Allegro MicroSystems, Inc. (ALGM) Earnings Call Transcript & Summary

Hello, everybody. Welcome to the 2030 Annual Needham Growth Conference. I'm Quinn Bolton, I cover the semiconductor capital equipment space for Needham. It's my pleasure to host this presentation with Allegro MicroSystems. Allegro is a leading supplier of magnetic sensors and power ICs, targeting the automotive and industrial markets. The company is the #1 supplier of magnetic sensors worldwide. And the company is also very well positioned, in our opinion, for the recovery in the automotive end market and for growing content driven by the trend towards safety and ADAS as well as electrification of vehicles. Allegro completed its IPO back in late October, and their share price has now more than doubled. So a great start out of the gates for the company. From management, we have President and CEO, Ravi Vig; CFO, Paul Walsh; and Senior Director of IR and Marketing Communications, Katie Blye. I'm going to hand it over to Ravi to go through the presentation, and then I'll come back to moderate Q&A at the end of the presentation. Ravi?

Thank you, Quinn. Thank you for hosting us today. And well, the computer is, I think, funny and flashing today. But thank you for hosting us today. Thank you for giving us an opportunity to share the Allegro MicroSystems story. We've -- as Quinn has stated, that we are a newly public company, and we have a -- and we have a great opportunity to share our messaging with you today. Let me start the presentation with providing you an overview of the company. And then Paul and I will do the Q&A with Quinn. We really do want to thank Needham for being part of our journey, and we're happy to say we're -- we've had a fairly successful run so far. I think when we go through the company, just to get everybody an overview of the -- of our profile, we are -- we have been really a best -- one of the best kept U.S. secrets in semis. We've got a 30-year history in semis. We started as a pretty successful IDM focusing on power ICs. We transitioned the company over to power ICs and sensors. And we've been -- we really have established this leading position in magnetic sensors in -- as well as a key focus in automotive and a key focus in -- and an emerging power IC business that's also attacking in the automotive space. And so as we look at the company, the company has been going through a transformation. We 4 years ago, we -- I took the role as CEO. A year after that, One Equity Partners came on as an investor. We've been through a significant change in the company. And I'd like to give you a little bit of an overview of what that has done to strategically position us to take advantage of the growth vectors that we have. Yes, my computer is flashing. I'm sorry. I'm not sure why it's doing this. But -- so as a snapshot, 3,700 employees, 10,000 customers, 30 years of innovation. Katie, I don't know, this computer is going crazy on me. #1 leader in MAG ICs. We ended last year on our core business, which is our focus business at $542 million. And as we -- and we've had over 10 years of operating profit. So a very strong history in the company. Automotive is a key area for us. It's a key business segment for us. And -- but we have an emerging business in industrial and data centers, which are really showing strong growth. Global footprint, 80% of our business is international, is out -- is shipped outside the U.S. So we have a very good profile in Asia, but also in Europe and South America. So I spoke a little bit about the transformation. The transformation that we've gone through over the last 3 years has helped us reposition the company for success. We restructured our manufacturing. We were an IDM. We've gone to a fabless asset-light model. We've divested fab. We've divested -- we've shut -- we've transitioned a couple of U.S. -- inefficiently U.S. manufacturing sites into our Philippines facility. We have also been on a path of transitioning for our second manufacturing facility in Asia, which is in Thailand and transitioning that over to our Philippines facility. We've already improved the gross margin by over 1,000 basis points in the company. So the transformation was really essential, but the transformation was not just a manufacturing efficiency activity. It also was to change the essence of the company, moving from an IDM where we were manufacturing-centric into an IT-centric, technology-centric company. The transition allowed us to establish great partners in manufacturing like UMC and TSMC. With UMC, we've been able to establish next-generation proprietary technologies, both in BCD as well as in XMR, and we'll talk about both of them later. But they -- but they positioned us very well to attack new markets. The markets were increasing in complexity. These technologies have allowed us to -- given us a toolkit to address the xEV ADAS data center markets. These market segments are all accelerating, growing at greater than 20%. Our R&D strategy also attacked -- went into this particular -- I'm going to just switch out off my camera here because I think something funny is going on to my computer. The R&D strategy also transitioned over to address these newer complexity-related markets. And in parallel, we did a global restructuring of our sales team. Our sales strategy has been to -- in the past was to take care of just our leading customers. We've really invested in our distribution business. Our distribution business provides a substantial gross margin pull-through. It addresses over 10,000 customers, increases the reach of our product base and it has been one of the core reasons why our industrial and other business has been growing so rapidly during this downturn. It's going crazy on me. That will be better. The PDF is going crazy. I apologize for all of this. Not had this happen before, and I have done a roadshow with... So I apologize about that. I have done -- I think, between the TTW and the roadshow, I think we did about 80 presentations, and this has never happened. But anyway, let's go with it. The company has 3 basic product portfolios. The magnetic sensor ICs and power ICs. And we have a newly established Photonics portfolio. I'll speak a little bit about the Photonics portfolio because we're really excited about this particular segment. On magnetic sensor ICs, Allegro has had a leading position in the market in this area. We've established it through innovation. We address a substantial number of applications in a vehicle between gear speed sensing, position sensing, linear angle, digital as well as, again, a growth segment in current sensing ICs, a great area for us that's really driving growth for us. When we start looking at the power IC business, the power IC business has a -- yes, my computer is doing bad things, real bad things. Okay. Is that still visible, guys?

