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

Thanks for joining us. I'm Joe Quatrochi, the semi-cap equipment analyst for Wells Fargo, excited to have the Allegro Micro team here, Derek D'Antilio, CFO; as well as Jalene Hoover from IR. Thanks for joining us.

Thank you. Thank you for having us.

Perfect. So maybe just to kind of frame the discussion to start, I think as we kind of look at the Allegro Micro story, what do you think is misunderstood by investors or maybe underappreciated from the story? And how do we think about the next 3 to 5 years, what you're most excited about?

Yes, it's a good question. As Jalene and I have been meeting with investors and at conferences over the last -- particularly the last 9 to 12 months, we found that there are a fair amount of, I would say, misunderstandings around the Allegro. When Allegro went public back in October of 2020, the company had already been around for nearly 100 years. It was founded in 1926 as Sprague Electric. So people think it's a new company. It is a new public company, new 4 years, but it's been around for 99 years. Why that's important is because the company has been serving automotive for 35 years as well. So it has reliability data, it has all this information, it has auto-qualified and it has experience in power semiconductors since the mid-1960s and automotive sensors since the 1990s. The other thing that we found that was probably a misunderstanding is people equate Allegro with EV. And so EV -- when EV is slow in North America or EV is slowing in North America as being a big problem for Allegro. And a few data points that we've pointed out is EV is awesome. It's growing over 20% globally, still projected to grow 20% globally, plus 20% for the next 5 or 6 years. But right now, EV is less than 20% of our overall business. And so it's a nice, exciting growth factor for Allegro but less than 20% of our overall business, while auto is 70-plus percent of our business, but we're doing things internal combustion engines that we've been doing for the past 35 years, ADAS applications, things that you see in Level 1 and Level 2 ADAS applications that we all have in our cars today and safety, comfort and convenience factors inside the cabin of the car. So that's the preponderance of our auto business. And then when I hear that EV is kind of having challenges in North America, that's a true statement. How much of an impact does that have for Allegro? The answer is -- the short answer is not much. We ship 15% of our products to North America. And North America today is 8% adoption of pure EV, which means that less than 1.5% of our overall sales globally are to U.S. EV. So while it's good is better, more is better, if they take away incentives and do those kind of things, it's generally inconsequential to Allegro today. The other thing that's interesting in Allegro is we get a lot of China questions, which is fair, given today's geopolitical environment. And about 25% of our sales are to China, so not outsized per se compared to where the auto market is globally. 18% of our sales are to Japan, which is a pretty enviable position in Japan. 20% is rest of Asia, which is Korea, Taiwan, Southeast Asia, India, 15%, North America, 14%, Europe, so very well balanced geographically. And the last piece I'll mention is we're not tied to any one automotive maker. Yes, we sell to Tesla. Yes, we sell the BYD, all the other traditional automakers. But no one customer is more than a couple of percentage points of our overall sales. And even distributors are only 8%, 9% of our sales. And what I'm most excited about over the next 3 to 5 years is how Allegro wins in being a relatively smaller semiconductor company, relatively small being $1 billion in revenue, compared to some of these much, much larger companies is we're exclusively focused on winning in two areas. We're the market share leader in magnetic sensing. We have 23% market share. That's grown from 19% since we went public, so about 1 percentage gain share per year. We are -- we spend -- we invest about half of -- 75% of our R&D in magnetic sensing. And then in power semiconductors, which is the other 40% of our business, we've become really good at things like motor drivers, energy regulators, high-power gate drivers, so very focused power semiconductor company, has again been doing that literally since 1965, so very focused R&D. And the part that I'm excited about is we continue to be the innovation leader and viewed as a premium product in magnetic sensing, particularly. And what I mean by that is companies are willing to pay more for our product on a like-for-like product basis, as evidenced by our gross margins, because of the specification differences on our products, because of the currency efficiency they get, because of the battery life they get, because of the accuracy they get in angle sensors and things like ADAS applications. So we have released now twice as many products this year as we have in the past. And even through these downturns, I've learned through -- now been through about five of these, that continuing to invest in research and development is critical. We have to continue to be the market leader because we win on specifications through investing in R&D, not only organically, but we bought two businesses over the last few years that fit perfectly with our technology, perfectly with our customers, things like TMR, which is the next click in magnetic sensing, we're starting to bring that to the market right now, both with traditional auto applications, which is really exciting, and some new applications. Maybe Jalene, you could talk a little bit about the continuous glucose monitoring and some of those applications?

