Good morning, and welcome to Allegro MicroSystems First Quarter Fiscal 2024 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. [Operator Instructions] Please be advised that today's conference 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, Carmen. Good morning, and thank you for joining us today to discuss Allegra's first fiscal quarter 2024 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 second quarter outlook. We will follow our prepared remarks with a 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.

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 on 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 or 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 cause 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 first quarter of fiscal 2024 and in our most recent periodic filings with the Securities and Exchange Commission.

Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, change in 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, Jalene, and good morning, and thank you all for joining us for our first quarter 2024 conference call. I'm pleased to report that we had a strong start to fiscal year 2024, including record sales of $278 million, up 28% year-over-year. On a trailing 12-month basis, we've achieved $1 billion in sales, marking a new milestone.

We've also achieved record non-GAAP earnings per share of $0.39, an increase of 63% year-over-year. Our financial performance demonstrates the progress we are making towards executing the strategy that we laid out at our recent Analyst Day event.

We continue to sharpen our market focus on e-Mobility and select Industrial markets, including Clean Energy and Automation, with sales in these strategic growth areas increasing 63% year-over-year to $159 million or 57% of total sales, up from 45% in Q1 of 2023.

E-Mobility, which includes the increasing electrification of vehicles and higher adoption of ADAS feature sets, continues to drive Allegro's above-market growth. Total Q1 automotive revenue grew 27% year-over-year, outpacing auto production growth of approximately 6% over the same period.

Sales into e-Mobility applications increased by 58% year-over-year and represented 48% of our Q1 automotive sales, up from 39% in Q1 of 2023. Our solutions-based design approach continues to be well received by our customers. Nearly 60% of first quarter automotive design wins were in e-Mobility.

A recent example during the quarter was a multi-portfolio chipset ADAS design win with a leading North American OEM further validating our strong value proposition. Our design win momentum and the significant content opportunity associated with those design wins, continues to drive our above-market performance in automotive.

Moving on to the Industrial market. Growth in Clean Energy and Automation drove 70% year-over-year sales increase in Q1, resulting in record Industrial sales.

First quarter Industrial design wins leverage our sensor technology for DC charging, residential solar inverter and energy storage applications, where we see expanding opportunities for our solutions.

We continue to align our investments in R&D and customer support capabilities to focus on high-growth secular megatrends in Automotive and Industrial markets that intersect with our technical expertise and market-leading sensor and power product portfolios.

I'm excited about the launch this quarter of the first device in our new Power-Thru portfolio that leverages technology from our acquisition of Heyday Integrated Circuits last October.

In addition to validating our ongoing commitment to innovation and execution, this launch serves as a proof point for the rapid pace at which our team can integrate new technologies into commercially viable and market-ready products.

Our new Power-Thru isolated gate driver offers a single package solution with an up to 50% smaller footprint and a 40% efficiency improvement compared to competitor offerings. This helps designers achieve their efficiency and power density goals in Clean Energy and e-Mobility applications.

This is especially important for higher switching speeds inherent in GaN and SiC where Power-Thru helps unlock the full potential of these wide-bandgap technologies. This is the first of many new products to come in our new Power-Thru portfolio, and I want to congratulate the team on this first and very important milestone.

Next, I want to talk about another important milestone, but first in our ESG journey. I'm pleased to have released our inaugural ESG report just last week, which highlights the significant steps we have taken thus far towards building a more sustainable future.

Our commitment to ESG is directly aligned to our corporate strategy and growth plans through the products we innovate and the applications they enable, which in turn support a greener and more sustainable world.

In addition to solving customer challenges like reducing emissions, making applications more energy-efficient and harnessing renewable energy, our innovative teams are also imagining ways to enhance our impact on the communities where we live and work.

As we -- after the need for more clean energy with innovative, efficient, socially responsible and environmentally conscious solutions, we're building long-term value for all our stakeholders.

I want to thank our teams who delivered another outstanding quarter, while further accelerating our strategy with the launch of innovative new products and moving our ESG initiative forward. I could not be prouder of our team and what we continue to build every day while executing our strategy and serving our customers.