Yes.

Yes. Okay. So the power IC business is -- focuses on brushless motors, motor drivers, 100-volt automotive safety ICs. A $166 million business, growing quite nicely, and we'll talk a little bit about the market share in a minute. The key thing about the company, I would say, is that it's really tagged on to great secular growth trends. We look at autonomous driving and xEV. We are very well positioned in those data centers. Our motor driver products and our power products are very well targeted to those. Industry 4.0 robotics is another good area for us. Green energy is a great area for us. And so these are all fundamental growth vectors for semis. We are very well tagged into them. When we start looking at a vehicle, this particular [ eye chart ] it's more to indicate that we have a substantial presence in a vehicle, as many as -- some of the leading vehicles may have up to 80 Allegro ICs in them. So this is not a small singular application business. We are very well diversified between comfort, convenience, internal combustion, ADAS and now tagged into the electrification trends in automotive. Of course, comfort and convenience is -- has a growth vector. Internal combustion powertrain will be around for a while. But we're very excited about ADAS. We're very excited about electrification. The TAM of the business that we work in today is $3.7 billion, but growing to $5.6 billion in 2024. So let's just talk about electrification, [ Neal ]. We win when cars electrify. Our position in internal combustion has given us a unique ability to -- to identify and attack these new growth vector in propulsion. And electrification is here to stay. It is starting up. It is in an inflecting area. It's a key growth driver for the company. What I would say is that, we don't have a single application electrification. Our current sensors, for example, are widely used across the board already today in onboard chargers, battery chargers, inverters, DC-to-DC converters, battery cooling. All of these applications really drive the volume, drive the socket content. We're already in production with the who's who of electric car manufacturers. So whether it's Tesla, Toyota, BYD, et cetera. An inverter, for example, could have up to 9 Allegro current sensors in it, depending on the design configuration of it. So we scaled quite dramatically when we get into these particular applications. An example is a SUV teardown that we show on an SUV that is being offered in the U.S., both as a battery electric as well as a standard model, internal combustion model. The internal combustion model has $17 of Allegro content in it. The battery electric model has $25 of Allegro content in it. The SAM for Allegro goes from $37 to $59 when you go from internal combustion to xEV. So we're very well positioned, very excited about this transition. As the conversion from internal combustion to full battery electric accelerates, our SAM accelerates, too, which we -- which really gives us great opportunities for the future. ADAS is another area. We like to divide ADAS into -- I'm sorry, stop [indiscernible]? ADAS, ADAS really will -- shows up as a wonderful opportunity for us. We break it down into sense, think and act, where we are really operating in the act portion of ADAS. And when we look at the act portion, steering, braking systems, our motion control focus from sensors and power really gives us a great opportunity. [indiscernible] is a very important pickup truck that is offered today in the it's a -- in the 2017 model, we had the power and the sensing portion of this pickup truck steering system, $4 of content. In this particular configuration, there's a 3x increase in content. And the reason is that the steering and braking systems now have to respond to autonomous functions. And when we look at this, we are already in production. We ship over $100 million of -- 100 million units of -- into the ADAS application space, in key applications, autonomous vehicle applications, leaders of like Tesla, Toyota, with their whole Safety Sense suite, et cetera. Breaking, steering, steer-by-wire, brake-by-wire, wheel speed, eye-safe LiDAR. All of these are great opportunities for the company. And when I speak about ADAS, I just want to talk about our Photonics acquisition. So we recently acquired Voxtel, a photonics manufacturer. The military -- Voxtel had been operating in the military space, creating solutions for the military for the last decade. The military had recognized that for to get range in a LiDAR system, you really had to operate in an eye-safe range. So this 15 -- eye-safe 1550 nanometer technology is really critical for the success of LiDAR systems. Voxtel brings us a whole suite of products and a toolkit that's perfectly applicable to the automotive market, 1D, 2D arrays, photodetectors, lasers, which we intend to optimize. Our goal now is to industrialize these, make them -- bring them to the volume requirements and the quality requirements for the safety specific systems. When we look at industrial markets, our industrial markets really are in the -- that they bring us an opportunity here for servers and data centers, et cetera. So we are already in a bunch of leading server manufacturers like Amazon, Google Cloud, Microsoft, et cetera. This data center trend is really driven by the need for cooling systems. As the power of data centers keeps increasing, efficient cooling has become a big deal. The transition to 3-phase motors has become a big deal. And we are -- 3-phase motors