Sure. So we're today entering into medical consumer devices. And we talked about on our June earnings call that we had a sizable design win with a company called Dexcom for blood glucose monitoring. We actually power the switch for that device. We talked about on our most recent call for the September quarter end that we had another sizable design win, another blood glucose monitoring company. So that's an area we're seeing traction. Also using this technology, we've talked about a metering win in North America. So making inroads and gaining traction in the industrial and other applications while we're also qualifying this technology to enter into the automotive space. So it's really exciting. For the first time, we've actually sized this medical opportunity at $300 million SAM, and exciting to continue to grow that business.

That's really helpful. And I think you guys, in your last earnings, you gave us kind of some new metrics in terms of updating kind of your TAM and things. Can you just kind of maybe walk through some of those? And what are the biggest changes that you made this past quarter in terms of valuing some of those opportunities?

Sure. So we refreshed our investor presentation that we published with our earnings call about 4 weeks ago. And we'll make typically quarterly changes to it, minor changes for the quarterly results. But once a year, we do a full refresh. And that's in conjunction with our strategic planning process. So we go through a strategic planning process with our Board. We had that at the beginning of November. And the value really lies in going through the process itself. I mean, you present to the Board, but that's a couple of hours. But going through the process, it allows us to say, "Are we still focused on the right areas? Are electrification autonomy is still the right areas?" The answer is yes, which is good. We found -- we go through the data bottoms-up to say, "Are we still reaffirming our target financial model?" The good news is, yes, we are. That's in there. So as we went through that, we've started to make sure that we update our investor presentation as a derivative of that. So there's nothing new, profoundly new in there, but I think we've tried to lay out the information to address your first question, which is what are some of the things that have misunderstood? And some of the things that we found that were actually even surprisingly good to me was, for example, when people talk about EV slowing, well, we talk about it as xEV, which is hybrid and EV. Because for a 400-volt EV battery, BEV battery and a hybrid is essentially the same content for Allegro, slightly different parts but essentially the same content opportunity, which is $60 per vehicle. When we look at that data, what was projected in 2021, shortly after Allegro went public, there were approximately 40 million vehicles protected by 2028 to be, what we'll call, new energy or xEV vehicles. That number today is 65% higher by 2028. So people thought EV was in a hype cycle in 2020, when Allegro went public, and it was. Interestingly today, the sentiment is horrible, but the data is 65% better than it was 4 years ago. So that's good news, right, as we go through these things. So it really reaffirmed where we're positioned. We also looked at geographies and said, "Where we're positioned, we'd want to reallocate." And as we think that through, China has certainly made a lot of inroads over the last 4 or 5 years. We're doing some things in China, we'll talk about shortly. But as we look at some of the other regions, like Europe, Europe has been challenged, right? So we'll make resource decisions around putting those things in there. But the investor deck also allowed us to update those things in auto and our SAMs for industrial, which we found today is larger than what we thought it was 4 years ago, not just because of the new applications that Jalene talked about, but some of the applications around clean energy, metering, solar, data center, liquid cooling pumps in data centers. So we found today that, looking at it, we have a bigger opportunity than we did 3 or 4 years ago.

That's helpful. Maybe just kind of focus a little bit on the kind of more near term, I think June quarter, you kind of thought maybe that bottom and now we're kind of thinking about guiding for December being down sequentially. Can you talk about just kind of what dynamic have changed in that time period? And I guess, how do you think about channel inventory looking into '25?

Yes, good question. So we still think June is the bottom. June was $167 million in revenue for Allegro. June is the bottom. And we were at $187 million in Q2 in the September quarter. We guided down at the midpoint 6% to $175 million midpoint in the December quarter. It's a 6% decline at the midpoint. Our typical seasonality over the last decade with the exception of about a year or 2, when there were wafer constraints, was 5% down in the December quarter, so not far off of seasonality. Still think June is the bottom. The December quarter does appear to be the trough quarter for auto for Allegro, largely driven by North America and Europe. Implied in our guidance is high-teens, around 20% decline in North America and Europe auto for this particular December quarter. Some of the idiosyncratic things in there are most of those customers are at 12/31 year-end, and they're driving inventories pretty low in the channel right now.

What about as we look into 1Q? And I'm not asking you to guide, obviously, but China auto has been strong and if you kind of look at the production data, historically, it's pretty small range of down high 20% to 35% sequentially. Should we think about that as being a potential kind of different seasonality in the business relative to in the past, just given China's automotive demand is much stronger than historically?