I'll now turn the call over to Derek to review the Q1 financial results and provide guidance for our second quarter.

Derek?.

Thank you, Vineet. Good morning, everyone. Starting with a summary of our Q1 financial results. Q1 sales were a record $278 million. Gross margin was 57.8%, operating expenses were 27% of sales. Operating income was 30.8% and adjusted EBITDA was 36.3% of sales. As a result, earnings were $0.39 per share, an increase of 63% compared to Q1 of fiscal '23.

Sales in the first quarter increased by 28% compared to Q1 of fiscal '23 and 3% sequentially. As a reminder, our Q4 had 14 weeks and on a comparable 13-week basis, first quarter sales increased by 11% sequentially. Please keep this in mind with respect to all sequential comparisons.

Sales to our automotive customers were $190 million or 68% of Q1 sales, an increase of 4% sequentially and 27% year-over-year. Within automotive, e-Mobility sales increased by 7% sequentially and 58% year-over-year, representing 48% of first quarter sales, up from 39% a year ago.

Industrial sales were $68 million, increasing 18% sequentially and nearly 70% year-over-year, led by Automation and Clean Energy. Other sales, which includes Consumer and Computer Applications were $20 million, declining 30% sequentially and 27% year-over-year.

From a product perspective, magnetic sensor sales were $174 million, increasing 4% sequentially and 27% year-over-year. And sales of our power products were $104 million, increasing 1% sequentially and 29% year-over-year.

Sales through distribution represented 56% of our first quarter sales, reflecting the transition from Sanken to a Japanese distribution channel during the quarter. Excluding Japan, Q1 distribution sales were approximately 41% of sales compared to 43% in Q4 and 37% a year ago.

Once again, no single end customer represented more than 10% of Q1 sales and sales by geography were well balanced with 22% of sales in both China and the rest of Asia, 21% in the Americas, 20% in Europe and 15% in Japan. Now turning to Q1 profitability.

Gross margin was 57.8%, consistent with Q4 and above our guidance range of approximately 56% due to favorable product and channel mix as well as favorable foreign exchange. Operating expenses were $75 million or 27% of sales compared to 28% in Q4 and 30% a year ago. First quarter R&D expenses were 14% of sales and SG&A was 13% of sales.

Operating margin was 30.8% compared to 30.2% in Q4 and 25.3% a year ago. Operating margin dollars increased by 56% year-over-year on a comparable sales increase of 28%, demonstrating the continued leverage in our operating model.

The effective tax rate for the quarter was 12.6%, slightly higher than our guidance of 11% due to the geographical mix of income. The first quarter diluted share count was 194.9 million shares and net income was $77 million or $0.39 per diluted share, an increase of 5% sequentially and 63% year-over-year. Moving to the balance sheet and cash flow.

We ended Q1 with cash of $362 million. Cash flow from operations in the first quarter was $49 million, consistent with Q4 and free cash flow was $4 million. We also significantly enhanced our liquidity by closing a new $224 million revolving credit facility to replace an expiring $50 million revolver.

From a working capital perspective, first quarter DSO was 40 days compared to 45 days in Q4 and days of inventory were 132 days compared to 127 days in Q4.

As discussed in our last call, we continue to rebuild our wafer and die bank, which allowed us to reduce our delinquent backlog and improve our lead times, which declined by approximately 30% in Q1.

We are also investing to expand our operations in the Philippines to support anticipated future growth and first quarter capital expenditures were $45 million. Before I turn to Q2 guidance, I'll provide some color on what we are seeing in the business environment.

Automotive in certain Industrial markets, including Clean Energy and Automation have been resilient in the first half of calendar '23.

Double-digit market growth projections for our strategic growth areas and our design win momentum continue to give us confidence in the low double-digit long-term growth targets that we articulated at our March Analyst Day.

Global auto production remains robust and is expected to increase by 5% in calendar '23 to nearly 87 million units and EV sales are projected to grow by approximately 30%. In the Industrial market, government policies, regulations and investments are driving the clean energy market with an estimated $1.7 trillion in investments announced this year.

