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

[Presentation] Good morning, everyone. I'm Jalene Hoover, Allegro's Vice President of Investor Relations and Corporate Communications. I joined Allegro just over 2 months ago and with more than 2 decades in semiconductors. There's no better way than to ramp quickly than to kick off an Analyst Day event and the company's first at that. We appreciate those of you here in person and those online for taking the time to join us this morning. I'm not going to read our forward-looking statements, but I encourage you to do so after today's event when the presentation will be available online in the Investor Relations section of our website under Events and Presentations. In summary, I'd like to caution you that today's presentation and the accompanying oral remarks contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have a great lineup here with us today to provide you with expanded insights into Allegro strategy, technology and innovation, how we win in industrial and automotive markets. And finally, our business performance and financial model. Note that following Derek's presentation, we will take a 15-minute break prior to Q&A. Once our presentation concludes, we hope that you can stay to enjoy lunch and enjoy our demos. And now it is my pleasure to introduce you to Allegro's President and CEO, Vineet Nargolwala.

Thank you, Jalene, and good morning, everyone, and thank you for joining us for our first ever Analyst Day. I'm Vineet Nargolwala, our President and CEO of Allegro MicroSystems, and I'm so excited to be here today to talk about a great company and where we're headed. When I joined Allegro last June, I saw a company at an inflection point, a company that is serving fast-growing markets with significant technology and business transformation is underway. A company which had the right products and technical expertise to help customers in those segments manage their transition. And a company, given the right strategies and disciplined execution, could deliver sustained long-term growth and create significant value for all of its stakeholders. Today, we want to share those perspectives with you, and I'm confident you're going to leave here as excited as I am about our future. So why are we here today? Well, Allegro is a very different company than the one that went public a little over 2 years ago. It's remarkable how far we've come. What's even more exciting is the journey and the potential ahead. Our Origin story, or Allegro 1.0 started as Sprague Electric and Wooster Mass nearly a century ago. Allegro 2.0 was being a division of Sanken Electric, then being carved out and taken public with a goal of getting to $1 billion in sales. We're almost there. So what does the future hold? Internally, we call our next chapter is Allegro 3.0, and we are building on a legacy of nearly a century and accelerating towards the future. With a sharper focus on e-mobility, clean energy and automation, increasing our technology and product innovation, building a strong ESG foundation, and continuing our growth and exceeding the targets that we had set at the time of the IPO. So today, we are reaffirming our guidance for fiscal Q4, and we want to share with you our strategies and our financial model as we look to the future. But first, for those of you who are new to the Allegro story, a quick introduction. Allegro is a global leader in magnetic sensing and power IC solutions. In fact, we are the #1 leader in magnetic sensing, and that comprises more than 60% of our sales. We're really an automotive first company. Automotive is in our DNA, and automotive sales are almost 70% of the company. Industrial is about 20%, and the remainder is a wide variety of applications from gaming to power tools. We are over 4,500 employees strong, and we serve a wide variety of customers in the automotive and industrial markets. We've been around for a long time. But we've been public only for a couple of years. And in that short period, we have built up a strong track record of performance with the most recent quarters delivering record sales and earnings growth. Our vision is to move the world to a safer and a more sustainable future, and it starts with a highly focused market presence. We got to start in automotive decades ago and our ICs have always been critical to the safe and efficient operation of vehicles. We're now evolving that focus to e-mobility, which is the electrification of vehicles and the increasing adoption of safety-related driver assistance features also known as ADAS. In Industrial, we target segments like clean energy and automation, where the automotive pedigree gives us a great advantage and differentiation and great technology leverage. Our core value is innovation with purpose, and that's timeless. It drives everything we do. And it's centered on customer intimacy with our engineers working very closely with our customers' engineers to solve the most complex problems. We design, build and launch products for automotive and then we adapt for industrial. So everything we do is automotive grade. Our organization culture is customer-centric, it's agile, and we value innovation with the fail-forward mindset. At the same time, we are adopting frameworks that bring efficiency and increase product velocity. This approach has resulted in leadership in magnetic sensing and in targeted power products. We're now adding to our leadership in power with isolated gate drivers and our over 1,300 patents built a significant moat around our leadership position. This leadership helps to deliver a very attractive financial profile. Our move to a fabless model has created a highly variable cost structure. That, coupled with our target of double-digit sales growth and expanding gross margins will create an opportunity for significant shareholder returns. Our strategy is simple. We are focused on large, fast-growing markets, driven by mega trends that intersect with our product portfolio and technical expertise. Both the automotive and industrial markets are being transformed by the mega trends of electrification and automation that are going to play out over the next decade. Within automotive, we are now laser-focused on making e-mobility a reality. Within Industrials, we are focused on targeted markets like clean energy and industrial automation that are being disrupted by the same mega trends. Our technical expertise and product portfolio in sensing and power ICs is uniquely positioned to intersect these mega trends, and now we are aligning our entire business system to our strategies. Over 75% of our R&D investment is now focused in these areas. Our teams are incentivized for success in these areas, and we are seeing proof that our strategy is working. Design wins in these areas are up 114% year-over-year and represent over 70% of our total design wins. I want to take you a little deeper on e-mobility, which is arguably the biggest transformation in the automotive industry since the introduction of the internal combustion engine. Electric vehicles and the adoption of ADAS features has reached a tipping point. Beyond the growing sales of electric vehicles, what's remarkable and what really matters is that every OEM is pouring all of their R&D and capital investment into electrifying their fleet. What's driving it, of course, is a confluence of increasing regulation, decreasing costs, especially on the battery systems and improving infrastructure, namely electric vehicle charging stations. This means that EVs are now projected to grow at over 20% CAGR and e-mobility as a total market represents a $4 billion opportunity for Allegro. Our content opportunity on EVs is twice that on internal combustion engine-driven vehicles approaching $100 a vehicle. What's really exciting for us is that e-mobility sales now are 43% of our automotive sales and e-mobility design wins are more than 65% of our automotive design wins. We're also seeing great alignment of our portfolio in fast growing industrial markets like clean energy and industrial automation. There is an ever-increasing demand for energy and the need for clean energy and a distributed bidirectional smart grid is more urgent than ever. Here, we are focused on solar, on wind, on EV charging stations where the power conversion challenges are identical to the ones we solve on electric vehicles. In data centers, which has grown nicely for us in the last few quarters, we are focused on thermal efficiency with our fan drivers for server cooling. This market is growing rapidly, and the content opportunity for us is significant. As we think about automation, the world is dealing with a labor shortage that is only getting worse. And this is not just in the Western world or in Japan, even China, the world's factory is facing an aging population and declining labor force. It's no wonder then that 8 out of 10 smart factory pilots are happening in China. The need for automation is stronger than ever, and our robust solutions for accurate and efficient motion control that were designed for automotive are finding great application here. These segments are normally fast growing, but the semiconductors required per system continue to increase, and that offers a great content opportunity for Allegro. Now a lot of you have asked us about our ESG strategy, and I'm proud to say that we are taking a very intentional and comprehensive approach to ESG. What makes it so relevant and exciting for us is that our products are critical to helping our customers achieve their sustainability goals. And so our core tenet is to maximize the impact of our portfolio. At the same time, we will work to minimize the environmental impact of our operations and our products and engage our supply chain on advancing sustainability. We will continue to work to build a diverse and innovative workforce and support the communities we operate in by cultivating the right opportunities for their betterment and advancement. In short, ESG is integral to our mission and is good for our business. This is a seminal moment in the automotive and industrial markets as significant technology and business model transformations get underway. And Allegro is uniquely positioned to help customers manage this transition and benefit from the opportunities. But being in these fast-growing markets is not enough. We understand and have what it takes to excel, to win and to be the leader. It starts with customer intimacy to obtain insights that you can't get from market research and build long-term relationships. It's being better than all the alternatives on the market. And what drives us here is the core value of innovation with purpose. It's working closely with customers to understand their needs and bring the right products to the market quickly it's also using our capital to make smart acquisitions to strengthen our portfolio. And it's about performance. We leverage our global engineering team to find the best solution to customer problems. We work with our supply chain to become more efficient every single day. We launched new products at the right time at the right quality. We operate at 200 parts per billion. That does not happen by accident. Our performance is highly intentional, and it's automotive-grade. So our customers know us and trust us to help us in this transition to a more sustainable future. And speaking of that future, we are ready with a strong management team with significant industry and public company experience. Beyond those who are participating today, I'm privileged to lead a deep and talented team. We have a great mix of leaders and talent with a long history at Allegro and those who joined us with great experiences from other companies. And our collective experience is coming together is exactly what we need to guide the company through its next chapter of growth. Joining me today are key members of my team to expand further on our strategies and our financial model. Derek D'Antilio, our CFO; and Suman Narayan, our Senior Vice President of Products; Max Glover, our Senior Vice President of Worldwide Sales. And I will introduce our next speaker, Mike Doogue, a prolific Allegro innovator with over 75 patents to his name. Mike has been with the company over 25 years and was recently appointed our first ever CTO. There is no better person than Mike to share with all of us why our technology is so differentiated. Mike?

