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

Good morning, and welcome to Allegro MicroSystems First Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Thank you, Sarah. Good morning, and thank you for joining us today to discuss Allegro's first fiscal quarter 2027 results. I'm joined today by Allegro's President and Chief Executive Officer, Mike Doogue; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our first quarter 2027 financial results and share our second quarter outlook. We will follow our prepared remarks with a Q&A session. Today's call includes remarks about future expectations, plans and prospects, which are forward-looking statements. Such statements are based on current expectations and assumptions as of today's date and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated or projected on today's call. The company assumes no obligation to update these statements, except as required by law. For a discussion of these risks and uncertainties, please refer to today's press release and the risk factors contained in our periodic SEC filings. Additionally, we will refer to non-GAAP financial measures during today's call. Today's earnings press release, which is available on the Investor Relations page of our website at www.allegromicro.com, contains important information about our non-GAAP financial presentation and also includes reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures. This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly. It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Doogue. Mike?

Thank you very much, Jalene, and good morning. Thank you all for joining our first quarter 2027 earnings call. We began fiscal 2027 with continued strong momentum, delivering our sixth consecutive quarter of sequential sales growth. First quarter sales were $259 million, above the high end of our guidance range and representing a 27% increase year-over-year. First quarter EPS was $0.23, increasing more than 2.5x over Q1 of fiscal 2026. Before Derek takes you through the financials in detail, I want to spend a few minutes on the business dynamics driving Allegro's growth. Our forward demand signals strengthened again this quarter. Bookings increased for the seventh consecutive quarter and backlog continued to expand. Allegro's growth is increasingly fueled by the intersection of our technology with the defining megatrends of AI, electrification and automation. This is particularly evident in our Industrial and Other business, where data center led first quarter growth, increasing 32% sequentially to establish a new quarterly record at 17% of total sales. Within data center, current sensors continue to emerge as a meaningful new growth pillar, increasing to 22% of first quarter data center sales. We are seeing accelerating customer adoption of our current sensors, which improve efficiency and system power density throughout the data center. Consistent with our expectations, current sensor growth rates are outpacing our motor driver business, which itself remains strong as fans are adopted more broadly in power supplies. This proven momentum across both our power and sensor ICs gives us confidence that fiscal 2027 data center sales will more than double over fiscal 2026. Looking forward, we remain encouraged by the significant increase in Allegro's content in next-generation AI servers. There is a growing need for high-speed current sensors, intelligent fan driver ICs and an outsized opportunity for isolated gate drivers throughout the data center. This creates a dynamic where rising server power multiplies our content far beyond the simple rack count growth. That expansion is showing up directly in our sales pipeline with data center again leading first quarter industrial design wins and with current sensor design wins surpassing motor drivers. For example, this quarter, we secured design wins for multiple important programs using our market-leading 5 megahertz current sensors, including a high-volume, high-voltage DC power supply with a leading provider. Within the quarter, we also secured multiple programs using our differentiated TMR current sensors in data center power supplies. Turning to automation and robotics. We continue to see increasing adoption of our sensor and power solutions in robotics applications. Importantly, we are winning in robotics today with our existing technology. The same precise high-resolution sensing and robust power products that have made Allegro a leader in advanced automotive motion control are exactly what robotics designers need now. Our decades of automotive safety heritage give us a distinct advantage, proven silicon, established high-performance motor control and proven quality at scale. Engaging with key robotics customers has been a top priority. My recent customer visits in North America and China have further confirmed what we already knew, that robotic joints pose the same fundamental safety-relevant motor control challenges that we solve every day in advanced steering and braking applications in cars. This quarter, we secured current sensor wins with large Chinese humanoid robot OEMs. We also secured a large design win with a prominent North American humanoid robotics OEM that is using our inductive position sensors in robotics joints. These wins reinforce our expectation that robotics and automation will contribute 3% to 4% of our FY '27 sales. And the long-term trajectory is even more compelling as humanoid robots incorporate more joints, actuators and safety critical motion control. We estimate our addressable content will exceed $150 per humanoid by 2030, surpassing our projected automotive content per vehicle. By securing these foundational sockets today, we are building a multiyear sales pipeline that we expect to become a meaningful growth vector for Allegro as the market scales towards the end of the decade. Turning now to Automotive. First quarter Automotive sales grew 15% year-over-year. This outpaces our long-term target of greater than 10% growth, which is built on our ability to outgrow SAAR by 7% to 10% through content and share gains. Our content per vehicle is expanding as the industry transitions toward electrified powertrains and advanced safety systems. We see a clear path from roughly $40 of Allegro content in legacy ICE vehicles to upwards of $100 in next-generation battery electric vehicles. Within Automotive focused auto, which includes xEV and ADAS, led first quarter sequential growth. Our content-driven growth is validated by broad-based geographically diverse design wins led by China, Korea and APAC. First quarter auto design wins were up 30% year-over-year. ADAS wins were led by electronic power steering and emerging electromechanical braking applications. High-voltage traction inverters and onboard chargers continue to lead our xEV wins. Let me now give you just a few examples of impactful design wins. In Korea, we secured several electronic power steering wins across 2 leading OEMs. These wins included Allegro current and position sensors, motor drivers and high-performance power solutions, reflecting the breadth of our sensing and power portfolio and rising content per system. Our current sensors were selected for a sizable win with a top Japanese OEM for a hybrid vehicle traction inverter, where our market-leading current sensors are driving share gains. In China, our motor drivers, high-performance PMICs and position sensors are gaining share in 12- and 48-volt electromechanical braking systems with both global and local Tier 1s. And finally, we won our first major TMR angle sensor programs for ADAS steering motors with leading China OEMs. This further demonstrates the share gain potential of our market-leading TMR technology. Our technology leadership continues to translate into broad-based design win momentum. This is fueling our content expansion strategy across xEV, ADAS, data center and robotics, positioning us to capture outsized growth in a large and expanding SAM. We remain confident in our ability to deliver target growth rates in auto and industrial. And in fiscal Q2, we expect both end markets to deliver mid-single-digit sequential growth. I'll now turn the call over to Derek to provide additional color on our financial performance as well as our second quarter outlook.

