time that indicates that maybe some customers are a little too skinny on inventory. We’re trying to respond the best we can. As you will recall, we built up some strategic die bank inventory that’s allowing us to respond in a very agile way. We expect more of that to happen, by the way, as the quarter goes on and perhaps even into next quarter. We think a lot of customers have become too skinny on inventory. In Europe and North America, the inventory situation has been compounded recently with cuts in production rates, a little bit of repositioning in the portfolio by the OEMs, which is having some downstream impact on the contract manufacturers and tiers as they sort of figure out what parts do they need in order to go serve perhaps a realigned portfolio. That’s causing a bit of churn, to be honest. And so it’s hard to look at that picture and say, are they – there might be pockets where they have no inventory and there might be pockets where now based on realigned product plans, there might be a little excess inventory. So that’s a little bit harder to read at full transparency. But we are working through that in close collaboration with the OEMs as well as the contract manufacturers and tiers.

Yes. And Mark, just to add to that, the strategic die bank is really important for us. As I visited customers over the past couple of months, the constant refrain I heard globally was we aren’t sure about what’s happening with inventory in the channel or at CMs, but they are very concerned. The OEMs are very concerned that the channel on an aggregate basis has gone too skinny. And so the die bank that we’re putting in place helps us protect our final OEM customer and us to be honest in a lot of ways. And so we think that that’s really important as we go through this sort of turbulent period here in both the industrial and the auto markets.

Very helpful. Thank you.

Thank you very much. One moment for our final question. The next question comes from Quinn Bolton of Needham & Company. Quinn, your line is open.

Hey, guys. I’m hoping you might be able to help square the circle here. In the June quarter, you guys saw a pretty heavy decline in revenue. And I think you said at the time that you took four weeks out of end customer inventory with that decline then from that June base a quarter ago, you sort of thought you could grow low double digits through the end of the fiscal year. Obviously, we’re seeing a little bit of a reset in December. And I understand your comments about pockets of inventory and lower demand in North America and Europe, given some of the production cuts, but that’s only a third of your total sales. And so I guess I’m just trying to get a better sense from you. Where do you think end consumption of your devices are? It sounds like inventory in China, Japan, and most of the rest of Asia is back to pretty normalized levels. And so I’m just trying to figure out, are you sort of implying that the run rate of your business, kind of sellout, POS type, is that now well below prior expectations, or is there still a fair amount of inventory digestion embedded in the September and December numbers?

Yes. And our target model was for automotive [indiscernible] production, plus at least 10% – 8% to 10%. I would tell you that our consumption estimates still track that, right? So it’s really a question of how long does it take for the inventory bubble to get completely digested. And as I said, it’s largely now an artifact in North America, Europe. Obviously, there might be some tiers that serve more than North America and Europe. So that you got to factor that in. But we believe that the consumption model continues to be intact.

So kind of end consumption maybe in that 225 million a quarter range, growing at sort of 10%. So once you get back to that level, whether that’s 2025 or into fiscal 2026, we’ll see. But it sounds like that’s kind of the right end demand levels to be thinking about.

Yes, we still believe in our long-term model as I mentioned, we went through a pretty extensive exercise both in our strategic planning and updating our investor presentation that really corroborated those numbers. And some of the interesting things you’ll see in that investor presentation is even when we went public four years ago, there was an expectation of EV growth around the world, or xEV growth being pretty good. Believe it or not, it’s actually better today for the next five years. So we were pleasantly surprised in some of the data we found. We knew that and we’re hearing that from our customers, but the data corroborated that.

Got it. Thank you.

Thank you very much. At this time, I am showing no further questions in the queue. I would now like to turn the call back over to Jalene for closing remarks.

Thank you, Corey. We appreciate you taking the time to join us. This concludes this morning’s conference call.