Thank you, Vineet. Hello, everyone. It's truly my pleasure to speak to you all today. In this session, I will first start with a discussion about Allegro's differentiated products. And then we'll talk more deeply about our innovative automotive first technology. And then we'll start to talk about how we combine the products and the technology to carve out leadership positions in the e-mobility and in our targeted areas of the industrial market. You've heard it said a few times today that automotive is in our DNA, and that's undeniable. It's actually one of the key foundations that helps us establish the leadership positions we have today. And in magnetic sensors, that leadership position is strong. We're very proud of the fact that we are #1 in the area of magnetic sensing. And we've been leaders in this space for years. Sometimes people ask me how have we maintained a prolonged leadership position in magnetic sensing. And the answer is simple, innovation with purpose. We have been prolonged innovators in this space. And as a result, we have the broadest portfolio of products that are more accurate, more efficient, smaller, more robust and can operate at higher speeds relative to the competition. And customers continue to love our products. I'm happy to report that since the time of the IPO, our market share in magnetic sensing is actually accelerated showing that we still have momentum in this marketplace. When we think power ICs, we again lead first with our automotive technology. The power market is large, and we don't attack the entire portion of the power market. Instead, we find high-growth areas within the e-mobility market, the industrial market, that value our automotive technology. Our motor driver ICs, they spend motors fans and pumps more reliably, more efficiently and more quietly than most competitor solutions. Our regulator ICs, they convert higher voltages into lower voltages that are more useful in various systems. And let me give you an example. So in the car, we have a 12-volt battery, our regulator ICs will step down that voltage maybe to 5 volts, 3.3 volts, and these voltage rails can be used to power chips throughout the car. Last but certainly not least, our isolated gate drivers. This is a new area for us. These products operate up at or above 1,000 volts. And they're actually optimized for driving gallium nitride and silicon carbide transistors. Additionally, when you work at these voltages, it's the sweet spot for the electric powertrain in cars, and significant portions of the clean energy market. So it's a fast-growing market, a new area for us. This should be a bright spot for Allegro for many years and I'll come back and talk more about the tech in these products before I wrap up the session today. Now before I talk too much about products, let me talk about what is inarguably one of the strongest foundations of our tech, and that's our Wafer Technology. For decades, we've been investing in this technology. For decades, we've been focused on making it automotive grade and as a result, we have this truly unique Wafer tech. It passes the most stringent standards of the automotive industry. What that means it can survive 175 degrees C for more than 1,000 hours. We also have a 120-volt capability. This is important for 48-volt markets in data center and in EV, but there's something more here as well. In a car, there are many voltage transients that can damage lesser ICs. But because of our high-voltage capability, this is just one more way we add to the robustness and the ruggedness of our ICs in the car. And lastly, you already heard about our 200 PPB failure rate. And I can tell you that's a tremendously low failure rate in the field. Our automotive customers deeply appreciate that. This is actually somewhat table stakes to play in automotive. But what's also true is that our industrial customers deeply value this as well. It's basically a means of measuring does a company like Allegro cause you problems in the field and with a number of that low, in general, the answer is no. Now I have a chip photo on the screen and I don't want it to put you to sleep. There's some good stuff in there, so stay with me. I put it there for a reason, which is to highlight that we have a truly unique technology in many ways, but one of the most important ways is through the up integration we achieve. In that picture, we have precision analog electronics, we have dense digital electronics, and this means we can add algorithms, even microcontrollers to our ICs. We have automotive-grade EPROM memory. And this may not sound super interesting, but I'll tell you, when you look out into external foundries, it's very difficult to find the right level of automotive ruggedness in memory. We created this ourselves. On the chip, we also have hall effect transducers, GMR and TMR transducers. And then not shown here, you'll see it later, we can also integrate high-current, high-voltage power transistors that are the foundation of our power ICs. So it's truly highly integrated, new entrants to the market can only dream about this level of integration. It's a moat and a barrier for entry for new entrants in the market. Now you've also heard over the years, we've transitioned to a fabless business model. And I want to point out that in that transition, our technology has only become stronger. And the reason for this is that through our approach, we installed our highly unique automotive-grade technology into some of the leading wafer fabs in the world. And this technology is captive to us. At the same time, these are highly skilled wafer fabs. So we leverage their expertise and unit processes and wafer processing, and we fuse together the best of Allegro with the best of the industry. And now we believe we have the strongest automotive grade tech we've ever had as a company. Now let me tell you a story about our sensor business. decades ago, we started investing in automotive powertrain technology. It's one thing to be automotive. It's another level of achievement to be in the powertrain. We had the Wafer tech that I just talked to you about, but then we also developed highly integrated packaging technology. And this is an area where Allegro truly differentiates ourselves. We have a history of integrating all types of components that add value, be it magnets, resistors, capacitors, all with the mindset of solving real and meaningful customer problems that we've uncovered working so closely with our customers. The first business that ramped was our speed sensor business, these speed sensors are at the heart of internal combustion engine cars, they make them more efficient, they make them less polluting. And we realized that we had found really a high-performing formula in combining Wafer tech and package tech to solve problems. So then we did it again. We looked at the EV powertrain, and we made this call long before EVs were clearly going to be as popular as they are today. We applied the same formula. We had the right Wafer tech. We made a completely new set of unique packages for our current sensors because we knew that there were so many current sensors in an EV powertrain. That's been successful, and I'm happy to report that today, we're actually one of the rare companies that has more dollar content in an EV powertrain than we do in an internal combustion engine powertrain. And the reason is current sensors. So let me double-click on these products. We believe this is the fastest growing area of the magnetic sensor market. And when we look at an EV in the marketplace today, we see cars with up to 40 current sensors inside. They're not just in EVs, you'll find them in clean energy systems, industrial systems as well in good numbers. You see 3 pictures on the right of the slide. These are all packages. So this is an example of how we use our packaging technology to truly differentiate our tech. Through innovation with purpose, we now have the broadest portfolio of high-performance current sensors in the marketplace today. And as a result, we help to make electric vehicles have longer range. We help them to charge faster and we can improve the efficiency of clean energy systems. There's another exciting area of the magnetic sensor market. Some of you already asked me some questions about TMR technology today, which is great. It's an emerging area of the market. TMR it's a different type of transducer. It's a magneto-transducer. It's a little more accurate, has higher resolution and can operate at higher speeds relative to hall-effect sensors and it's beginning to take share from Hall-effect sensors. Now I want to point out hall effect sensing will be the majority of the magnetic sensor market for many years to come. But the fact is that TMR is starting to take share. Customers like TMR, they can make higher-performing motors. They can also more easily control power electronics using silicon carbide and gallium nitride transistors. And these applications, the faster operating speeds of TMR can be beneficial. We saw this coming. We started investing in TMR technology more than 10 years ago, and I'm happy to report that if you were to take a part one of the most popular electric cars on the road today, you'd find Allegro TMR products inside. It will continue to be a heavy area of investment for Allegro. We believe we're leaders in automotive TMR sensing today. But through our investments, we plan to extend that leadership position. So I encourage you to keep an eye out for more and more TMR product releases from Allegro in the years to come. And later on, when Suman speaks, you'll hear about some of the other products that are in development for TMR at Allegro. Okay. A different story now for our power business. So if you look back between the 2010, our power business was highly focused on the consumer and office automation market. And there was a reason for that. Allegro was and still is very good at spinning motors and there's many motors in this type of equipment. But at one point, we realized we were missing a golden opportunity in the area of power, and that was to enter the market leading with our automotive first technology. So we did that. We found applications within the ADAS market, the EV powertrain, then in industrial, there was data center and other target industrial areas. The strategy worked. It continues to work. I'm happy to report that we've actually tripled our market share in our target power areas over the last 5 years. And it just goes to show how the winning formula of leading into the market with our automotive first technology could drive good results. When we think of our power business, the Motors portfolio is actually one of the most important areas of growth. There are a lot of motors sold in the world today. There's actually a lot of motors in cars today as well. And let me go with the last chip photo of the presentation, but hopefully another good one, which shows in the top of the picture, dense digital circuitry. This is where we put embedded algorithms into the chip to help control motors. At the bottom, you see the power drivers. These are the transistors that actually can put an AMP or more into a motor to get the motor to spin. What we have there in that photo is a single-chip plug-and-play solution. Our customers like these chips, they put them in the motors and the motor spin very easily. They're also quiet and efficient. Competitor solutions often require 2 chips to accomplish what we do in 1 chip. For example, it's common to have a power driver and a microcontroller and 2 separate chips on a board in a motor, and the customer might need to write some code in the micro. It's a much more difficult design-in challenge relative to Allegro's rose plug and play solutions. So I keep mentioning the benefits of the motor ICs, one is efficiency, and we keep talking about quieter motors. And let me give you a real example about why that's important. So if you've ever been in an electric car in the cabin, there's no internal combustion engine noise. It's a quiet place. And what was happening is that passengers were actually able to hear a winning noise coming from some of the motors in the cabin. Not using our technology, this was using competitor technology. One switching to a chip like Allegro, this is where the audible noise comes down and the driver experience improves. So just an example, it's a bit of an esoteric reference to quieter motors, but in your daily life, there's many situations where acquired a motor enhances the user experience. Last but certainly not least, our isolated gate drivers. I talked about the applications for these ICs earlier, but let me repeat them. They're actually used in high numbers in EV powertrain and clean energy applications. In the EV powertrain, they're in the inverter, they're in the charger. And we believe that there could be up to $30 of Allegro content for these ICs in an electric vehicle. We've actually seen in an onboard charger application 32 high-power gate drivers being used. And that's going to be an important stat that I'll come back to in a minute. If you look on the right, the upper right that's Allegro's newest technology. And what we do is we combine multiple functions from the power system into our single chip. And this is another story where we do in 1 chip, what competitors require 2 chips to do. Now think about that charger that uses 32 of these. You can understand why customers are quite excited about working with Allegro because when you're using 32 installations of an isolated gate driver, adding 32 single chips rather than 64 chips is a big advantage. This is how we can shrink the size of these power systems by up to 50%. And that's meaningful to the customers. On top of that, we actually bring efficiency benefits of up to 40%. Customers are deeply engaged with us on these products right now. We will release our first gallium nitride isolated gate driver this calendar year. We're already working with our lead silicon carbide gate driver customers, and we expect this business to bring us revenue sometime in the next 2 years. Truly exciting space for us. So in summary, I want to wrap up with just a few takeaway messages. I talked a lot about the tech. It's truly unique at both the wafer package and circuit level. Number two, I want to give credit to the Allegro team. They truly are experts at determining what customer problems are in the field and figuring out how to put together the building blocks of our tech to solve those problems. Third, Vineet mentioned, we're applying 75% of our R&D into these high-growth areas of e-mobility and target industrial. So we're really taking the unique tech, the expertise at solving customer problems. We're putting it in the high-growth areas of the market, and we believe this will help us drive outperformance in years to come. Throughout the presentation so far, and you'll hear it again the words that we win as cars electrify. In fact, Allegro wins when the world electrifies. To tell you more about why this is true, I want to introduce Max Glover, our Senior Vice President of Worldwide Sales; and Suman Narayan, Senior Vice President of Products. Gentlemen, the floor is yours.

