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

Good afternoon and for those that are still with us and awake in the U.K., good evening. My name is Matt Ramsay, the semiconductors analyst here at Cowen. I'm sure you guys have seen quite a lot of me this week. So you'll be happy to know that this is the last time you have to look at me during these sessions as it's the last session of the conference. But certainly, saving a really, really interesting and exciting company for the last session that I'm hosting as part of the conference. I'm pleased to be welcoming the whole senior team from Allegro Micro. To have a chat about their company, CEO, Ravi Vig; Paul Walsh, the CFO, Katie Blye is with us as well. So it's -- this is a company that I've really been spending a decent amount of time digging into and learning about the company's had an IPO in the not-too-distant past and a successful one at that. Our teams at Cowen don't yet formally cover the company. So Ravi, maybe you could -- with that in mind, for this audience, spend a few minutes talking about the company at a bit higher level, the product portfolio, the end markets you compete in and the catalysts and long-term drivers of the business? And then I have a number of questions that I prepared that we can dig into a little bit more deeply.

Thank you, Matt, and thank you to the Cowen team for inviting us here today. From Matt's conversation, I gather some of you maybe in the U.K., so thank you for staying up, listening to us. Hopefully, you have a beer in your hand or something to make this all fun. Let me try to get started on Allegro and give you a little bit of an overview on who we are and a little bit of the history of the company. So Allegro has been in the semiconductor business for over 30 years. So we were a company, one of the initial innovators in actually over 50 years. We've been one of the initial innovators in power ICs formed in 1965. Sanken Electric purchased us in 1990, as a journey went along, I was brought on about 4.5 years ago to be CEO. We at that point wanted to return some of the capital investment to Sanken. And through that journey, we brought on One Equity Partners, who helped us both with restructuring of the company and helping bring us into the form we are in, which is a successful -- we hope a successful public company. From a corporate perspective, or footprint, over 3,700 employees, many of them are in the Philippines in a wholly-owned assembly test facility. Great customer base, over 10,000 customers, global, the who's who of automotive as well as industrial customers. And as Matt said, just recently listed in NASDAQ on October 29. What we have that special is we have a very focused portfolio in 2 basic areas: magnetic sensing ICs and motion control in power ICs. So these are the 2 areas that we focus in. We have established great positions, leading position in MAG sensing, a great growth position in embedded motion control and power, both of which are driving our growth vectors. We believe in IP, as a company our size. We really believe that we need to have something special for our customers. Over 1,000 active patents globally. And they really do serve to be the foundation of great products from us. Key markets, automotive, 70%; industrial is approximately 15%; and the rest of the market, the broad other market for us is about 15% of the business. With -- in automotive, the key thing that I would like to say is that we've had a long-term established position in automotive moving through the journey of efficiency of automotive first internal combustion as well as in safety with interior safety as well as in braking and steering safety. As the journey in automotive has continued, we've innovated in fuel efficiency by using through our sensors and power devices. And then now we are heavily tied into electrification of the vehicle as well as in autonomous driving, especially as it relates to the steering and braking components of that -- of those particular systems. Great growth vectors for us. We feel really positive. They should serve as tailwinds for us in future years. Industrial and data center, a great story for us. We've started up to reapplying our company into industrial data center areas. It's a great growth vector for us, great margins, really sticky, intersects with automotive, both in motion control as well as in electrification. Data centers are a cooling story for us, thermal management. The business tripled over the last year, and we expect continued tailwinds as we move forward. And we ended the last year with a great positive momentum of $591 million, $175 million in fourth quarter, with 9% revenue growth over 10 years of profit. What it's all anchored on is technology and market-leading position. So when we look at the 2 businesses that we have, they're all anchored on BCD technologies that we co-developed with our foundry partners. It's a -- we have an asset-light footprint, but we really leverage our foundry partners with their tech as well as our IP to develop our processes. 175 degrees heat technology, this is really unique within the industry. It's very directed at automotive, especially automotive safety systems, and it separates us from the broad consumer or industrial competitor base that is really more architected around 125-degree centigrade wafer process technologies. IP is central to us. We create sticky system solutions. Very often, we are sole sourced, very often, our projects may last 7 to 10 years. So once we designed it, we last a long time. As we said, MAG is about 65% of our business. Great TAM, $2.1 billion. 13% CAGR in the auto and industrial spaces that we focus in. Specifically, our leadership is in Hall but also xMR technology, which we've invested in the last 5 to 7 years, really creating a technology that we can deposit xMR on top of our BCD, creating an integration platform that provides value to our customers. The same philosophy is in power. It's about 34% of our total revenue. Great growth tailwinds. Great TAM between auto and industrial with a 10% CAGR. Our focus in power is really an embedded motion control. So we have motor control IP into our products. We know how to drive motors spin motors provide safety signals -- safety information back, all of which is very applicable in automotive, which is benefiting from electrification, but also in industrial and data centers, all cooling and driving solutions are becoming a major deal. So that's pretty much us in a nutshell. As a company, we're extraordinarily happy about our value proposition that we bring great tailwinds with the automotive market with the market recovering in terms of SAAR, but also our content growth above SAAR, which we typically believe it's within the 5% to 9% level. So a great tailwind for us, anchored on great growth vectors, gross margin expansion stories that we have with our manufacturing restructuring as well as our product mix and great profit expansion. And with that, Matt, I'll turn it back over to you.