Meaning that China is down in which quarter, in the June quarter?

In March.

China down.

March quarter, yes.

So typically, China was down marginally for Allegro in the March quarter because of the Chinese New Year, right? So it's 1 week off, essentially, right? However, because of the mix in our business, right, that approximately 15% to 20% of our business is levered to all the other regions, North America and Europe being down almost 20% in the December quarter. All else being equal, if we are not guiding for it, but if we just took out the normal seasonality of 5% decline in the December quarter and said, historically, that goes away in March, that would imply March would be up 5%, all else being equal. Even though China is down, the other regions balance that out. That's the beauty in sort of the model of having -- not being over-levered to any one particular region.

Okay, that's helpful. Maybe let's have a click on the Automotive. You guys talk about e-mobility versus non-e-mobility. How do we think about the two kind of growth vectors within that? And maybe just where do you see that mix going over time?

Sure. So the reason why we broke out our auto, so 70-ish percent of our business is Automotive. And approximately 50% of that is what we call e-mobility, which is the conflation of xEV, so it's EV powertrain, it's hybrid powertrain and ADAS applications for Level 1 and Level 2 applications. The other side of our business, what we call the non-e-mobility, is the traditional ICE powertrain business, coupled with the in-cabin safety type of applications or convenience function applications. So two of those, both the ADAS and the safety and convenience, are sort of powertrain-agnostic. Those are on both of our cars and increasingly trickling down. The growth areas have been and continue to be -- the outsized growth areas continue to be the e-mobility side of the equation. That's gone from about 35% of our auto 2 years ago to 50% of our auto. We expect that will continue to be the growth engine of our auto business from a pure growth percentage standpoint with projected EV growth of xEV in excess of 20% between now and the end of the decade globally and projected ADAS applications for Level 1 and 2 things that we do, between 10% and 12% between now and the end of the decade, so pretty excited about that. The good news is safety and convenience grows kind of in line with production, assuming that if we gain market share, it grows faster than that. And ICE is not dropping off a cliff, particularly in places like the United States. People will be driving ICE cars long after certainly I'm doing this and after most of us doing this. So I think the good news is we have a very balanced full auto portfolio and balanced by region and balanced by automakers. So we're really excited about the growth engines. But we also have to continue to serve the automotive customers we've served for the last 35 years.

Okay, that's helpful. You talked about what's been happening in Europe and North American OEM. I mean, how do you feel about the setup into 2025? Do you think things are kind of a cleaner start looking into next year? Obviously, expectation for production is relatively muted or kind of more normalized post COVID, kind of supply chain crunch? But how do we think about that setup?

Sure. So we feel good about setup for 2025. When I start to look at where we are by region, we took a lot of our pain in the June quarter of 2024, in particular with Asia. We were down 54% in China sequentially. That was a lot of inventory that came out of the channel. Korea was down pretty significantly. The positive, when I look at the places in Asia, 70% of our business, is that Japan never really got too far ahead of itself in terms of inventory. So we've been shipping to consumption in Japan. Now consumption in Japan has been kind of bouncing along flattish but still consumption. In China, our business was up 52% in the September quarter off the bottom in the June quarter, and we're starting to see some orders within lead time, particularly from Korea and China, which indicates for those particular parts, they probably don't have inventory in stock. The other thing we're seeing in North America, in particular, and in Europe now is Tier 1s are actually going below their stated levels to where they wanted to be from an inventory standpoint. Some of that's their own economic issues and some of that's the 12/31 year-end that most of them are on and there's incentives around that, right? So we feel like people are going below the inventory levels that they may even have been at 4 or 5 years ago. And so there are some who believe this could set up a semiconductor crunch at some point in the future again with automotive. I'm not sure when that will happen, but we feel really good about the fact that we've cleared a lot of decks, particularly on inventory in Asia, still working through that in North America. Our industrial business, with the exception of medical, which is new, has been bouncing along the bottom for quite some time and undershipping that. And all of our models suggest we've been significantly undershipping in auto for the last several quarters compared to production, compared to the content growth. And there's some analysts who cover us, including yourself, have put up some really, really good graphs that showed that kind of consumption level compared to what we're shipping in both industrial and auto. So we feel pretty good about that. There's a lot of things we're doing to continue to optimize our financial model as well. We continue to move functions to the Philippines. We opened a shared services center last November in the Philippines. I now have 250 people there doing lots of administrative functions. And that's a function of just optimizing our cost structure, not because of the cycle. There are things you do because of the cycle. But 70% of our customers in Asia, they're in the right time zone. 80% of our vendors in Asia, they're in the right time zone. Frankly, it's a 5:1 cost differential. Loyalty is fantastic. So we'll continue to optimize our cost structure. And there's a significant amount of drop-through to our financial model when the revenue comes back. Our variable contribution margin, or the change in gross margin divided by the change in revenue, since we've been public is 65%. And because we have underutilized capacity in our back end, $1 of revenue translates into 65% of gross margin, all else being equal. And then OpEx, we don't expect that to increase by more than inflation. Yes, you have to give people raises, but more stuff will move to the Philippines. AIP resets next year in the June quarter. March quarter, marginal increase in OpEx, when you look at things like payroll taxes reset in the March quarter. So I'm excited about the fact that when these markets do come back, our financial model is built to have a significant amount of drop-through to EPS.