allow for the cooling fans to become more efficient. They allow them to become lower in audible noise, both of which are key trends for the data center. So not only are the data centers increasing, but there's a trend right now to convert from the single-phase fans to the 3-phase fans. We're really happy to say we are very well engaged with all the market leaders in this particular space. As we look at Industry 4.0, another area that we operate in, a bunch of smaller place, but we operate in this space pretty well. ABB, Amazon, et cetera, Smart Robotics. All of these have motion control systems, a key area of growth for us. When we look at our competitive space, Quinn introduced us as a market leader in MAG. Yes, we are the #1 supplier. It's a sustained position that Allegro has this -- and we also have, more importantly, a market share expansion in power ICs. This is a wonderful space. We focus very heavily on BLDC. That particular space is growing dramatically as motors become more efficient, get more use in applications. It's a 2% market share that we have that's growing quite nicely. It's actually growing at 50% faster than the market in general. Our competitive profile is pretty good. We line up very well because of our focused concentration in automotive, but also we allow for and provide us a diversification using our smart motor controls and regulation capabilities in data centers and in Industry 4.0. Another key story for Allegro is that we have a great diversified customer base. Top 20 customers are 49% of the revenue, but we are not anchored into any 1 customer. No customer is greater than 10%. Over 10,000 customers going through our distribution channel. They are a great pickup for us because they lever our core development. They give us additional return on engineering when we work in this particular space. Over 51% of our revenue goes there, great margin profiles and we've been investing in our distribution networks to service these particular customers. But great geographic footprint. So when we look at our profile, I'd like to say 20, 20, 20, 40. 20 North America, 20 Europe, 20 Japan, 40 in Asia, of which about 20-odd percent is China. So when we start looking at this, the diversification is what brings opportunities to the company, but also stabilities during downturn. And that when you look back on our performance through the downturn, that's public information, you'll see that we didn't get impacted as heavily as many of our peers because of our diversification. Great blue-chip customer base. The -- this is the customer base that we are tacked on to, allows us now to tie on to the automotive growth vectors. And when we start talking about manufacturing, our fabless automotive -- fabless asset-light model is wonderful. So we were a 100% -- 57% internal fab company in our fiscal '19. Today, we are fabless. So we've affected this major transformation that really sets us up for better cost structures as well as better leverage, better capacity, et cetera. So we have UMC as a leading partner. We are bringing on TSMC as we speak, gives us a great opportunity for capacity in this particular environment. We've divested Polar Fab, also continue to optimize our manufacturing footprint where we are reducing our assembly -- internal assembly footprint, levering our outside partners much more. Today, 50% of our assembly activity is external. And 100% of our test is internal. We hold our proprietary IP. There's a lot of IP associated with magnetic sensor testing, especially high volume in automotive testing. Our growth model is -- I think, is wonderful. In the near term, we will see our -- the auto recovery helping drive a CAGR. So there's an [ 8.5% ] projected CAGR in automotive. We see content expansion in our base business in automotive, but xEV ADAS helped give us the inflection and data centers bring on the industry -- industrial growth for us. In the long term, we see Photonics adding up to this. We see our XMR activity, which we've invested in quite dramatically. This is a new magnetic sensing technology that -- that we've brought on. This is really going to help us with establishing or continuing to establish our leadership position in magnetics. Our XMR technology is very critical to us, and we have a proprietary line with our fab partner at UMC, where we are able -- one of the few companies in the world to do XMR on silicon. Great positioning, wonderful medium- and long-term story for us. We do believe that the mid-double-digit teens kind of growth rates are achievable in the near term. And in the long term, the low double digits is certainly a model that we can target. So just to wrap up, as a company, #1 position in MAG sensing, large growing TAM in the xEV ADAS. I would say that technology is key, our product -- our proprietary knowledge is key, diversified blue customer base -- blue-chip customer base. And we've got this combination of margin expansion [indiscernible] both through operational initiatives, operational restructuring and portfolio diversification, bringing -- attacking these new growth vectors to help bring us both margin and growth. And finally, we're really proud of the management team. The management team has done a lot over the last 3 to 4 years in restructuring the company, leading us to this point, and we're really confident that we'll be able to lead the company in the future. So with that, I do apologize for the technical difficulties, not sure what happened, but I'd like to kind of turn it over to Quinn.