No. Thanks, Ravi. That's really helpful sort of reintroduction for a lot of folks to the company and a good summary. There's a lot of things to dig into. But I kind of have to start 70% almost of the business is automotive. And I can't get through an investor call or a semiconductor meeting today where we don't hear about shortages, semiconductors in the automotive market. And it's been a remarkable 18 months from lines down. Please don't give me any chips to way faster recovery than I think any of us would have imagined than a supply chain that's really struggling and stretch to keep up. Maybe, I guess, for yourself and for Paul, if you did give us a little bit of how you guys are seeing things in your own business in terms of book-to-bill? Where your channel is? Your ability to supply customers? How much you're potentially the upside of your business is capped by shortages of other components that go into cars? There's trying to disentangle this matrix of how the semiconductor industry is trying to serve the automotive customers is a challenge for a lot of us externally. So if you have any thoughts on those topics, it would be really helpful.

Do you want to take that, Paul?

Yes. I'll start with it. As -- like everybody, we have a significant amount of demand. We have unprecedented levels of backlog, precedented levels in my experience, to have ordering patterns where most of the orders are placed out of time. The essentially the near-term backlog is in place. In a typical quarter, we enter with 85% to 90% of the quarter's anticipated revenue on the books. And that's in normal time so that's not the case now. We had a lot more than that. We have not reported on book-to-bill. And we haven't reported our backlog numbers. But they -- as I noted, there are some of the context I provided that hopefully gives you some sense of where we are. As to the impact of other component suppliers impacting us, I'm not aware of anything. If anything, it would be anecdotal to understand that, but it could have an impact. I mean, I just don't have -- I haven't heard anything myself on that front.

Go ahead.