We are, however, cautious in the near term given the macroeconomic uncertainty with increasing interest rates, inflation and geopolitical concerns. More specifically, we are monitoring China closely, where auto production declined 15% in the first half of calendar '23.

Our sales in China in Q1 declined 13% sequentially or 7% on a comparable 13-week basis. We are seeing multiple factors at play in China.

OEM finished goods inventory is higher than normal due to the transition to more stringent emission standards and at the same time, China's renewal of its new energy vehicle tax incentives, combined with OEM price reductions are expected to increase sales volumes in the midterm.

And as a reminder, our sales are very well balanced geographically and China represents about 1/4 of our sales. We believe that our products and strategy will drive long-term above-market growth, but macro uncertainty and rapidly changing business environment, particularly in China, makes it difficult to precisely predict quarter-to-quarter impacts.

We are watching these macroeconomic factors and leading indicators in our business closely so we can best serve our customers and continue to execute to our target financial model. Now with that backdrop, I'll turn to Q2 outlook. We expect sales in the second quarter to be in the range of $270 million to $280 million.

The midpoint of this range is a 16% increase compared to Q2 of fiscal '23. We expect gross margins to be between 56% and 57%, reflecting the projected product and channel mix. And we expect operating expenses to be between 26% and 27% of sales.

We expect our non-GAAP tax rate to be approximately 13% and our diluted share count to be approximately 196 million shares. Based upon these assumptions, we anticipate non-GAAP earnings per share to be in the range of $0.35 to $0.39 per share. Now I'll turn the call back over to Jalene for questions.

Jalene?.

Thank you, Derek. This concludes management's prepared remarks. Before we open the call to your questions, I'd like to share our second fiscal quarter conference line-up with you. We are attending Needham's Virtual Semiconductor and Semi-Cap one-on-one conference on August 22.

And Jefferies Semiconductor, IT Hardware and Communications Summit on August 30 at the Four Seasons Hotel in Chicago. We will now open the call for your questions. Carmen, please review the Q&A instructions. .

[Operator Instructions] Our first question comes from the line of Gary Mobley with Wells Fargo Securities. .

I appreciate the qualitative comments with respect to visibility, but maybe if you can quantify things a little bit more and quantify what your customer order lead times are given that, I believe, the link with backlog as you cited, is down 30% sequentially.

And maybe if you can quantify where your backlog sit today relative to where it has been recently and what sort of revenue coverage you might be contemplating in the second quarter revenue guide?.

Gary, this is Vineet. Thanks for the question. So you asked a few questions in that question. So let's take it one by one. I would say that, I think starting with lead times, we're really pleased with the work the teams have done to bring our lead times back into what are so called industry standard lead times.

There's a few packages, I would say, are still constrained. We're working through those. But on the whole, we are very pleased with the progress we've made. And as we've said before, as lead times come back into a normal range, we expect the backlog to moderate. So I would say the backlog is now back in what I would consider normal levels as well.

That said, our order patterns continue to be very strong. Our design wins continue to be really good. And so on the mid- to long term and certainly the visibility we get into our forward-looking business makes us feel really confident about the growth rates that we committed to at the Analyst Day.

Derek, I don't know if you want to add anything more to that?.

Yes. And Gary, with respect to Q2, we feel really good about the Q2 guidance. That's largely covered by our backlog. And within that, we'd expect auto to be up marginally in Industrial and other to kind of be flat to down slightly in Q2 based upon the projected shipments that we have scheduled in our backlog. .

That is helpful. And if I can ask a follow-up question about gross margin, I believe the beat in the first quarter was about 180 basis points.

Maybe if you can single out the contributing factors between mix, revenue mix and FX tailwind and embedded in your Q2 gross margin guide, is there an expectation of a continuation of the foreign exchange tailwind?.

Yes. Thank you, Gary. This is Derek. So really, the larger proponent of Q1's beat was on the product mix, and that will vary from quarter-to-quarter. So we had a very favorable product mix in Q1. We've also benefited from the transition in Japan from Sanken as a distributor -- as a Tier 1 distributor to the distribution channel, and that's been marginal.