Thank you, Ravi, for the presentation, and I apologize you're having computer issues. But thank you for powering through. Ravi, I wanted to start, and Paul as well, with a question that you may be receiving from investors, lots of headlines in the -- on the automotive side, but semiconductors as well about capacity constraints and shortages of semiconductor components. I think Ford, Honda, VW have all announced some reductions in their automotive production because of shortages of semis. At the same time, we're hearing from more and more of our semiconductor companies that there are shortages or capacity constraints on the foundry and test and assembly side. So, I guess, how are you viewing the current supply situation of semiconductors just broadly speaking? I realize you're in a quiet period, so not trying to ask near term, but how big of an issue do you think this is for the industry moving forward?

Yes. So part of our story has been that we've brought on partners in terms of supply base. So for us, our fab partners are not transactional. And so we have long-term strategic relationships with them that are a win-win commitment for us. So we are pretty confident about our supply base, but there is a general situation going on in the industry where power analog, for example, relies on 200-millimeter types of wafer capacity. And it's pretty well known that a 200-millimeter capacity is not really being -- there's not a lot of 200-millimeter fabs being built today. And so there is that overall riding issue where power analog in terms -- and which the automotive business really does rely on does have some basic structural issues that are there. And as you can see, this kind of spreads on to the back end, too. What we've looked at in the industry, and again, this is pretty well understood, is that during the downturn, the entire supply chain, actually customer chain reduced their inventories. And so now as we go -- coming back out of this downturn, the demand not only is fulfilling end-customer demand, but it's also requiring us to refill the pipeline, to refill the supply chain. This particular bounce back makes it very difficult for most semi suppliers to understand what is really where -- where the supply is going? Is it -- are you really shipping to end customer demand? Are you shipping into inventories, et cetera? So but this is a normal chaos of a semiconductor recovery. We all have lived this. We've been through this. It's our jobs now to try to parse through and see what's real, what's not. And I think all our competitors are probably doing the same. But clearly, there are situations out there for sure. And I think we'll suffer through it for a bit, but I'm sure the industry will work its way through.

How do you think that the industry ultimately resolves the 200-millimeter wafer capacity situation? Doesn't look like there's a lot of new 200-millimeter fabs being built. Perhaps there are some IDMs that have underutilized 200-millimeter fabs that could be sold to foundries. Do you think we need to see more automotive production moving to trailing edge 300-millimeter fabs. Just any thoughts on how we work our way out of this. I mean automotive demand looks like it's going to set to rise for a number of years given some of the longer-term trends. Things like these -- the supply side is going to have to adjust.