Yes. I mean, I mean, as Paul said, it is unprecedented what we see out there today. And what I'd like to point out is that this is a 2-year story in the making, right? 2019 was a pullback because of in automotive, going from a 95 million vehicle projection down to an 87 million actual. And during that pullback, there was an enormous amount of inventory also pullback from the market -- from the customer base. When it came into 2020 with COVID, we had a further pullback because of cash management philosophies. And we kind of predicted this in November, December, when I was asked about this automotive market and what do you see. And my point back then was the first wave is going to be simply an inventory-driven shortage that within cycle time of products, and you can only ship what you have in inventory at that point. And if you don't have it in inventory, it's going to take you a full cycle time to start replenishing. We saw that January, February, March. We saw that within the industry, various companies had stock outs, et cetera. And through no fault of theirs, demand came in far higher than forecast just kind of blew through the inventory you had, and now you're just waiting for more product to be made. So that was the first phase. Now we get into the second phase, which is now the capacity. How does the capacity line up with the actual demand that's coming in? And that's murky, right, because the demand is so high at this point that it's quite murky, it clearly exceeds the capacity. But I think what every semi guy is doing company, I'm sure, is doing is to try to redirect the available capacity to where we think there is true demand. It's our job to assess what the customers need because what signals we get are, like I said, murky. And so we're trying -- we are doing our best to target deliveries to actual usage rather than to inventory builds. And we're going to see this continuing pattern continuing for a while until things loosen up.

Got it. No, that's helpful. I think everyone's trying to do the same type of analysis that you're describing there. I wanted to dig -- the next step on automotive, I wanted to talk a little bit about the product portfolio and the content gains. There is -- as you noted, there's these 2 really powerful vectors driving the automotive semiconductor industry, the push toward autonomy or intelligence and the push toward electrification. And there's sort of some pieces of them are not related. Some of them are very intertwined. But from a sensing point of view, you mentioned things, Ravi, like braking systems and other type of sensing component. How do we tie those -- the content for you that might be associated with that type of a system to one of those vectors? And I'm sure there's other examples, but it's not -- I mean I cover companies like Infineon and ST Micro that are right in the drivetrain of electric vehicles. And that correlation between electric vehicles and their content is very, very clear. But some of the systems that you're in, I wonder if you could elaborate a bit about the vector of content growth versus those 2 big vectors of electrification and intelligence?

Yes. So let me just kind of start a little bit with our framework in automotive. We play in 4 different areas of automotive. So we play in comfort and convenience systems where we are focusing on seat-belt buckles, power windows, trunk latch switches, there's a variety of parts that go into. It's very high volume, and lighting systems, et cetera. Then we work in internal combustion powertrain. We can ring-fence that particular piece because we all know the internal combustion powertrain is eventually going to start seeing a decline. It may be a slow decline, but it will still see a decline. And then we have 2 other growth vectors. One is electrification and the other is autonomous ADAS systems. For us, electrification is a wonderful, wonderful trend in automotive. What people are going to realize is electrification actually impacts multiple systems within the car. And so we started with electrification investments, the traditional electrification investments in current sensing, for example, almost 10 years ago, where we targeted solar. Back then, solar was the big item that everybody should be aware of and we targeted electrification products in terms of current measurement that was really required at all these crazy high voltages at these very high current levels. And magnetic field sensing of the current gave a contactless or a low -- very low resistance version of being able to measure the power required for control of these circuits. And so these -- when we started moving towards automotive, for example, we'd like to point out that, hey, the Prius was actually the first electrified vehicle, it's a hybrid. It's been around for a while. They forget about it, but it really was the first groundbreaker that we had. Allegro has significant share in that particular -- in the inverters for Toyotas. An inverter might use 6 to 9 of our current sensors. Very large content there trying to -- some of them measuring the legs, some of each phase, some of it's measuring is there for safety, et cetera. So there's an awful lot of product in a single inverter for us. But not only that, when you go to battery electric or plug in hybrid, either one starts developing an ecosystem of wall chargers, onboard chargers, battery chargers, DC-to-DC converters, all of these systems start requiring between 2 and 6 current sensors per system. And we have -- like we said, we invested almost a decade ago. We believe we have one of the broadest portfolios in the marketplace, lots of protected IP in this particular space, going from miniature 20 amp types of sensing capability all the way to 1,000 amp kind of sensing capability. Lots of innovation here that makes the industrialization much simpler for the car manufacturers. So the traditional electrification piece is pretty clear. But -- and we have great growth vectors in that particular area. Our electrification -- our EV business grew 50% year-over-year. So we're -- and we are establishing over 50 different tier 1s or tier 2s, providing product into the electrification systems in terms of automotive worldwide. So great broad footprint. We don't know who the winners are going to be, but we know that we -- with the breadth of our customer base, many of them are going to be great winners in this particular market space, and we hope to be their partners through all of this. With electrification, Matt, as you know, it brings a whole different challenge. So for example, the heating system in a car, no longer is generated from the heat from the vehicle. That -- the heater provides some power IC opportunities. The cooling systems in a vehicle, audible noise becomes a big deal. So switching to 3 phase motors becomes a very big deal in that particular space. We have great 3-phase motor technology. That's also coincidentally applicable into data centers. Seat cooling fans, it's another system. You think, well, in the past, they were really for the Uber high-end vehicles. Well, when you have an electrified vehicle, it's like having floor heating in your house. It's the most efficient way of heating a person. And so they're -- and so you reduce the battery drain, but it adds a bunch of cooling fans into the seat. So there's a bunch of other application regenerative braking. There are a bunch of other applications that come on just because of electrification that gets us excited. ADAS is a 3-pronged system, sensing, thinking and acting. We're very well embedded into the acting. So you have to be able to drive the vehicle when you give it decisions. The steering column systems are showing great innovation. But we have an example where 1 customer of ours goes from $4 of content in the steering system to $12 of content in that particular system, all to allow for autonomous control of the vehicle. When you look at the braking systems, they're also changing. And then long term, we think this is a great intersect between ADAS and xEV. They're going to reimagine how the car is designed. The skateboard platforms are going to move steering systems into wheels. They're going to move breaking into break on the caliper, all of which control creates more motion control systems as what we do. So we are pretty bullish on these 2 trends.