Thanks, Mike. Good morning. I'm thrilled to be with all of you today, and a warm welcome to those of you attending virtually. As mentioned, Suman and I will take a few minutes and talk through how we win in automotive and industrial markets. So before I dig into automotive or market-specific information, let me strategize or let me explain our strategies to win in the markets that we serve. It really comes down to 3 things: first, we embrace our automotive first design and manufacturing methodologies as foundational. We build products that thrive in harsh environments. We can produce them at scale and we can produce them at world-class quality levels. We often support products for very long life well beyond a decade. We embrace functional safety as a differentiator, so that our customers can build critical systems that are failsafe. What I'm describing is table stakes for an automotive supplier and our target industrial customers also see value in these competencies. Second, we have a heritage for joint innovation with our lead customers. We've developed a reputation in the market over many years for pursuing levels of technical customization well beyond those of our peers. Mike mentioned a number of examples where deep engineer-to-engineer dialogues have spawned really amazing ideas that allow us to better serve our customers and those conversations really inform our deep domain expertise in the markets that we serve. Finally, Joint innovation with lead customers is a great business. Don't get me wrong. But sustainable multiyear growth comes when we can scale these solutions to additional customers, both large and small, and also apply them to adjacent markets where customers see similar value. To do that, we have a global direct sales force, and we also have regional technical centers that allow us to engage customers deeply in the geographic regions that we serve. Finally, we serve more than 1/3 of our customers through our global channel partners. In essence, this is how we win. So let me define the markets that we prioritize and apply this strategy. As Vineet mentioned, we look at this in 2 very basic ways. First, do these markets offer us sustainable long-term growth; and second, to the customers that comprise this market, see value in our differentiation. We're fortunate to have more than 10,000 customers. The array of products that they build around our technology is inspiring. However, e-mobility, clean energy and automation play to our strengths, our customers in those markets value the differentiation that we offer, and it gives us a long-term growth opportunity across our entire portfolio. This, along with our play-to-win mentality, is how we outpace industry market growth across sensing and power markets. So we're #1 in magnetic sensing. We have the opportunity to further increase share in a growing market. As you can see, the SAM for our power business is enormous, and we're able to significantly outpace the market growth through a very targeted and focused strategy. You're going to notice a theme as we walk through the solutions today. All of our target market solutions comprise a unique combination of power and sensing products so that we can provide unique differentiation to our customers. So let's get into more detail starting with e-mobility. I think we all know that the auto industry is going to change more in the next 10 years than it has in the previous 50, we're ready. As you've heard, we have a trusted pedigree serving the automotive industry. And our solutions are more relevant than ever as these automakers pursue mega trends around electrification and autonomy. Although we're a young public company, we've been serving the automotive market for more than 3 decades. As a result, we've been able to build a very balanced market profile. No customer is more than 10% of our revenue, and we have a healthy distribution of revenue across the 5 geographic markets that we serve. As a result, you're going to find significant Allegro content across all top 20 OEMs globally and many, many more. So serving the automotive industry is hard work as a semiconductor supplier. However, that hard work is rewarded because we are awarded business that will span high-volume series production for many, many years. Although the automotive product development cadence is increasing, still substitution cost for a component in high-volume production remains very high. Further, supply and demand alignment has been a hot topic in the industry lately. And I'm proud to report that more than half of our e-mobility revenue is protected under long-term supply agreements with our customers. I'll also add that as the auto industry transforms, direct engagement with the automakers is essential. This is something we've done for many years. We know how to do this. One example that we have employed in the past with automakers directly is to help them leverage our sensing products in their powertrains to make them more efficient so that they can meet increasing fuel economy standards. So we have to replicate this playbook not only from a technical standpoint but also a commercial standpoint. If we do this, then we can unlock value for Allegro at a system level. We can be acutely informed of industry trends that are emerging, and we can also support our automakers directly with long-term supply agreements, product development agreements and even direct sales. Our intention is to be an indispensable partner for the automakers as the industry transforms. You've likely heard statistics in the industry around overall semiconductor content growth in automotive. For one, a third-party market research firm states that the value of semiconductor content will double between 2020 and 2026. Largely, this is due to the increased adoption of higher levels of ADAS features, advanced driver assistance systems and the move to electrification. Through close collaboration with our customers, we've seen this coming. Our joint engagement with our largest ADAS customer dates back to 2005. Our close collaboration with the global leader in EV powertrain inverters, dates back more than a decade. Our pipeline and our design wins have already shifted to e-mobility. This underpins the 25% CAGR opportunity for Allegro in e-mobility and also our overall automotive growth at 7% to 10% above SAAR. Of course, the faster the world moves to EVs and embraces ADAS functions at or above level 1, which includes functions like lane keep assist, automatic emergency braking, and adaptive cruise control, the faster we can unlock the massive content opportunity associated with our design wins. That's because essentially, our growth story in e-mobility is one of content growth. Some of this growth is evolutionary, more intelligence, more sensing, more redundant systems across the vehicle. But some of it is revolutionary with the preponderance of blank sheet of paper designs for electric vehicles, we have the ability to influence new architectures and utilize our products to make vehicles more efficient and safer. As you've heard, we build on a traditional auto base as a foundation. Many of these applications like HVAC, lighting, in-cabin actuation and infotainment, will persist regardless of the propulsion type of the vehicle. However, the significant content that we find in the EV powertrain and specifically steering and braking, allow us in total to access the content opportunity more than 2x in a battery electric vehicle, what we would find in a traditional vehicle with a combustion engine. So as an industry, we cross a tipping point for mass adoption when we lower the barrier of entry for first-time buyers. In my recent discussions both with automakers and large Tier 1 automotive customers, there's a focus on 3 key technical themes: improving battery efficiency, reducing charging time and increasing vehicle safety. Solving for these allow automakers to access a wider variety of price points and vehicle classes and help move the electric vehicle concept from early adopter into the mainstream. So let me turn it over to Suman and you can help us explain how.

