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

All right. Well, good afternoon, and welcome to, I think second last session of day 1 of our 52nd Annual TMT Conference. Very pleased to be joined by Allegro MicroSystems' CEO Vineet Nargolwala. Vineet, thank you for joining us.

Thank you for having me.

I think most people here are probably familiar but maybe you could spend a minute or 2 talking about Allegro, introduce yourself and the company.

Sure. So hi, I'm Vineet Nargolwala, CEO of Allegro MicroSystems. Been with the company almost 2 years now, and it's been one heck of a ride. In the last 3 years, Allegro has grown over 80% top line, and we've grown EPS 13x -- more than 13x. So as I said, has been in a heck of a ride. We're $1 billion magnetic sensing leader. We are an automotive first company. So everything we do is designed for automotive. We've been in automotive longer [indiscernible] operating there for over 40 years now. And that's really our DNA. But we then take that technology that we develop for automotive into selected industrial markets like clean energy and industrial automation. And that's really who we are. We've been on a journey of expanding our margins. We are now at, call it, mid-50s with PAT and a target of getting closer to 58% and above that. We are known for our leadership in magnetic sensing and the power applications we serve. We are hyper focused on automotive in the select industrial markets, and we pride ourselves on innovation and on agility. And that's -- those are really the 3 big reasons why we win in the marketplace.

Thank you for the intro, and we're going to get back to innovation and agility, I promise. But I did want to start talking a little bit about the cycle. I mean your first year or so at the company was basically how much are you going to beat by and that variable was driven by how much capacity you were getting. The last couple of quarters, it's been softer and you've entered a period of cyclical digestion. Could you maybe walk through the drivers of, I guess, the inventory buildup and how you expect to recover coming out of it off the June quarter guidance?

Sure. Yes, you're exactly right. So when I joined the company, our single biggest challenge was, would we get enough wafers to keep our customers supplied. Well, we solved that problem and then some, and we went on a pretty significant capacity expansion. There are -- as I think about the 2 end markets we serve in the automotive end market, there was a dynamic of the OEMs who always operated on just in time and required their OEMs and tiers to hold inventory, really wanted their tiers to increase the level of inventory that they were holding, right? So they're tiers in the contract manufacturers. So typically, they were holding about 4 to 6 weeks, and they over a period of time, bumped it up to double that. And as interest rates stayed higher for longer and the OEMs took away the incentives to hold that additional inventory, we are seeing the tiers and the contract manufacturers start to pare back that inventory level. And so for us, it was a question of, okay, we signaled in the last quarter, and we expected the sort of the same rate to happen this quarter, we were thinking that this would happen more sort of over multiple quarters. But as we made the turn into this calendar year and we started having the 3-way discussions between OEMs, the contract manufacturers and us, we came to the realization that the OEMs -- the tiers really wanted to bring back the inventory levels in line much sooner. And so we have worked with them to aggressively bring that down. So we think that by the end of this quarter, roughly 4 weeks of inventory come out, and that brings most of our -- of the tiers and contract manufacturers into the right range. And so automotive demand continues to be stable. EV growth continues to be pretty robust at about 25% to 27%. So we think that going into next quarter, automotive, we're going to start shipping into normal demand. And that's why we think automotive, we will see this sequential growth going into [indiscernible].

And has there been any change in the demand backdrop even as there's a lot of headlines about EV softness. You're obviously well tied to EVs. And then within that, can you maybe talk about the confidence in a return to low to mid-single digit -- sorry, low to mid-double-digit growth in the September quarter. So the question we've gotten from a lot of investors is, which I think a fair one, is why the down 30% and then plus double digits instead of down 20% plus 5%, something like that. And I think you touched on it with the inventory and the tier one conversations but maybe you can expand on that and the demand drivers?

So maybe your first question first. So we actually don't see any EV slowdown, right? So there's obviously a lot of inks built on EV momentum is slowing. That's really a very narrow lens on what's happening perhaps in North America and maybe even with a couple of players in North America. We have a very global business in automotive. We're exposed to all the regions pretty much as the automotive distribution holds. And we see significant growth happening across the board. And nobody we know in the OEM space is working on new ICE platforms, right? So it's all BEVs, right, battery electric vehicles. I think when we think about the quarter-to-quarter transition, what gives us confidence and conviction in the profile is the forecast we received from our OEMs and the tiers and then the confirmed orders in our backlog. So we've already filled to more than where we are for this -- what we've signaled for this quarter. So we feel good about the quarter. And then we look at the trajectory going into the next quarter, we're seeing the orders come in that give us the confidence that we will see that, call it, mid-teens growth rate going into next quarter.

And is that mainly an auto discussion? Like how is the inventory situation on the industrial and other sector?

That is absolutely an auto discussion. We're not ready to call recovery in industrial markets as of yet. We think that's probably second half, if not later. Within industrial, of course, there are nuances. So our clean energy space continues to show some good momentum but it's not broad based, right? So EV charging is growing, but solar is not. Data centers, I think, is still digesting from the traditional air cool standpoint, the inventory in the channel. And liquid cooling, some really interesting designs and architectures but it's not settled yet, and we'll see the first design wins come into play in the next 12 months or so.

Okay. I want to circle back to that but maybe we'll go into the auto market now. I think from the outside looking in, there's -- it's not the -- Allegro MicroSystems and your power ICs and in particular, magnetic sensing, it's not the easy conceptual EV story about power semis into an inverter or ADAS processing for automation. Can you spend a couple of minutes explaining Allegro Microsystems secular growth in the content story of BOM, both the magnetic sensing and power IC side in the auto market?