Right. And I think that's a great question, right? So that's a question both for customers like us wanting to buy from the foundries and also from the foundries, from their perspective on strategy. So typically, they've reserved their 300-millimeter fabs for fine line width. Automotive is moving to a higher voltage space. So by that, I mean, it's not a 5-volt, 3-volt, 1.8-volt kind of power analog space. It's moving to the 12-volt and then to the 48-volt, it's moving to the 800-volt, 600-volt. Voltages are moving up, which tend to be more suited for the older trailing edge technologies. And so it's going to come down to the foundries, whether -- how they restructure their service of the demand, whether they move some of their lower voltage trailing edge activities to 300 millimeters or whether they start adapting the 300-millimeter fab to address this growing demand for higher voltage -- the higher voltage space, providing more high-voltage 300-millimeter capability. So I'm sure the industry is all going to work its way through this.

Yes. So it sounds like investors will need to watch sort of the higher voltage 300-millimeter process capabilities at some of the foundries as a potential solution?

Yes, it's going to come down to power analog. How are the foundries going to address a 12-volt, 48-volt, 100-volt kinds of things that today target -- you're pretty much focused on 200 millimeters.

I wanted to ask about your leading position in magnetic sensor market. Obviously, as the #1 supplier, you've done a great job there. But just wondering if you could highlight, what do you think separates or differentiates Allegro from some of the other magnetic sensor vendors out there, Infineon, Melexis, some of the Japanese?

So we operate as a technology company. So IP is central to what we do. We're not a commodity supplier. We're not looking for the high-volume, low-cost, low-ASP model. We're looking to be in the higher-ASP space. Our ASPs exceed the market in general because we are a technology supplier, and we try to solve -- we try to provide solutions to our customers. And very often these solutions have deep embedded IP inside the parts. So we have over 1,000 worldwide patents. It's something that's really critical to -- to the -- to who we are to our DNA, but it also allows us to have separation from our competitors. These patents serve as a basis for ring-fencing our business. But not only that, they also serve as a proof point that what we provide is unique IP to our customers. So our solution sets solve really deep problems like -- with magnetics like measuring how gears rotate and all the problems associated with that in a car, but more recently, our solution sets provide us very unique IP in current measurement, and current measurement is a key space in terms of inverter design and electrification, onboard chargers, all kinds of different -- as vehicle electrification happens, this is our fastest-growing segment in the company. But it also is growing because we've identified this great technology space. We've got XMR on silicon coming on. We've got proprietary haul technologies, whether it's 3D hauls, 2D hauls, 1D haul effective. So our suite is so broad. Our technology is so deep that we're able to attack these advanced spaces. And it gives us a little bit of separation. Our global footprint is another one, okay? We have access to customers worldwide. That also allows us to bring the best of products solve the most difficult problems that are there worldwide.

I kind of wanted to spend a minute now on the XMR technology. Our understanding is that XMR is a more precise magnetic sensor, talk to us about sort of what the advantages of XMR are as well as the competitive landscape. You mentioned that you have XMR on silicon, which I think is pretty unique in the industry, maybe only 1 other player has that capability?