Thank you, Max. Good morning, all. Driven by electrification, power and sensor products for Allegro Micro systems in EVs are outpacing market growth. In the next few slides, I'll walk you through a few examples of Allegro's products where they play and how we innovate with purpose to address the needs that Max talked about. In electric powertrain, we will address charge time and battery efficiency. And in breaking in steering we will address safety. First, let's take a look at the electric powertrain. Every power conversion is an opportunity to extend battery life and thereby extend driving range. The primary function of the EV powertrain, as Vineet mentioned, is to be an efficient power conversion system. That delivers energy to the various components of the car, thereby minimizing losses to extend battery life. There are really 3 key systems in the car. There is an OBC, onboard charger, which basically converts AC to DC energy and charges the battery. There's the DC to DC converter, which takes the high-voltage DC and delivers to the rest of the car. And then you have the traction inverter, which takes the energy from the battery and converts it to acceleration from DC to AC. When we mean power conversion, that's what we mean, DC to DC, DC and AC to DC. Now let's take a look at why our current sensors play such a crucial role here and why we outperform our competition. Mike talked about this before. So if we take 3 things to look at on our current sensors, it's our high accuracy on current sensing, especially in terms of measurement, our high measurement bandwidth and our high levels of integration, which puts our current sensors in a small package and thereby improving power density. So we'll look at accuracy a little more here for the traction inverter. In case of the traction inverter, accuracy is really important. And that's really because the current sensor helps you to control the motor quietly and without vibration. The less vibration, also known as stork ripple, you have more battery efficiency as you don't drain the battery fast. Then let's take a look at the OBC and DC to DC. In the OBC and DC to DC, if we need 100 amps and we use a current sensor that has a 5% error, we'd be asking the controller for 5 extra amps. That would drain the battery faster. It's very similar to your cell phones. Allegro's current sensors today are targeting less than 1% error. This results in a more efficient power conversion and extends driving range. Mike also talked about how the SiC and GaN transistors are improving power efficiency. Our new 5 megahertz high-measurement bandwidth current sensors, help systems with GaN and SiC power switches, and we do our measurement effectively. Our current sensors can also detect shorts in less than 2 microseconds. Thereby, you can actually save your components, your expensive components on the car like your silicon carbide. Additionally, our current sensors are completely isolated from high voltages, addressing system safety needs. In addition to the high measurement bandwidth, you saw Mike talk about the acquisition of the high-voltage isolated gate driver technology, which is now being prioritized by the R&D teams. The technology and integration in isolated gate drivers are unique. As Mike mentioned, offering 40% more efficiency and 50% reduction in board space. Last but not the least, in extreme weather conditions, our intelligent and code-free motor drivers extend the range of the EV by heating or cooling the battery pack as needed. So over the next 2 slides, we're going to talk about braking and steering applications. Let's dive into the technology for braking and steering as it pertains to Allegros products and how we meet our stringent safety standards for these systems. In braking and steering, we leverage the whole product portfolio for Allegro. The position sensors, the speed sensors, the current sensors, the power regulators all come together along with the motor drivers in a symphony. So let's look at the EV steering systems. Mike mentioned this that the EVs need to be quiet. It's a customer expectations that the electronics that they put in the EV also keep the decibals done. In electrical power steering systems, our 2D angle sensor, we talked about this briefly based on TMR technology, gives us a precise position of the EPS motor and allows us for a quiet start-up and control. These new TMR based sensors have up to 8x based better accuracy, angle accuracy compared to all the technology available from our competitors. This level of control reduces the vibration of the motor and allows for a quiet operation of the motor. Our current sensors close this loop and keeps the vibration down as well. With the advent of steer by wire systems, the mechanical components of the car like the steering wheel and the steering rack is being replaced by purely electronic systems with 2 or more additional motors at the rack to guide the car. This, in addition to the feedback motors on the steering wheel is a big multiplier for Allegro as a growing number of motors and steer by wire represents a significant multiplier in terms of sensors and quiet merchant gate drivers. We can also see how steering system manufacturers like integration. With our integration of the power regulators and our motor drivers, we offer 20% less board space compared to our competition. As stated earlier, the need to be compliant to ISO 26262 and ASIL standards are really important for our customers. All of our products for braking and steering systems are rated for automotive safety. Our position sensors combine TMR technology and Vertical Hall technology in a single package, achieving ASIL D, the highest safety rating, which our customers use to reduce their design footprint and improve their overall safety. Now let's take a look at steering applications as they are transferable to braking systems. As I mentioned before, a lot of the technology transfers over to braking. In breaking our customers demand a fast-breaking response for safety. When the driver presses the break, position sensors used to detect the amount of braking force. This signal instructs a motor to turn on and create a hydraulic force to the brake calipers. The motor requires several Allegro components similar to the EPS motor, power regulators, gate drivers, current sensors and motor position sensors. In addition, a wheel speed sensor is used to detect if the wheels are slipping so that the ABS system can be turned on. The next evolution of braking replaces the hydraulic systems with independent motors on each wheel, which generates a braking force by electromechanical means. This is called EMV. EMV requires smaller electronics to provide a faster breaking response. You can see how the content now spreads from steering to breaking in the car and also allows our customers to save design and engineering overhead costs by reusing validated components from one system to another in the car. Now in this slide, we'll talk about how the architectures are evolving over time for braking, steering and traction motors and how it's going to enable more content for Allegro in the future. In the last section in braking, we saw the evolution from electrohydraulic to electromechanical braking. You saw the changes in steering from traditional EPS to steer by wire, with these changes, we expect the component count for Allegro power and sensor products to grow 2x to 3x per car, as the number of motors continue to increase. On the horizon is an even more integrated system called the corner module. In the corner module, we see the possibility of the convergence of the traction motor, the steering and braking all in the wheel. The beauty of these modern vehicles is that the level of safety required is almost twice as much as before. We can now extend the position of leadership and grow rapidly our solutions and continue to close collaboration with our customers as the architectures continue to change. We talked about a lot of applications and how we address some of the needs that Max brought up. I want to give you a quick snapshot of the products that we're releasing to support these applications. These outperform our competition in the applications we saw earlier. We launched our ASIL C rated high measurement accuracy current sensors at less than 1% error. We continue to launch new ASIL D-based position sensor products based on TMR. We're launching our new intelligent motor driver products for battery cooling applications. Our 5 megahertz bandwidth current sensors and isolated gate drivers enable efficient use of faster switching technologies such as GaN and SiC to minimize power losses. The electrification of the powertrain leads to significant lowering of carbon emissions. My team and I are proud that we work on these innovative products that contribute to the reduction, leading the way for a sustainable future for all of us. So I just want to bring a quick summary to what you heard on automotive. The market opportunity in electrification is significant. We continue to invest in differentiated solutions for e-mobility applications, coupled with our momentum with customers, we believe we will outpace the market growth. We'll now switch gears to the industrial market, and I'll let Max share with you how we're applying the automotive first strategy to industrial.

Thanks, Suman, fantastic. So again, I want to talk about industrial and how we win. And we'll talk about playing to our strengths, and we'll talk about why we target attractive markets like clean energy and automation. So again, we've highlighted our automotive first strategy on multiple occasions this morning. This is our DNA. This is our differentiation as a company and we embrace it. So we make sure that our targeted industrial strategy also comprehends where there's long-term growth, and we can play to these strengths. The elements of our automotive first strategy that resonate with our target industrial customers include our rigorous quality standards, our ability for our parts to work in extreme environmental conditions and our long life cycle where the vast majority of our products are available for 10 years or more. This is critical in many industrial systems that need to exist in the market for decades. Further, we've doubled down collaboration with our global channel partners over the last 5 years. These partnerships give us value-added services that complement our road map and our technology. These things can range from fast prototyping, services for start-ups and new innovators, all the way to complex end-of-line programming and additional logistics support for some of our largest and most strategic industrial customers. These partnerships have enabled us to grow at above market rates and allow us to exceed the expectations our customers place on us. So the industrial markets where the growth opportunity and Allegro entitlement intersect is clean energy and automation. The combined SAM for these markets more than doubles in the next 5 years and the $3.5 billion SAM potential for Allegro is significant. So where does Allegro win? First, you can draw a straight line from our leadership and our technology in electric vehicles to the world's ambitions to electrify everything in clean energy generation and storage. This underpins our ability to address the $2.2 billion clean energy potential. We also win where there's precise motion control required. This can range from robotics within the automation space, and advanced thermal solutions for data centers that leverage our BLDC motor driver technology. Finally, we love applications where we can improve energy efficiency. Again, this ranges from solutions that enable power conversion from the grid to an end point, highly efficient power supplies and industrial motors. In total, these fundamentals allow us to unlock an 18% CAGR opportunity across clean energy and automation, and that's validated by our design win pipeline. So let's dive a little deeper into clean energy. The undertaking underway to modernize the world's electric grid is massive and route with challenges. As an industry, we need to move from large centralized energy resources reliant on fossil fuel to highly distributed grids that rely on sources with intermittent output like the sun and wind. We have to evolve from an always-on one-way grid to a bidirectional grid that's highly optimized for real-time supply and demand requirements. The overall clean energy market across renewables, grid investments and inverters was $798 billion in 2021, and it's growing. Within that, solar, inverter and storage markets are growing at the highest CAGR. With that backdrop, we're acutely focused on serving the EV charging infrastructure market. Within that, units are growing at 29% CAGR. And this ranges from smaller AC, DC wallboxes that you'll find in a home, an apartment building, a small business or a hotel. All the way to the big megawatt DC fast chargers that can charge vehicles with unprecedented speed and are pack full of power and sensing content. Solar also represents an overall market opportunity of $280 billion in 2025. And the units that are relevant to Allegro are growing at a 20% CAGR. Again, new technical deployments and business models are going to emerge as solar generation and storage has to exist and happen closer to the point of consumption. When we talk to our strategic customers in this space, they have big ambitions to grow, and we are committed to helping them utilize rising our IP portfolio, and our products. Let me turn it over to Suman to explain a bit more.