Sure. So Yes, magnetic sensing is not something that rolls easily off the tongue, right? And it's a hard technology to understand. So we get it. But magnetic sensing has proven to be one of the most efficient and effective ways of measuring very important modalities. For example, in EVs, it's current. So the traditional way of measuring current was a shunt resistor, right? So basically, current flows through resistor, you measure the voltage drop and you try to measure the current. Well, the problem is that there is a lot of power dissipation that happens in a current -- in a shunt resistor. So the advantage of magnetic sensing is that you can accurately measure current without the current having to pass through it. And so when you look at an EV, there are over 40 applications where current needs to be measured, and it's really important. You have a 400-volt or 800-volt battery source and you're stepping down the voltage to operate at 12 or 24 volt and 48 volt, depending on the subsystem and you're also converting it to AC for the traction motors. So there's power conversion happening all over the EV and at every stage before and after you want to measure current in order to make sure that you're accurately and efficiently transferring the power. And so that's why current sensing is one of the biggest applications on an EV and magnetic sensing is the most elegant and efficient way to measure current. That's where we're seeing a ton of growth. Motor drivers is another area where we're seeing a lot of growth. PMICs is another area. So these are more of the traditional power management ICs, if you will. And for us, it's always leading with magnetic sensing, and we optimize the solution with our power ICs around that magnetic sensing solution, that's how we win.

And I know a big part of the rationale of your acquisition of Crocus was the TMR and current sensing part of the portfolio. Can you talk about what that brought to Allegro, why that was so important and the rationale behind the acquisition?

Absolutely. Yes, we are really excited about the Crocus Technology and the team being part of Allegro. And now I'm happy to report that more than 6 months in, the team is fully integrated. The technologies are fully integrated. So the way to think about Crocus' TMR versus what we were working on. We were working in a TMR sensor for automotive and we are actually shipping our native TMR. The Crocus team, really strong team of physicists that have really built a very strong TMR stack coming out of the MRAM world and then they pivoted to sensing. And we believe that together, the combination will be really powerful, and it's proving out to be that case. We think TMR, which stands for tunnel magnetoresistance technology, is really well suited for the most demanding applications within automotive and industrial, including medical, by the way. Very high accurate -- high accuracy, higher resolution and very, very low power, and that becomes important anytime you get into a battery-operated environment. So we're seeing the most demanding applications like battery management systems like high resolution, angle sensing all migrate towards TMR. So we're getting really good pull and momentum with our customer base within automotive and in industrial. It also came to us with a book of business in medical. So I know it's different than automotive but it's starting to become a very interesting application for us.

All right. And by the way, this is meant to be interactive. [Operator Instructions] On the current sensing side, are there metrics you can give to help investors understand, again, what the actual real cost savings or a range extension that you can get from moving across your portfolio to TMR, for instance, and -- or even from shunt to AMR and TMR -- sorry, GMR.

It's really a power budget question. So the question is better asked of an OEM, I think, because they look at the overall power budget and say, okay, if we deploy so many shunts. We have so much power dissipation. It will differ from architecture to architecture. So it's hard to put an exact finger on it. But we have the lion's share in the world on current sensing applications as well as on position and speed applications. And most recently, we had a third-party report, which said that we actually grew our share over the last 12 months while all the other solution sets remains static or actually regressed. So it's clear evidence that our solutions are winning in the marketplace and resonating with customers, and we're seeing more and more applications of our current sensing.

What do you think gives Allegro, I guess, the right to win and what's led to those share gains? Is it packaging and form factor? Is it resolution? Is it all the above? Is it the liability?

It's all of the above. So I think when it comes to magnetic sensing, it's not obvious but we are the 800-pound gorilla in that space. We have the broadest portfolio, the highest performing portfolio. And we have a excellent, excellent portfolio of hall sensing and now we're augmenting that with MR sensing. We have GMR and then increasingly, it's all going towards TMR, right? So when an OEM or a tier looks at us, they're able to find the exact fit for their application within our portfolio without having to lose or having to go outside of this portfolio. And we continue to invest heavily in expanding that leadership and making sure that we are continuing to drive innovation within the magnetic sensing world, and that's why we win.

And I guess I would ask the same question on the power side. I mean you're known for the magnetic sensing but you still have -- I think it's roughly 1/3 of the business is power ICs, what's Allegro's edge there? Maybe it's the pull from the magnetic sensing and the sockets you have there. But what are some of the learnings and the technologies that you have on the power side that makes Allegro win in autos?

Yes. So it's a great question because we'll be the first ones to admit we're not a broad-based market leader in power like we are in magnetic sensing. But in the applications we serve, we have such deep domain expertise, especially in the automotive applications that we have been able to build leadership in those power niches, right? A great example is motor drivers in the case of safety applications and ADAS applications. We have learned through our experience in automotive, how to spin motors really efficiently and very quietly. And that matters when you think about cabin noise and you think about EVs where there is no engine noise, and you want to make sure that your customer experience and the driver experience is absolutely superior, right? And our motor drivers are able to deliver that. The accuracy matters as well. So when you're relying on motor drivers to do lane departure and lane keep, even small degrees of error matter. And so we bring the most accurate, the most reliable, automotive-grade motor drivers, PMICs DC-to-DC converters and our high-voltage gate drivers through our portfolio because of that innovation and the agility we bring, it's hard for broad-based power players to compete with us in those applications.