Yes. Maybe we'll touch on kind of the target model and things in a sec here. But I mean, I guess, go back to kind of what you're saying in terms of you're seeing some of these Tier 1s that their inventory is going well below kind of the normal, I mean, what's -- can you remind us what's your lead times for chip production in terms of wafer in to wafer out and relative to that kind of inventory that they're holding?

So our typical lead times are about 12 weeks. That's where our stated lead times are right now. They got elevated a few years ago. We can supply that -- we can supply customers faster than that today because the on-balance sheet inventory today, about half of that is wafer and die bank that we hold in our back-end facility in the Philippines. So that cuts 45 days off our lead time from the start of a wafer to kind of having a wafer through probe. That's good. So we can supply things quicker today. But we have sent letters to our customers, as has many of our peers, saying, "We can accommodate you today, but please help us by giving us more level loading forecast, those sort of things because 6 or 9 months from now, we may not be able to accommodate you, right, and we'll go back to surge pricing and all these kind of things." So that's kind of where we are from a lead time standpoint right now, and we're working to normalize our production schedules and those sort of things.

Okay, that's helpful. I think you mentioned a little bit earlier, but we can double-click on you're doing some different supply chain things in China. Can you talk about that? How does that help with your competitive positioning there? Can you elaborate on that?

Yes, sure. So China -- the ship to China is about 25% of our business and about half of that gets reexported out of China. So we're shipping to the traditional automakers in China, like the Stellantises, the Fords, the Teslas were manufactured in China, majority of which gets reexported out of China. We're also shipping to the global automotive makers in China, like the BYDs, the Geelys, the Cherys, the NIOs, et cetera, and some of the locals. And about 2 years ago, we recognized the fact that customers were asking us to have a plan. They weren't quite mandating it to have localized supply chain in China coming from the Chinese government requesting that. And so we went down a path of having wafers qualified at SMIC in China. We're starting to get those first sample wafers from SMIC. The yields are pretty good for where they are in the cycle right now. We've also signed up JCET and Carsem, both in Suzhou, to do probe assembly and test. The intent is to have a full turnkey solution in China. Not for the entire China market, it's expected to serve for us approximately half the China market. The reason it won't serve all the China market is because we don't want to put proprietary wafer deposition technology in China. So it will be standard SMIC processes. We don't want to put proprietary packaging in China. There will be standard processes at the OSATs. That proprietary stuff always still comes out of our factory in the Philippines. So that will help us compete better in China, both on having the localization and, quite frankly, from a cost standpoint. Because China is, for us, the most competitive market in the world, the most price-competitive market in the world. And having a localized supply chain in China really helps with that. I have been asked a few times, could we use that supply chain outside of China? And as a pure CFO, I'd love to do that. But showing up a GM with SMIC wafer just doesn't work, so you have to start to look at geopolitical lanes around the world.

And only having kind of 50% of that being really manufactured in China, just given some of the proprietary nature, your customers are fine with that?

They are. The good news is there's local suppliers in China. There are local suppliers that we've been told are cheaper. They can do things faster. But the good news is they haven't met the specs yet. And the things we're doing, there are still very, very stringent safety requirements for ADAS applications, not just outside of China but in China, right? They don't want cars crashing into trees in Shanghai. And the same thing with emission standards. So that's one thing. That's really been helpful because they still have to meet those standards in China. The second thing is all of the growth in production in China of automotive over the next 6 years is projected to be export-related. So even the local Chinese manufacturers, anything -- any of their growth is coming from export. So having the parts that meet Western standards are still important for them.