Thank you, Max. So as Max said, if we summarized some of the discussions in automotive, when cars electrify, Allegro grows. When the world electrifies, Allegro grows faster. There's a power conversion involved in every one of these applications that you see, so inverters, EV charging, data center and automation. And I'll walk you through what the parallels are to what you saw in automotive, especially on the EV powertrain and braking and steering. Solar uses same solutions as the EV inverters for power conversion. The principle is the same. Energy from the solar panel can either be sent to a battery for storage or be converted from DC to AC to power the home or grid. The solar inverter needs to operate in a harsh environment like its automotive counterpart. Leveraging building blocks from automotive products such as to life expectancy of over 10 years. We also provide system integration that requires fuel external components. You saw some of those examples that Mike mentioned in his talk, both from current sensing, isolated gate drivers, the integration of the PMIC and the motor drivers, they all offer value to our customers, which is smaller board space. Next, we'll talk about some of the EV charging. After capturing this energy from the sun, we need to power the car. In these DC systems, power conversion is very similar to what you saw in the onboard charger or the DC to DC that you saw on the EV powertrain. Our high bandwidth current sensors and isolated gate drivers enable efficient use of faster switching technologies like you heard before, with GaN and SiC FETs to minimize power losses. In addition to this, our current sensors are also used for accurate phase monitoring and short circuit protection for increased safety. Today, these charges are made from 10 to 25-kilowatt modules that multiply current sensors. To reduce charging times, customers can build higher power modules by just using stacks of these current sensor modules. So as the trend continues to go to DC to DC, our content continues to increase in both current sensing and gate drivers. Next, we'll talk about the high-speed fans that are used in data centers and also where our current sensors are used. Our motor driver technology long proven in the automotive space and other demanding environments for decades has found and data center for efficient operation of the data center fans. Allegro's proprietary quiet motion controllers offer smooth, quiet motion while eliminating the need to write software. Mike talked about this briefly, and this is why they're used in data center fans. We can also reduce board space by 30%. You saw the elimination of the components like the microcontroller and things like that, that you don't need on the system anymore. These devices are designed for high-speed fans that operate 28,000 RPM, and they really move heat fast with less power consumption. The current sensors are used for monitoring and protection of the power outlets on these power distribution units in data centers. Next, we'll talk briefly about automation. Vineet mentioned that acute labor shortages will drive the need for industrial automation in all sectors. The strong demand within the industrial automation space for sensors and motor drivers fits well in Allegro's portfolio for high-quality products with integrated safety features. Intelligent motion control systems are at the heart of many of these pick-and-plays systems that you see. And if you remember, there was a symphony. Whenever there's a motor opportunity in BLDC, you have current sensors, you have position sensors you have gate drivers and you have the regulators all play together. So we have a big opportunity in industrial automation as the world continues to face these shortages. Just to summarize where we are, in industrial. In the industrial markets, we're focusing on clean energy and automation, and Max explored why they are fast-growing markets for Allegro. We're effectively aligning our field sales, marketing teams to engage closely with the top customers who are looking to solve problems in electrification. We're efficiently using our R&D from automotive first strategy to quickly build products for this market. So you can support the harsh environments, but also we can bring Allegro's innovation, quality, safety and reliability to this industrial market, which our customers value. Now if you're all tired of this, let me introduce Derek D'Antilio, our Allegro's CFO, who can translate what all of these innovative products and growing markets mean to Allegro's future in financial terms. He joined Allegro in 2022 and with more than 20 years of experience in semiconductor and high-tech companies. He also served in the U.S. Army, thank you for your service, Derek, and please take the stage.

Thank you, Suman, and good morning, everyone. Now that you've heard about what makes Allegro unique, I'll finish this morning by providing some insight on a few things. First, on Allegro's operational transformation; second, our track record of strong financial execution. I'll summarize the growth opportunities that you've heard about this morning. I'll also introduce our new financial model, and I'll review our investment and capital allocation strategy. Finally, I'll tie back what I heard this morning to our financials and how we think about the future. I'll start by providing an overview of the company's operational transformation but because it provides some insight into how we think about the business and how we make investments today. The way we look at it from an operations point of view is Allegro 1.0 was a pioneering integrated device manufacturer, or IDM. In fact, with its first fab in Wisdom, Massachusetts in 1965. So we really do have multiple decades of fab experience. Allegro 2.0 was the period of the transformation from about 2017 until 2021 when we spun off the Polar Fab, closed the Worcester fab and consolidated our 2 back-end operations into one highly efficient back-end operation in the Philippines. This transformation drove gross margin improvements of over 1,000 basis points in that period of time. And we're now just getting started on the Allegro 3.0 period of operations as a fabless asset-light business. And again, this is very important because these changes are really fundamental to how we run the business and how we make investment decisions. As you've heard, innovation and customers are our first priority. I want to talk a little bit about our operations today and some of the strategy for our future operations. A very unique and important aspect of all of our operations is they're all automotive grade. What that really means is they're known for having extremely high quality and reliability standards. For example, as you've heard in auto, quality is measured in parts per billion versus parts per million. An auto grade qualification for parts establishes a very high barrier to entry. This slide provides an overview of our current operations today and a little bit about our strategy. On the front end, we source wafers from 3 fab partners, approximately 50% of our wafers are sourced from UMC in Taiwan, 30% to 40% from Polar semiconductor in Minnesota and the remainder from TSMC. A significant portion of this waste for tech is also multi-sourced with these partners, providing a high degree of scalability and risk mitigation for us and our customers. In addition, we're constantly driving forward our wafer tech road map, as Mike talked about earlier today and looking at regionalizing partners in the regions where our customers are. For the back-end assembly and test processes, we use a mix of our internal facility in the Philippines as well as outside OSAT partners in Asia. Approximately half of the assembly and packaging is done in our internal facility in the Philippines, and this includes high mix, low-volume parts that are more economical for us to do ourselves. It also includes proprietary and advanced packaging for difficult auto applications that are designed to with strength some of the extreme conditions that we talked about this morning. Industry standard packages as much as our industrial and our outside third-party industry standard packages and consumer assembly is done at leading OSATs in Asia. As we scale, we expect to continue to optimize this mix of internal and outside packaging. Finally, we performed 100% of our test at our own facilities, including quality and assurance. We found that owning quality and test best supports auto-grade 0 defect initiatives, we've also found it allows us to be very responsive to our customers with quick resolutions and product enhancements. We're also very proud of the track record of financial execution, including meeting both our strategic and our financial targets. We have a robust planning process and a management operating system that helps us drive results. And our team really believes in the philosophy of doing what we say we'll do and meeting our commitments to our stakeholders. Since our IPO, we've demonstrated above-market sales growth, an increasing percentage of sales into our strategic focus areas, both gross and operating margin improvements, significant operating leverage and as a result, over the past 3 years, operating margins have improved by over 1,200 basis points and EPS has nearly tripled. We have also met or exceeded quarterly sales and EPS guidance every quarter since our IPO. Another important and unique element of Allegro's business is that our sales are very well diversified geography and with our channel mix. Sales by geography are well balanced with China, our largest market, representing only about 25% of our sales. We have a strong market presence in all major automotive markets in the world, including the United States, Japan, Korea and Europe. In addition, as Max mentioned, no single customer represents more than 10% of sales. Our geographic growth has really been enabled by investments in local sales and technical resources close to our customers, and we continue to do that. For example, a few months ago, we announced the change in our go-to-market approach in Japan to better support our customers there as the Japanese auto industry transitions to an EV first mindset. Looking at channel mix, a little over 60% of our sales are direct and nearly 40% of our sales are through distribution partners. Our direct sales are enabled by these close relationships built over decades with auto OEMs and Tier 1s. We also have long-term agreements with many of these direct customers, which gives us visibility and improves variability for our customers and Allegro. We also leverage our global and regional distribution partners to service over 10,000 customers, particularly in industrial and consumer markets. So this slide talks a little bit about how we intend to continue to outgrow the markets we serve. What really underpins the above-market growth is our focus on strategic growth areas of e-mobility in the select industrial markets we talked about this morning. We've targeted these markets because we believe they offer long-term secular growth opportunities for our products. So a key takeaway is we are growing fast in fast-growing markets. Looking at each market, we'll first look at auto, which represents nearly 70% of our sales. In auto, our target is to grow above auto production or SAAR by 7% to 10%. What gives us confidence in this target is, first, as Max and Suman described, our automotive first mindset and decades of auto OEM relationship gives us every opportunity to win. Second, our products are designed to enable the secular mega trends and e-mobility that Suman described. As Vineet mentioned, e-mobility represented 43% of our auto business in this past quarter, and this SAM is projected to grow by 25% CAGR over the next 5 years. In addition, we still have a very robust ice and safety business that isn't going away. Next, turning to Industrial, which represents approximately 20% of our sales today. In the industrial market, we're targeting growth of 5% to 10% above industrial semiconductor. Here, we leverage our auto-grade technology, as you've heard to solve similar challenges in clean tech and automation. And as a result of our focus, the SAM -- Allegro SAM in Industrial is growing at a CAGR of 30% over the next 5 years. Finally, we sell our products through distribution to thousands of customers for consumer and consumer applications. And we expect these markets and Allegro sales to generally grow in line with global GDP. In addition to the above-market sales growth, we also see a path to continued gross margin expansion. As I described earlier, our operational transformation has given us over 1,000 points of gross margin improvement over the last 4 years. And our new gross margin target is above 58%. We expect these incremental gross margin improvements will come from 3 areas: First, product differentiation and mix, our focus on technology leadership and a mix shift towards feature-rich products that you heard about earlier, research and development investments in our strategic growth areas, and continued BOM cost reductions. The second area is supply chain optimization, where we expect to continue to optimize the mix of internal and external operations execute on our Wafer tech road map and benefit from purchasing power as we grow. And the final area is internal efficiencies in our manufacturing facility in the Philippines. We will continue to optimize our assembly and test processes and benefit from volume through the factory. As we've talked about, we've continued to deliver strong financial results. So without further ado, I'll talk about our new financial model. From a sales perspective, we're still targeting low double-digit sales growth. This target really reflects the focus on the fast-growing markets we talked about this morning. And it's also consistent with the double-digit growth in our IPO model but at a starting point of sales that is nearly double it was 2.5 years ago. We're targeting gross margin at or above 58%. Operating expenses are targeted to be below 26% of sales, but within operating expenses, we'll continue to invest in research and development at a level of about 15% of sales to drive continued technology leadership. We'll also continue to make investments in local sales and technical resources close to our customers. In total, we expect OpEx will always grow slower than sales and we'll see continued leverage from SG&A. And based upon these targets, we expect operating margin to be at or above 32% of sales and this represents a 700 basis point increase over our IPO model. And finally, excluding working capital changes, we expect our targeted free cash flow to be at or above 25% of sales. Finally, turning to our investment and capital allocation strategy. Our first priority is to continue to invest in organic growth, where as you've heard this morning, we believe we have significant opportunities. Here, we'll continue to make investments in R&D and CapEx in those strategic growth areas. We'll continue to expand our direct sales and our channel partnerships, particularly in regions where we see the largest opportunities. And all the investment decisions are going to be based on a combination of sales growth, and ROIC. We will also supplement our organic growth with select M&A. And very importantly, we view M&A as an integral part of our existing strategies, not a diversification. And as a result, M&A has to meet certain criteria for us, including it has to either accelerate our strategic growth areas in e-mobility or industrial as to complement, extend or enhance our existing expertise, we have to be able to sell the product through our existing sales channels. And finally, an acquisition must be accretive to our target financial model. These criteria are important as they allow us to realize the benefits of an acquisition faster. We also intend to maintain a very strong and flexible balance sheet. We believe our business model will continue to deliver strong cash flow to support these growth opportunities. But we could use debt where we believe it's accretive and serviceable. However, I expect to maintain a very strong net cash position at all times. So in summary, we believe the following factors that the team has outlined this morning will allow Allegro to continue to create value for all of our stakeholders. First, our focus on large fast-growing markets in the secular areas of e-mobility, clean energy and automation. Second, our technology and market leadership with differentiated product portfolio that drives gross margin improvements, Third, whole combination of sales growth and gross margin expansion. With that, I'll now turn it back over to Jalene to tell you about the rest of our program.