The foreign exchange was the smaller piece of Q1, it was still impacted but we do expect that to start to normalize in Q2. So Q2's guidance reflects our projected shipment mix along with normalization of the U.S. dollar and the Philippine peso. .

And it comes from the line of Joshua Buchalter with TD Cowen. .

I wanted to follow up on the segment guidance you just gave. So we dive back into the numbers correctly, which is a big if. The Industrial segment, it seems like it's going to be down after a couple of quarters of very strong growth.

Is there any sort of inventory digestion going on there? And then kind of same thing with the other segment, it suggests down pretty sharply again in the fiscal second quarter, are we -- how close are we to that for bottoming?.

Yes, Josh, this is Derek. So the results for the last couple of quarters, and particularly the mix between market and even in Q1 were really a result of what we've shipped -- shipping out of backlog, making allocation decisions. Going into Q2, there's still some of that. From a distribution channel standpoint, we're at target levels right now.

We've continued to rebuild that distribution channel over the last four quarters. As you know, that troughed about a year ago. We've continued, I think, to work with our distributors. We're at target levels right now in our distribution channels. So within Q2, I'd expect sales to distribution to be down marginally and sales to OEMs to be up slightly. .

Okay. Got it. And then I also wanted to ask about China from your prepared remarks. You mentioned it declined 7% in the quarter.

Was that commentary mainly focused on autos? Or was it more broadly across your other segments? And do you expect China to grow into the back half of the year as some of the auto numbers have picked up in recent months?.

Josh, this is Vineet. So I'll take that one. I think before I jump into some China-specific remarks, the context here is that any time you go to a big technology or market transition, it's never a straight line, right? It's never linear. And the transition to an all-electric future is going to be no different.

Now China does have some specific issues that it's dealing with. But we believe that in the near term, there is going to be choppiness across all our end markets. Derek pointed out that auto production declined in China in the first half. We're certainly seeing some impact of that.

Industrial continues to be, from an inventory standpoint, still elevated. But make no mistake, China is a very important region for us.

It's very important for the entire automotive industry, is the lead of our volume when it comes to autos and EVs and local Chinese OEMs or Chinese brands are now playing a much bigger role and the global stage when it comes to EV. So we're really confident and have a lot of conviction in our mid- to long-term thesis around China and the China OEMs.

Near term, like we said, it's going to be a choppy market. It's a little bit like solving from multivariable calculus, right? There's a lot of variables at play. And as Derek pointed out, it's a little hard to pinpoint the quarter-to-quarter transition exactly, but we feel really good about the mid- to long-term perspectives in China. .

[Operator Instructions] And it comes from the line of Chris Caso with Wolfe Research. .

I guess the first question would be around lead times. And I think your comments said that they were down about 30% in the first quarter.

Can you talk about where that stands against where lead times would normally be? And is it increasing supply still likely to bring those lead times down further as we go through the year and what impact they may have on your order rates?.

Yes, Chris, this is Vineet. I'll take that one. So our lead times, as I said, we've -- our teams have done a great job of reducing our delinquent backlog and bringing the lead times back into what we would consider a market competitive or industry standard.

Having said that, we do have plans to further reduce our lead times, especially targeted around our distribution channel, some of our Industrial customers, where point-of-sale really matters. And so you can expect us to continue to bring down our lead times.

I think from an inventory level, Derek can add some more, but we feel really good about where we are with our inventory levels now. And the nature of that inventory being in sort of die bank, I think, gives us a lot of optionality. .

Yes. And I think, Chris, I expect inventory levels from a dollar standpoint to flatten out from here on. As Vineet mentioned, we have sufficient die bank. And it's really there to support our customers from a quick term standpoint. So we feel good about the current levels, but I wouldn't expect it to increase from here. .

Okay. Great. As a follow-up, follow-up is on pricing. And I guess we've heard some commentary from others, perhaps some uncertainty about what will happen with foundry pricing as we go into next year.