Yes. So hard disk drives actually were the first use case, if you want to call it that, for XMR. They were -- the magnetic pickups -- as disk drive density kept increasing, the magnetic pickups had to become more precise, more sensitive. And so they actually -- they were the source of innovation of XMR and by XMR, it was GMR and then TMR. So these technologies were actually architected and designed to provide 1s and 0s. Okay, that's what the hard disk drive technologies were. We've invested in the long term. This is over 5 years of R&D investments into XMR, into GMR and TMR to make them become analog specific. To provide analog data out, but they provide much higher sensitivity, much better signal-to-noise ratios, but the challenge of these technologies was can you make them analog? Can you get a large linear region, so you can measure physical properties that come out? We've invested in this. But along with that, we -- our thesis is that a multichip XMR using a discrete XMR with glue chips is not the long-range goal for automotive, higher reliability, reduction in wire comp, reduction in package footprint was critical. So we invested in XMR on silicon. We brought on partners, worldwide leading foundry fab partners and fab design partners. But also we brought on UMC in a partnering relationship to locate our own tool sets in their line to do XMR on silicon. Now we just released -- we've released recently products in ABS, wheel speed sensing. We've released products in gear sensing. So these are all products now we start -- we are rapidly expanding our portfolio to address all aspects of the XMR application space. They're great solutions. It provides us a separation again from our competitors. Not many competitors are able to address the market with these technologies. So we're excited about this. It's a long-term play. All of this -- automotive is a long-term play. It's not for the short-term faint of heart, right? You've got to invest in it, you've got to wait for the cycle time to monetize it, but then it becomes an annuity.

I wanted to ask also about your brushless motor proprietary solutions. That's been, I think, a pretty fast-growing area for the business. Obviously, applications both in industrial as well as automotive. But how are you differentiated on the brushless motor drivers and controllers?

Yes. The last 4 or 5 years, we took our power business, which was focused on DC and 3-phase motors and we recognize that we needed to up our game in IP. And so what we ended up doing is really studying and investing in understanding how motors are driven. So not simply providing the silicon to drive the motors, but also the intelligence associated with driving the motors. So we have great products today with embedded 3-phase motion control algorithms embedded into the IC itself. We are able to replace in the case of data centers, for example, solutions that require microprocessors that go along with discrete devices, et cetera, take a 2 double-sided PC board, replace it all with a single chip with a little bit of glue, passive components to drive these fans. They communicate well with the micros or with the controllers from the Amazons and Googles, but more importantly, they have the full embedded drive algorithms in them. And what this does is it makes it much easier for our customers, the motor designers to release new products, release new generations. And so it's been a win-win for us. It's a rapidly growing space for us. We're really excited about this space.

It seems like one of the applications you mentioned for the brushless motors was in the data center and the cooling fans. You're taking advantage of the transition from single-phase to 3-phase motors in that application. Where do you think we are in that transition from single phase to 3 phase? And do you name any of your data center customers?

Yes. So we -- our direct customers will be the fan manufacturers. The fan manufacturers of the -- they are very large manufacturers in Taiwan; Delta, Sunon, ABC, and Japan Nidec, for example. These are very large manufacturer service data center customers. We work both with the data center customers as well as with the fan manufacturers to optimize our solutions that work to drive the fans but also communicate the -- solve the problems of the data center manufacturers. In my deck, and which, unfortunately, can go very well, but in my deck, we had a list of customers there. Amazon Web Service, for example, is a customer. Dell is a customer. Google is a customer. The who's who -- Cisco, the who's who of data center customers are using our particular products. So -- and these are great products because once they get in there, they get qualified, they get certified. They have long -- they also have great longevity, not longevity like automotive, but they're certainly not in that consumer space. So we're really excited about this particular business.

Great. I wanted to ask 1 question to Paul. The company's done a great job, as Ravi mentioned, in the transformation from a fab business to an asset-light business. Margins have come up by now over 1,000 basis points. But you've got, I think, to the target model, another 500 or 600 basis points to go. Can you talk to us about what's left in the business to drive that gross margin up towards 55%?

Yes, Quinn. We -- one of the key drivers will be the consolidation of our back-end factories into the factory in Manila that is well underway, nearing completion. We have talked publicly about this being complete by the end of the fiscal year, and then there's some transition. So that's on target, as we've stated before. And then there are just numerous other initiatives internally that will drive product cost reductions, process cost reductions. And those, as we've discussed, are -- they're underway, but they'll be -- they're in various stages of completion over the next several years.

Great. Well, it looks like we've reached the end of the presentation time. So we should end it here. Ravi and Paul, thank you very much for joining us. Really appreciate your participation at the Needham Growth Conference. Hopefully, next year, we'll all be in New York in person, but thank you again.

Thank you, Quinn. And I appreciate the opportunity to present the company. And again, we'll thank you for putting up with us powering through these technical difficulties. But thank you all.

Thank you.