Thank you, Derek. This concludes our formal presentation. We will take a 15-minute break before returning to our seats at about 10:40 to kick off the Q&A session. The primary drinks are to the right, restrooms are to the left and drinks are over there as well. [Break]

We'll now begin the Q&A session. [Operator Instructions] Thank you.

Right here. Gary Mobley with Wells Fargo Securities. I wanted to pick up where we last left off with Derek. I wanted to ask about your margin targets, the gross margin specifically, if there's an astric to it. More specifically, if you see it perhaps trickling down before it trends back up towards 58% because of the FX tailwinds you have benefited from recently and then as well to achieve that greater than 50% gross margin, what is it contingent on from a timing and from a revenue perspective?

Yes. Gary, thank you for the questions. So in Q3, our non-GAAP gross margin was 58%, but as Gary alluded to, that included about 200 basis points of foreign exchange compared to the beginning of the year. So it's really in that 56% range. So our guidance for Q4 is still 57%, approximately 57%, and that still includes some tailwinds from foreign exchange and a little bit of mix benefit there. So in the short-term, as I've mentioned before, I expect the gross margin to kind of be in that 56%, maybe could tail up towards that 57% range. But our medium-term target, and you can view this as 3 to 5 years is sustainably at 58%. And the factors really I outlined in the presentation, starting with mix and product being the biggest, as a fabless company, that's really the biggest lever, is mix and product. The second factor is we will continue to get some leverage from both our suppliers and our internal facility, but the one is really going to be mixed and this product differentiation you heard about today.

Chris Caso from Credit Suisse. The question is on impact of pricing. And what sort of pricing environment is contemplated in your long-term targets? And then maybe you could speak to a little bit in the shorter term. We've still seen foundry wafer price increases. What are you expecting in the shorter-term on that as well?

Yes, good question, Chris. Thank you. So in the long-term model that we talked about in the low double-digit sales growth, that does not contemplate any changes or price increases. In the past 2 years, we have had some price increases we've talked about, both with our OEMs and in particular, in our distribution channel. But going forward, the model really just contemplates us growing fast in those fast-growing areas and content gains that we talked about. No pricing and no share is contemplated in that model. We, of course, will target both of those. In the past, we've had some pricing increases, but the preponderance of our sales increase over the past 2 years has really been volume and mix. And in terms of wafer price increases, we've talked a little bit about us locking in our wafer pricing now with our 2 of our major partners, UMC and Polar. That's contemplated in that model as well.

Josh Buchalter from TD Cowen. I wanted to ask about the supply side of the equation. I know you've been ramping at UMC, Polar is, obviously, a long-standing partner and you added TSM last year. In your long-term target model, given some of the growth rates that your end markets are growing at, is supply a gating factor at all as I know it has been for the last couple of years? And can you walk us through some of the assurances you have on supply, the next, let's say, 1 to 2 years. I know Polar has that investment, but that's probably not until 2025 where that kicks in?

Josh, thanks for the question. We don't believe that supply is going to be a gating factor for our growth in the near-term or in the mid-term as we look at the future growth rates. As Derek alluded, we have inked strategic agreements with our major suppliers, and that's aligned with the growth rates that we believe we will see and we will have to support, and in terms of the Polar investment, we're really excited about what that means for us, and we will be able to expand the capacity as well as bring new technologies to Polar. The one thing that I just want to emphasize is that most of our products are able to be manufactured at any of our locations because each of our wafer suppliers has the proprietary technology that Mike laid out in his prepared remarks.

Peter Osberg at [ Tokevill ]. Just wondered if you could address how changes in the supply chain and sort of architecture of new car platforms, specifically the sort of consolidation of systems versus more discrete items, how that sort of plays into the competitive nature of the markets you supply? And what I'm kind of trying to understand is you guys have done a really good job about focusing on niche products that sort of fit your products, your competitive abilities. Does the sort of consolidation and change from both supply chain as you're working more with direct OEMs, changing of sort of how the whole industry sort of works, and also the sort of more cohesive platforms that auto OEMs seem to be driving towards, does that change the competitive dynamics for you guys and industry? And does it make a breadth of solutions more important than necessarily core deep, technological competitive advantage on individual systems, if that makes sense?

Yes. Peter, thank you for the question, and I'll start off and then maybe have Mike add more color to it. When we look at how we win, the direct relationship with the OEMs has always been central to our value proposition. And as systems converge, we think that's going to be even more important. We have built really strong expertise in our IC solutions, whether it's on sensing or on the power side in these systems that are now converging in. So we believe that we are really well positioned not just with our heritage and our legacy in those systems, but also with our ability to find new ways to integrate more content, continue to drive smaller packet sizes, continue to bring more power dense solutions and also find ways to reduce total BOM costs. Mike, I don't know if you've got more to share there.

I think it's very well said. I mean when we see consolidation at the system level, it starts to become more apparent to our customers, just how much having optimized, consolidated, combined solutions can be at the system level when pieces are broken apart, that's sometimes not so obvious. When you put them together, it becomes very clear. So as we see certain systems consolidating, we actually think that may be a benefit for us because of our high level of integration.

Quinn Bolton with Needham. I guess first, in your presentation, you talked about many of your products are sole-sourced. Wondering if you might be able to give us a figure, what percent of your business do you think is sole-sourced, especially in the automotive business? And I guess a related question to that, given the supply constraints in the automotive business over the last 2 years across the entire food chain, have you seen the OEMs actually looking to multisource? Or do you think they're going to stay with sole-source relationships? And then I've got a follow-up.

Quinn, thanks for the question. I would say that the amount of effort it takes for an OEM to qualify an IC supplier. And the level of qualifications that we have to go through does not lend itself easily to dual source. So the vast majority of our design wins, we tend to be sole-sourced. Now it doesn't mean that the conversation stops there. There's a high degree of burden on us to prove that we've got a resilient supply chain that we have redundant manufacturing capabilities, and there are ways in which we can assure our customers about -- whether it's through strategic inventory or what have you -- that we have the ability to maintain supply. So I'll ask Max maybe to chime in a little bit and talk about how OEMs are thinking maybe differently or if at all, about that situation?

Yes. Well said, Vineet, and it's a great question. So at the end of the day, when we directly engage with the OEMs, they're looking for us to instill confidence that we can supply them for the long-term. And so instead of pursuing a commoditized solution to Mike's earlier points around addressing some of these unique value propositions, instead, we instill confidence not only with long-term supply agreements and direct agreements with the OEMs but increasingly making sure that they understand our supply chain and how flexible it is that they have confidence. That allows us to kind of lead with innovation as opposed to looking for marginal value in a crowded field.

Great. My follow-up was just you talked about some of the opportunities in electromechanical braking, steer-by-wire and the corner modules. Can you give us some sense, when do you think those types of systems will start to see their way into production at some of your lead customers?

Yes. So maybe I'll let Mike talk about what sort of timing we are seeing in some of those -- some of those are in the design cycle now.

Yes, we see for certain systems like electromechanical braking, we see a lot of activity both at the Tier 1 and OEM level. So that activity starts now. Actual production timing is not 100% pinned down, but let's just say some of it would be within the next 3 years. When you think longer term for those corner modules, now those corner modules, just to remind everyone, they put elements of the powertrain into the corners of the car. That's a much, much bigger transition. That won't happen until 2028 plus. And even if it happens in 2028, some market analysts say it will be in a small number of cars. That's a much longer-term trend, but EMV and steer-by-wire, both of those technologies are actually in design now.

Gary Mobley, Wells Fargo Securities with a follow-up. Recently, you ended your exclusivity with Sanken as your exclusive Japan distributor. I'm curious if we can pull back the layers there and help us understand how that benefits you in terms of giving you access to a larger subset of Japanese automotive OEMs or Tier 1s and maybe related some of the Chinese OEMs as well.

Yes, Gary, thanks for the question. So just to provide everybody the context, Sanken had been a primary distributor in Japan for the longest time. We were always in the background doing technical -- detailed technical support, but Sanken was taking the lead. As we have now thought about how to support Japanese OEMs as they start to move towards an EV-first mindset, it became very clear that they needed more support. And so we have now restructured our agreement with Sanken where Sanken is in the background, and we're taking a lead with our engineering support, our field applications engineers and our salespeople to provide those OEMs the right level of support as they start to lean into this transition. It doesn't mean that Sanken has completely gone away. They're still in the background doing logistics support and quality support and they'll continue to do that for some time. But we think this is really important as the Japanese OEMs where we've always had a really strong position now need more direct help from IC suppliers like us to help them with the right products and solutions in the transition.