And I guess, for the discussions you're having with them, for the cars that they want to export out of China, they are preferring to have a non-Chinese wafer chips. Is that the right way to think about it, I guess?

That's exactly been the discussion. But really, where the discussion has been is the demand to have a full China supply chain for everything they do is not completely there. For the local market, it's completely there. They're not saying, "I'd prefer to have a foreign part for the market," but the customers they're selling to you in the foreign markets are saying that for the most part. Japan, Europe, the United States, places like the Philippines, they're probably okay with that. And I was there a few weeks ago and I saw three BYD dealerships. They're making a lot of inroads in those kind of places.

Okay, that's helpful. Maybe let's kind of shift away from auto for a second, talk about the industrial market, obviously, broadly speaking pretty weak for semis. Can you talk about the inventory dynamics that you're seeing there? How do you think about the kind of setup into '25?

Sure. So industrial for Allegro, we call it Industrial and Other, the other is kind of some small consumer pieces that have been historically sold through distribution, so all of our Industrial and Other is sold through distribution. And Allegro designs parts for automotive. So we design parts for automotive and we leverage those into distribution to sell into applications that have a similar use case. We're not necessarily designing parts for the industrial markets. And what's in our industrial, I know it's different for everybody, is largely solar. So you think about solar mini inverters, similar type of inverter or applications you'd have in an automobile. There's also industrial automation, which has electrification and autonomy. There's data center cooling, which has been traditionally air cooling three-phase fans, now it's turning into liquid cooling, which is kind of exciting. There is also consumer applications, for example, angle sensors for things like Xbox controllers, Meta headsets, small piece of our business, sold through distribution at really good ASPs. So that's great. And a really new market for us is medical, as Jalene talked about, this continuous glucose monitoring, which is using a TMR switch, which came with the Crocus business, high volume, very interesting business. For the most part, that business -- the industrial business, with the exception of medical, has been fairly muted for the past 12 months. Excess inventory in almost all those areas, solar with the demand challenges in Europe. Data center, people are surprised when I say it has been muted because of where we are in the data center. And quite frankly, just to be candid, there was too much inventory in those particular parts with the fan manufacturers. That's the bad news. The good news is that's down to $2 million a quarter. So it could drop a little more, but 0 is the bottom. The even better news is we're starting to see green shoots there with design wins in some of the areas Jalene talked about plus in the data center, starting to see design win for liquid cooling. So we feel like there's a few more weeks left of inventory in the distribution channel which relates to industrial around automation, solar, some of these data center parts. But it's really been bouncing along the bottom. We've been undershipping there now for 3 quarters. And some of the new things we're doing are pretty exciting. So we feel good about that for 2025.

Okay. I mean, in some of those markets, right, changes in administration, maybe solar is a little deemphasized probably.

In the U.S.

In the U.S., right? But can you talk about the liquid cooling opportunity? Is that a content uplift relative to fans? Or how do we think about that?

It is, absolutely. I don't have the numbers on what the content uplift is because right now total data center sales are 1.2% of our sales in any given quarter. It peaked at about 5% or 6% of sales. But it is a content uplift. It is an interesting opportunity. And it's another example of where we've leveraged pump cooling in an ICE vehicle to liquid cooling in a data center. So a similar -- it's a motor driver that does the same things they would do in an automotive, and it's all automotive-grade, which has the reliability standards that they're looking for in these long-term data centers. So that is an exciting opportunity for us.

How do we think about just the -- you kind of just mentioned a bit, the cross-R&D capabilities of what you're doing in auto translating into other markets? I mean, where does -- you said earlier, 75% of R&D is spent on magnetic sensors. But how does that translate across auto to industrial? Is there a really good crossover that you're just...

It's all. So the engineers actually, for the most part, when they're designing a part, they're designing it for auto. And that -- the business development folks are tasked with figuring out how to take that same part and find the use cases in the industrial applications, some of which we've identified, some of which we have business development teams leading, other of it just goes through fulfillment and through demand gen within the distribution. But the design is auto-centric. And the top of that for industrial is all leveraged from that. So that's the really nice part about that. We're not designing anything specifically for industrial, so you get a ton of leverage on the R&D side of things.