Can you talk about your view of what you think is the cost situation as you go into calendar '24? And if that changes, how that may affect your pricing to your customers and your revenue on a year-on-year basis next year?.

Yes, Chris. Maybe I'll start with the second part first. So we've been very consistent in our commentary around pricing. And our pricing, especially in our automotive business, which is about 70% of our business has always been value proposition based. We are in long-term agreements with most of our customer base.

It's very hard for us to sort of do transactional pricing. So it's not a question of input costs go up or down X and hence, price goes up or down Y. So I think our value and the innovation we drive in our products helps drive the value proposition and the pricing equation.

And so we feel really good about the stickiness of that pricing as we go forward. From an input cost standpoint, I would say that the pace of change has moderated, but inflation hasn't completely gone away.

And so we are in active dialogue with some of our major suppliers and partners around what's changing, what to expect as we go into the next calendar year, but we feel good about balancing sort of the input and the output here from a cost standpoint. .

And it comes from the line of Quinn Bolton with Needham & Company. .

Congratulations. On the next quarter and outlook, I guess, Vineet, I just wanted to come back to your commentary around the China market. It sounds like you're seeing perhaps some volatility in the auto business in China.

But if you look beyond China, I assume the rest of the geographies, you're not seeing anything that makes you nervous about the outlook for the other geographies.

Is that the right interpretation of your prepared comments?.

Yes, Quinn, thank you. That's exactly right. So I would say, when we look at our other regions, the order patterns, the stability is fairly consistent with what we've seen in our past quarters.

It's really China, and the commentary was very China-specific that it's hard to sort of pinpoint exactly the quarter-to-quarter transitions, we're really bullish about the mid to long term. But in the near term, there are multiple variables at play that make it really hard to pinpoint to quarter-to-quarter transition. So it is very China-specific.

The rest of the regions, I think, are performing as we expected. And certainly, we see -- while we're watching it closely, we don't see any near-term churn in those regions. .

And Quinn, as you know, one of the nice parts about our business is that each of the sort of five regions are approximately 20% of our sales, so it's pretty well balanced. .

Got it. And just a follow-up on the China business.

I don't know if I missed it, but did you make comments about where you thought dealer inventory levels were within China? I know production seems like it had slowed, but do you have any thoughts on inventory levels of vehicles within the China market? Are they elevated? Are they back to normal? I think some of your auto peers had suggested that dealer inventories in China may now be back to more normal levels?.

Yes, Quinn, what we commented on was that there is a phenomenon happening right now in China where there is a transition to a more stringent emissions standard. And that has driven some excess inventory of the leftover models that are perhaps not compliant to the new emission standard. So that's going to take a little bit of time to work through.

This is pretty consistent with what OEMs have commented publicly as well as other tiers have. So we're not alone in seeing this phenomenon.

Having said that, we see the EV market continue to grow nicely and the added incentives that exist in China or were renewed in China around EVs, I think are going to be really good for the long-term growth of the EV market. .

Perfect.

And then just maybe for Derek, just on the wafer allocations among TSMC, UMC and Polar, is there any sort of mix shift that you see this year among your suppliers that could create either margin tailwinds or headwinds? Or do you think that the margin outlook and foundry pricing is pretty stable?.

So I don't anticipate a significant shift in the mix. In Q1, it was about 20% Polar, 70% UMC give or take, 10% TSMC. That will vary a bit quarter-to-quarter. And pricing and the revenue per wafer will vary as well. So I don't anticipate that having a significant impact on our gross margins.

As Vineet mentioned, we also continue to work with our customers and our vendors to make sure we're marching towards our target financial model point. But I don't anticipate the wafer allocation itself, they have a significant impact on our gross margins this year. .

[Operator Instructions] All right. I'm not showing any further questions. I will turn it back to Jalene Hoover for her final remarks. .

Carmen, I'm not sure if you can hear us or not, but thank you so much. .

Go ahead. .

Okay. Thank you so much. We appreciate everybody for taking the time to join us today. This concludes this morning's conference call. .

Thank you all for participating, and you may now disconnect..