Vijay from Mizuho. Just a quick question on the magnetic sensors. I think you said 62% of revenues on magnetic sensors, and then 43% is e-mobility, which is EV and ADAS. How does that map into the magnetic sensors? So is that 70% of your magnetic sensors goes into EV ADAS.

So I don't think we've exactly broken it down, Vijay, thank you for the question. But I would say that, by and large, our product portfolio maps pretty well to our market segments. So automotive is roughly 70% of the sales. I think it's -- you can easily apply that to the product segments.

Got it. And just a quick question for Derek. On the gross margin road map, you said manufacturing efficiencies. So if you look at your mix of foundry today between TSM, UMC and Polar, are you contemplating a change in that mix as you look out to fiscal '28 or longer term, I guess?

The model doesn't necessarily contemplate a significant change in that mix. So that mix, we're contemplating staying the same in the model there, right? And we've chosen to have long-term agreements with UMC, a long-term agreement with Polar. And quite frankly, over the last 2 years, they've become quite cost competitive, at one point in time, if you roll the clock back 2 or 3 year, the Taiwanese supplies were significantly better cost price than the U.S. suppliers. I think TSMC has been pretty aggressive in the market with price increases. I think we've done a good job in negotiating. We'll continue to evaluate our foundry partners in terms of technology, price capacity, those 3, but there could be others that I alluded to, as we start to regionalize that fab channel as well. There could be others in other countries.

Natalia Winkler from Jefferies. I wanted to ask a question on the isolated gate driver opportunity. And just ask how do you see the market kind of the existing competition, right, in that space? You guys are expecting revenues in the next 2 years, right? Who are maybe the players that are already in the space? And what's the differentiation that you see in that product line. And I understand that's kind of coming from the Heyday acquisition.

Correct. Natalia, thank you for the question. Maybe I'll get started and then ask Mike to weigh in as well. There are plenty of gate drivers in the market. I think when we think about what is unique about us, it's not dissimilar to the other products where we drive a lot of integration. And so it's really the transformer capacity -- capability as well as the isolation ability and the gate driving capability all coming together is what makes us unique. Mike?

Yes. So as I mentioned in the presentation, we have this winning formula we like to apply whenever we can. It's not always true. But in the area of isolated gate drivers, it's literally true that the competition has to use 2 chips to accomplish what we do in 1 chip. And it's a little more technically nuanced, but I'll explain it here. We actually combine both an isolated gate driver and an isolated DC-to-DC converter into a single package. And that's the real differentiator for Allegro, the isolated DC-to-DC converter is needed. It's not a corner case when you need it. It's generally needed. And that just talks to the disruptive nature of the technology such that we take 2 necessary components, put them into one with a single inductor and that's the innovation that we believe will drive leadership for Allegro going forward.

And just to add, when you now look at more than 30 such instances where you need this product, it starts to add up really quickly, and we can drive roughly 40% lower package size and a resulting BOM cost because of that.

Understood. And the second one was on Voxtel. I think at the time of the IPO, there was this discussion of potential LiDAR opportunity. Is that kind of still in the play in the long-term?

Yes, it's a great question. So Voxtel is our photonics business. And we really think of it as an asymmetric bet on the industry adopting 1550 nanometer eye-safe LiDAR, which is really the crux of the technology here. We remain committed to that. We are sampling customers right now. But obviously, there's a lot that needs to go right for that technology to get it opted. So we'll give updates as we make progress. But for now, it's not a material part of our revenue case going forward.

I have an online question from Brett Rosenbaum with Adage Capital Management. Is there a material difference for Allegro's market share in ASP for SiC architectures versus IGBT versus BEV?

Yes. So I'll start and maybe Suman can weigh in as well. The -- we are really agnostic to the underlying device technology. And it's still very early to see SiC and GAN architectures widely in automobile, but we don't believe that it will be a material difference. Suman, I don't know if you think differently.

I think you're right, Vineet. I feel like with all architectures, we're agnostic to what architectures are playing, whether it's IGBTs or SICs or GANs, we want to basically add content with our current sensors to -- and we talked about some of that to all of those architectures for us. The isolated gate drivers, as we talked about prominently will continue to grow as the SiC architectures and GAN architectures continue to evolve over time, especially in the automotive space.

Yes. It's Chris Caso. You had talked about the -- both the content and EV versus ICE vehicles and where that's going over time. I think you said it's 65% of the design wins. So what does that imply for your exposure to EV versus ICE over time? And obviously, there's long design cycle, so you've got some visibility over time. If you can give some color on that, please?

Yes. So our content opportunity in EVs is twice that, close to twice that of ICE vehicles. So ICE vehicles is roughly about $38, $39. With our portfolio today, it's -- we are at about $60 on a pure EV -- on an equivalent EV. And then with the isolated gate drivers, we get closer to $100. So as the architectures evolve, as we see a slew of new EVs come out, we expect our e-mobility sales as a percentage of our total automotive sales to keep growing. Hopefully, that answers your question, Chris.

Yes. And it's right now, was that 43% of revenue?

Yes. In the most recent quarter, we reported it as 43% of revenue.

And a year ago, Chris, that was 37%. So that's been growing. When you look at that guidance or when you look at that target financial model, right, about outgrowing the underlying automotive SAAR, within that, there's a 25% CAGR on the e-mobility piece starting at 43%. The other business is not going away, and we've kind of seen that growing, particularly safety, comfort and convenience growing in line with auto production.

So it's really kind of levered to growth in EV and then growth in the ADAS portion of the ICE is really what's driving it?

Yes. So that section of our business is safety, comfort and convenience. It's everything from heating and cooling, which, obviously, has some dynamics around EVs. Some of the other safety features within, that are not completely ADAS related, so that's growing. Obviously, our pure ICE business is -- will eventually start to decline. So net-net, I would say the other parts of our automotive business are staying flat, and it's really the e-mobility business that's growing for us.

Last follow-up, I swear. So if your data is correct, roughly 90% of your magnetic sensor business is Hall-effect sensors. But the puck is clearly going towards XMR, in particular, TMR. And so my question is, to what extent does this impact your revenue growth? Is the TMR solution carry higher ASP? And to what degree does it impact your gross margin outlook as well?

Yes. So I would say that we are really excited about bringing TMR technology to our customer base for all the reasons Mike went into, better accuracy, more robustness. And we will drive the market and the certain applications within the market towards TMR. At this point, the -- we can expect TMR to be differently differentiated margins relative to Hall specially in some of these select applications. That's all comprehended in our revenue profile, though. So I don't think it drives anything more than what Derek has already laid out in terms of our revenue targets.

If you've already asked your two questions, you're welcome to ask another one.

Josh Buchalter from TD Cowen again. I wanted to ask about competition specifically in Power. I mean it has to be a different competitive set. It's a much bigger market, but you're going up against bigger and well-capitalized peers. You called out the auto grade, your integration at the die level. What are the key areas that allow you to win in what is, frankly, a more competitive market? And is it also combining it with your magnetic sensors? How important is that? Just curious your thoughts specifically on competition in Power.

Thanks, Josh. So Power is a well-served space, right? And we are really focused on leadership in niche applications. And motor drivers is a great example of that, specifically in automotive. And so for us, it's not about trying to take on the entire power market. It's about really being laser-focused on the applications where we have a lot of expertise, we have the deep customer relationships, and our automotive grade performance and ecosystem really allows us to differentiate versus somebody who may have a great power product generally, but is not really customized for that particular automotive application. So that's really where we shine. Suman, I don't know if you want to share more on that.

I think we talked about some of the motor driver applications where especially in steering and braking and those applications. We're laser-focused on making sure that our motor controllers are optimized for those applications. And Mike mentioned the cold free aspect on the fan drivers as well. So we're really tailored to the end application. So that's our growth space for us.

Got one over here, Quinn Bolton with Needham. Just to sort of follow up, maybe a little more detail, if you could, on the traction inverters, onboard chargers for both gate drivers and the current sensors. As I look at a typical traction inverter, I think common configuration would have 12 power transistors. Does that equate to roughly 12 gate drivers from Heyday? Is it a different number? And sort of similar question, how many current sensors would you have in a typical traction motor and onboard charger?

Yes. So Quinn, I can start and maybe Mike and Suman can weigh in as well. It really depends OEM to OEM and tier to tier, and it depends on the architecture. Somebody who's got a 400-volt architecture may have a different set of requirements versus an 800-volt architecture. And so it really depends. I would say every time there is a power conversion instance. You need current sensors, and you probably need current sensors on both sides of their power equation, okay?

I agree with what Vineet said. There are so many different power architectures in the market today. One thing remains true. In those types of systems, there's always multiple current sensors. And the trend we're seeing is that there's even more gate drivers in those systems. Now the relative numbers, they do change greatly depending on the architectures out there. But it's an exciting story for us because in the end, lots of new content for Allegro, no matter what the architecture is in those systems.

Just a follow-up and a question on the China business. And you said China is 25% of the business. First part, is the mix of business within China similar to the corporate mix? Is it a little more or less exposed to the auto side? And then, can you speak to just sustainability in China given the geopolitical tensions and such, where your competitive position is. I imagine that's still an important market because of EV in China is sort of overexposed versus the rest of the world.