Some examples could be you could take a position sensor that's used in the steering system, right, and repurpose that into robotic, a robotic arm and automation. You can take inverter technology from EVs and also use that in solar technology. So it's valuing the same specifications and also the high performance in harsh conditions over long lifetimes.

In fact, frugal New England CFOs like myself are starting to ask our engineering teams like, "I'm sure it's great that they're all auto-grade, but do you still need all the auto-grade if you're selling Xbox controllers, right?" So no one is going to die if my son throws a Xbox controller at the wall. I mean, so you don't need cold tests. You don't need hot tests and some of these things, right? And that's real. That saves $0.02, $0.03, $0.04, right? So we're starting to think about those kind of things. But customers do buy, particularly in industrial, for the reliability of those things. But there's actually opportunities to optimize the financial model there further.

That's helpful. You kind of talked about gross margin a little bit ago. Near-term puts and takes on gross margin, how do we think about kind of the upcycle as we look into next year?

So the near-term upside opportunity on gross margin is all related to volume. So because of the fact that we're significantly underutilized in our back-end facility in the Philippines, we've made significant investments there over the last 2 or 3 years. We invested $250 million in the back end to build out the facility, the probe assembly and test capacity expansions there. That was about 12% or 13% of our sales -- capital intensity in the last 2 years. That's down to 5% this year. That's done. That will continue to be in that 5% range for the foreseeable future. Our financial model is 6%. So it's in that range. So any volume though that back-end facility, all else being equal from a mix point and a price standpoint, it's 65% drop-through. So that's good news. That's the near-term increase in the gross margin. The other side of that is the new products that we released, the TMR products, the isolated gate drivers, all the new products have been inherently higher ASP and a higher gross margin or variable contribution margin. So that adds to that. And then the third dynamic really is as industrial starts to come back, industrial has historically had a significantly higher gross margin than auto simply because of the volume leverage. There's people who are buying these parts through distribution, less of a chance to negotiate and they're buying units in thousands versus in millions, so they're paying a higher ASP. Those are the near-term levers. On the flip side of that, we have to continue to battle pricing over the near term and over the longer term, that goes back to normal pricing and automotive. And we'll continue to work with our suppliers on that. We'll continue to optimize our fixed cost structure as well.

That's helpful. I mean, in terms of pricing and competition, are you seeing -- you talked about just kind of the dispersion of geographic revenues or anything we should be thinking about from a pricing competition on that front?

Pricing is more of a near-term, medium-term thing. So automotive pricing is going back to normal, meaning it's dropping single-digit declines every single year within auto, and those are productivity declines. In the near term, the difference is IDMs are being much more aggressive on pricing because they have large fabs that are completely underutilized. So there's a near-term pricing dynamic. But in auto, that's hard because if you give discounts in year 1, it's a gift that keeps on giving. So people are being very strategic with variable contribution pricing right now. But they have to be careful not to let that go out for a couple of years.

Okay. I think you talked about a long-term gross margin of 58%. I mean, obviously, you said near-term volume is the driver. I mean, are there other things that we should be thinking about that gets you to that target?

Yes. As I mentioned, the new product mix is TMR ramps from practically 0 up to 20% of the overall magnetic sensing market by 2030. That's a huge uplift for us. Isolated gate drivers, which we just introduced and are not shipping yet, that's an uplift for us in addition to the volume that goes through that channel. So our financial target that we reaffirmed is 58% in the next couple of years. We were actually there 2 years ago at 58.3%, 58.4% a couple of quarters. And what I said at that time was that was slightly higher than it should have been. We had our Analyst Day, our margins were 58%, my tag was 58%. I got asked if I was being too conservative. I said, "Well, the real margins at the time were 56%." Because what happens at the beginning of these cycles is when prices went up in the distribution channel, they go up before the cost catch up. We're in the oppose of that situation, where distribution pricing has come down very fast and it does continue to do that before cost catch up. So the cost catching up to that also helps with the gross margin.

Okay, that's helpful. You mentioned announcing some of the new products recently, I mean, isolated gate drivers. Can you -- for maybe some of us who are not as familiar, can you talk about the position there? Why is that important? And what is the opportunity kind of looking over the next few years there?