No, that's really helpful. And I wanted to, I guess, piggyback on the point that you made there, just at the end, which is -- I've been trying to quantify this hypothesis that I have, which is folks view electrification and ADAS autonomy as to sort of parallel vectors. But some of the regulation from a CO2 emissions perspective is really force functioning the electric vehicle trend for plug-in hybrids and full battery electric vehicles. And my hypothesis is that, that redesign of the car is the catalyst that can really allow some of these ADAS systems and the technology to penetrate the vehicle. The auto industry has been great at a long time of introducing piecemeal features and charging for them over time. You touched on it there in your answer, but do you see that as electrification and redesign being a catalyst for significantly more ADAS and intelligence functions?

Right. I mean, it's far easier to control the vehicle when it's electrified and what it is -- when it's an internal combustion vehicle. So -- but you do see that intersect. And you also see the intersect where these 2 systems kind of merge. The skateboard is a classic example, right? The Gen 1 or the Gen 2 electric vehicles are not really going -- there's still an adaptation of the current design philosophies of vehicles. When they go to the next phase and get to the skateboard designs, you're going to find that probably one of the reimagining of the vehicle might be break on caliper. Every caliper has a motor on it. You don't need all the hydraulics to come to the in cabin. Another one might be steer by steering per wheel. So there's a little motor there to turn each wheel, either independently or through a linkage together, but it stays on the skateboard. So there's a lot of reimagining of these systems in how you kind of control the vehicle. And so the ADAS system, which -- the acting piece of ADAS, the braking, steering, is going to continue to evolve as at the complexity pushes down into the skateboard as opposed to stays inside the body itself. And as these systems kind of start reintegrating into each other. So we see that there is a -- again, I would like to just use the words reimagining of the vehicle, that's going to happen. Today, it's going to be an incremental step. Tomorrow is going to be very large changes, which are going to drive semi content and sensor content.

No, it's going to be exciting to watch. I mean, I saw the F-150 lightning announcement made by Ford. And all of a sudden, you have a -- what's been the best-selling car in the United States for, what, the last 25 years, now you have an F-150 with a truck bed and a trunk in the front, instead of an engine, right?