Yes, Chris, it's a great question. And I would start by saying that China is an incredibly important market for us. It's 26% of our sales, and we see a tremendous amount of growth going forward as we look at our design pipeline. For us, it's really important to make sure that we are serving the China market in the right way, which is building out and continuing to build out our sales teams, putting more engineering talent on the ground, and we are exploring continued localization of the supply chain as well. We do a little bit of assembly there today, and we're exploring ways to do more in the China market. So winning in China continues to be a really important imperative for us. And we're -- we obviously acknowledge the current geopolitical tensions. And we will continue to monitor that and make sure that we have -- we retain the ability to serve the market in the right way. Okay.

And while I have the mic, and we're through a lot of the presentation, maybe I'll ask one of the short-term questions as well. And you did reiterate your guidance for the quarter today. The auto industry has been supply constrained for some while based on some of the slowdown we've seen elsewhere, there's better supply availability. Maybe you could speak to that to say, as the auto industry perhaps tried to catch up on some of the production that they haven't been able to address going forward, what that means for you? And the other side is there's some kinds about inventory in general and what you see with regard to inventory for your automotive customers?

Yes. Thank you again for the question, Chris. So it's clear that we have -- we are coming out of a very significant supply constrained environment. And it's across the supply chain, across the ecosystem, right, whether it's us as an IC supplier or our automotive customers as the end customers. And so this year, we're going to see some reasonable step-change in the growth profile of automotive production. And we think that's going to go a long way in alleviating some of the constraints, get our OEM lines operating at higher utilization, get more inventory on dealer lots. Pricing starts to come more at normal levels. And so we think that there is still room to run for automotive production. Our belief is that equilibrium is somewhere around 90 million units. It will take some time to grow into that. But this year, we'll make a meaningful step towards attaining that equilibrium. And as a result of that, I think we're going to see -- and the industry is going to see continued growth related to automotive production. I'll let Max say a little bit more around what we're seeing in the channels. But to our knowledge, we're not shipping into any inventory positions.

Yes. Well said, Vineet, and thanks, Chris, for the question. So when we talk with our customers, a key theme as we navigate the current dynamics is really close and frequent contact on what they need because while Vineet mentions the overall units for production and automotive this year are growing at single-digit rates, EVs are planning to grow closer to 50% year-over-year. So our customers are keenly motivated to make sure that they have the right BOM set of components to support that. So we're working very closely there, and we're employing commercial agreements and other tactics just to make sure that those discussions are happening, and we're not just relying on an opaque value chain and ordering patterns as we may be had in the past. So the customer intimacy there is really, really important and we know that our customers are trying to make sure that they dial in the critical EV mix of their business this year while supporting traditional auto production at the same time.

And Chris, one of the things we've talked about publicly is we continue to watch all aspects of the value chain in terms of where inventory is building, whether it's with our distributors, auto suppliers. And we reach out to our customers, as Max has talked about, Max' team, really working with those customers to understand which portion of the backlog is shippable soon. There's pass over our backlog that are past due that we're working with customers to allow them to reschedule and in fact, cancel, we want to make sure it's a good backlog. We want to make sure they want that product. We want to make sure we're not shipping in inventory because we have places for immediate production today.

Vijay from Mizuho again. My last question, sorry about that. Max, just on the magnetic sensing side, can you talk about the competitive landscape? And what are you seeing there? Or how you see your design pipeline, win pipeline there. And for Derek, and Vineet, the Power IC side is obviously a huge blue sky opportunity. Do you see any M&A coming down the pipe there?

Good. So maybe I'll address the first one. In magnetic sensing, as with Power, it's a well-served market. Clearly, we have a leadership positioning across magnetic sensing, and we also consider ourselves in a leadership position in current sensing. And really, that's driven by the technology advantage that we think we've built up over 2 decades, and Mike outlined that well. So we're confident that we'll continue that momentum, not only in the overall magnetic sensing space but also in the current sensing space.

Yes. And Vijay, I think on M&A, Derek laid out really well, our sort of guardrails for M&A. We think M&A is an integral part of our toolkit as we look to drive growth but it has to make sense. It has to align with our strategies. It has to move our technology road map forward. It needs to meet our economic conditions. So absolutely, we'll continue to look for the right assets. The Heyday acquisition for us is working out really well as we've outlined how we think about taking those products into the market. We're really bullish on that. And we look for opportunities like that or opportunities that bring a little bit of scale but are really aligned with our technology and strategy road maps.

Any more questions?

And Peter Osberg, again. I just wanted to follow up on the sort of supply chain inventory issue and sort of what's going on in production. It would seem like looking at it not super deeply, but that car manufacturers focused on sort of whatever vehicle system they could make the most profit dollars on. So that led to higher premium luxury cars and also, obviously, with EV transition happening as well. So just wanted to understand if all production is no longer constrained, do we see a potential negative mix effect as manufacturers go back to sort of more economic vehicles versus luxury premium and whether that has any meaningful effect or if switch to EV sort of wipes that sort of off the board?

Yes, Peter, maybe I'll start and have Max weigh in as well. So we do believe that over time, there is going to be EVs at all price points in the market. And we see that as we look at our design pipeline and the work we're doing with all the OEMs. From a -- I see content standpoint, it doesn't make that much of a difference because our products are critical to the operation of an EV or an ICE for that matter. So it's not like you can forego these features. None of what we do is nice to have. It's safety critical, it's critical to the safe and efficient of the electric powertrain. And so we believe that even though automotive OEMs will fill out the portfolio over time, it means it won't have a material impact on our mix.

Yes. Great. And just to add, our play on autonomy or more specifically ADAS, that's a here-and-now opportunity, right? When I think about the functions we enable, like lane keep assist, automatic emergency braking, adaptive cruise control, those are penetrating into the mainstream already. And so even in those mainstream vehicle classes, we'll see an uplift in content as those features are really driven to the majority of the units that are being produced.

And to do that, you need the costs downs or -- or like so what's driving that change? Is it literally just the ability to, for you guys to deliver a system that's more cost competitive? Or is it as you get scale or whatever? Or is it just customer need that this has to happen because it's now expected. Because I think in the auto industry in general, as things move from luxury to mainstream to economy, those sole supplier situations get less and less and price becomes more and more important, obviously. So just -- is there something unique about sort of what you're delivering and you've obviously already touched on it as saying it's critical, but any sort of expounding on that to make it. So we understand that this doesn't just go away as you move down the value chain.

Yes. Peter, I would say that generally, we don't really see changes in our profile as OEMs make decisions and what features to include or not include in a program. It largely depends on what they're treating as a standard versus option. And I would tell you that the safety features Max outlined may be options, but they're really standard. Increasingly, what we used to consider luxury is now a must have, and nobody wants their families driving in cars without the safety features, which are now seen as essential. So regardless of the mix within the automotive portfolio, we feel really good about our ability to grow and continue to serve customers.

Just a follow-up with regard to the long-term supply agreements you have with your auto customers, can you talk to the nature of those agreements, sort of what the average duration is, what they cover, pricing and volume, just sort of how that deals with the relationship you have with those customers? And then with that also the agreements that you have with your foundries that back them up and how that plays together.

So Chris, of course, we can't share the details of those agreements. But they cover the normal things you would expect as what are the volume needs and what pricing they want to lock in for that. Typically, they tend to run a year. In some cases, we have multiyear agreements. But -- and they're different than the agreements that we signed with our foundries for sure, right? With our foundries, we have a different dynamic. We talked about the Polar agreement, and then we also talked about the UMC agreement. So 2 very different animals, but our customer contracts tend to be very specific to the applications we serve and can be single or multi-year duration.

I guess as a question in a better way that you can answer it is does it include some pricing in there as well, such that market conditions change, if customers own demand forecast change, to what extent does that protect Allegro?

So it depends. If we're being asked to put in specific investments to support a customer, then I think there's going to be belts and suspenders on that agreement to protect Allegro. But if it's a generally available part, they're just reserving capacity, then it may not have all the hook. So again, it differs customer to customer.

I have an online question for Derek. Karl Coker with Woodline. For your target model, what tax rate should we assume?

I think that one's for you, Derek.

It's a good question. So our non-GAAP tax rate in our guidance for Q4 is 11%, and that's based on today's legislation. In the target model, when you're talking about free cash flow, I've used the tax rate, a cash tax rate of about 15%. That all has to do with the way the R&D capitalization works and the deductions we get. So there was a slightly different tax rate between our non-GAAP tax rate that you'll see in our cash tax rate to use in that free cash flow model.

Thank you, Derek. Unless that we have time for one more question, if anybody would like to take the final question? No. All right. We'll call it a wrap, and I'll hand the mic back over to Vineet for closing remarks.

Okay. Well, thank you, Jalene. And I want to thank all of you for your time and your interest in Allegro, and I want to especially thank all of you who braved the flurries here in New York to make it here in person. I want to close in some summary thoughts that might be helpful to you as you think about our Allegro going forward. We are laser-focused on the markets of e-mobility, clean energy and automation, and this underpins our double-digit sales growth going forward. Innovation with purpose drives everything we do and gives us great technology leverage and gives us great returns on our R&D investment. Our leadership in magnetic sensing and in selected power products is going to be further enhanced by the focused R&D investments we are making as well as smart acquisitions like Heyday, and this leads to differentiated margins. And all of this coming together really underpins the attractive financial profile that we laid out for you here today. So thank you again for your time, and we look forward to sharing progress in future dates and future updates. Now I invite you to join us for lunch, and please see our product demonstrations as well. Thank you.