Sure. So we bought a business in France in September of 2022 called Heyday Integrated Circuits. It was really just 10 engineers who had a really awesome concept for an isolated gate driver, which ON Semiconductor does, Infineon does. But these isolated gate drivers are taking essentially three functions and putting them into one package. So it's about 1/3 less on the BOM on the board from a cost standpoint, from a size standpoint, 2x better from an efficiency standpoint. We just released our first product to market, which is a gallium nitrate isolated gate driver, geared towards the industrial market, geared towards data center, geared towards solar, much more efficient on driving power between the applications. We're in the process of development and about to release later next year, a silicon carbide isolated gate driver. That adds about $40 in SAM opportunity for us in content on an 800-volt battery electric vehicle. The first part of it, the gallium nitrate, is all industrial application, which you expect to start shipping in the latter part of 2025. We released it at Electronica a month ago in Munich. And we've got a fair amount of real good interest in those products.

Okay. When you launch a new product like that, how long does it take to kind of -- especially for -- in automotive, right, how long does it take to kind of start to see that -- see wins in the pipeline turn into revenue?

Yes, so typically in automotive -- so in industrial, the reason why the gallium nitrate was launched first in industrial was those wins turn into revenue within a year generally in industrial. That's why we went there first. Within automotive, generally speaking, in the Western world, from the time you get a design win to the time it's shipping and production is about 2.5 to 3 years. In China, that can be faster, 18 months.

Yes. How do you think about depending on a lot of the semi companies -- there's a clear difference in how fast China automotive is moving relative to the Western regions. And I think some people view that as a positive. But then I think that a lot of investors maybe will push back and say, "Well, but that's turning into kind of more like a smartphone type of cycle or iteration, where every year or every 2 years, you're having to go win your socket again." How do you guys think about that?

Yes, I haven't analogized it necessarily to the cell phone market, but I could see the -- I can see why people would do that. We think about it right now as an opportunity, right? And we talk internally about China speed, how we have to do everything from a sales cycle standpoint at China speed. We have to do anything from an R&D cycle standpoint at China speed. So our goal is to continue to win in China, right? We think we do that on specifications. We have to stay ahead of the competition. And we're continuing to compete very fast. I think in general, on the margins, that's good for us and we're continuing to compete at that speed. And that is much faster than, I think, the majority of the Western world.

Yes, okay. I think earlier this year, you guys had done some things with Sanken, obviously, was a large owner, still is a large owner. But can you talk about the capital allocation priorities now, now that you did some transaction with Sanken that increased the float? But maybe talk about how should we think about capital allocation post that?

Yes. So Sanken has owned Allegro since 1989. Actually, they bought Sprague Electric, Sprague Semiconductor. And they took it public in October of 2020 with a private equity firm. The private equity firm is completely out of the stock, as you'd expect, after 6 or 7 years. And Sanken Electric held 52% of the shares from the time the company went public up until this past July. We worked with Sanken to do a unique transaction. They wanted to monetize a portion of their shares. Frankly, I don't think they wanted to monetize it at that point in the summertime, but they had an earthquake in Japan. They had some unique capital needs. So we helped them monetize about $1 billion worth of their asset in Allegro. We did that in July. But at the same time, we were able to put 30% more free float in the market and we retired 6% of the shares by buying back $10 million at what I think in the medium term will be a good price for Allegro shareholders to do that and Sanken paid for all the transactions. As a result of the combination of doing that, coupled with buying Crocus last year, the company borrowed $400 million in Term Loan B. That's down to $375 million. So in the near term, paying down debt has been our priority from a capital standpoint. We'll continue to invest in research and development. We'll continue to invest in efficiencies and systems and those sort of things. You probably won't see us do any large M&A anytime soon. There might be some small, small tuck-in things. But the goal really and the priority is to pay down that debt. That's the most accretive thing we can do right now. It's at SOFR plus 2.25%. It's trading above par as it starts to get -- as we start to get towards the end of the soft call period, I'm going to look to reprice that pretty quickly and continue to make voluntary -- large voluntary payments like I've done throughout my public company career because that's what we promised to the debt holders, the equity holders and the rating agencies. And in our trough quarter, the June quarter, which sales were down 32%, we were still free cash flow positive, $15 million in free cash flow. So when the debt holders and others ask, "What does the trough quarter look like? How does free cash flow look like," we just point to June quarter and say, "It looks okay."

Yes, okay. That's perfect. I mean, in the 30 seconds we have left here, anything we didn't cover that we should have?

What do you think, Jalene?

I think we've hit on the topical things of late.

Okay, perfect. Thank you for joining us.

Yes, thank you very much, Joe. Thank you very much. Appreciate it.

Thank you.