Thank you, Mike, and good morning, everyone. Starting with our first quarter results. Sales were $259 million and non-GAAP earnings per share were $0.23. As a percentage of sales, gross margin was 51.1%, operating margin was 19.4% and adjusted EBITDA was 23.9%. Total Q1 sales increased by 7% sequentially and 27% year-over-year. Sales to our automotive customers increased by 1% quarter-over-quarter to $165 million and 15% year-over-year. Focus auto sales, including xEV and ADAS increased by 3% sequentially and 11% over Q1 of '26. These results reflect growing lead time orders within lead time orders not able to ship in this quarter. Auto demand from our customers continues to be really strong. As Mike mentioned, auto design wins were up 30% year-over-year, and auto bookings were also up 30% year-over-year and up high single digits sequentially. Industrial and Other sales increased by 18% sequentially to $94 million and by 59% over Q1 of FY '26, led by continued strength in data center to record levels. Sales to our data center customers were 17% of Q1 sales, up from 14% in Q4 and 10% in Q3 of FY '26. And as Mike mentioned, sensor solutions were now 22% of our Q1 data center sales, increasing 66% sequentially. This has also driven our data center product margins to the mid-50s. From a product perspective, magnetic sensor sales increased by 6% sequentially to $150 million and by 16% year-over-year. Sales of our power products increased by 7% sequentially to $109 million and by 47% over the prior year quarter. Sales by geography on a ship-to basis were as follows: 32% of sales in what we term rest of Asia, which is essentially Korea, Taiwan and India, 25% of sales in China, 17% in Japan and 13% of sales in both the Americas and Europe. Now turning to Q1 profitability. Gross margin was 51.1%, up from 50% in Q4 and gross margins have improved by 290 basis points from 48.2% in Q1 of fiscal '26. The improvements were driven by operating leverage, product mix and to an early and lesser extent, recent pricing actions. In addition to outgrowing our target markets, operational excellence and gross margin improvement remain top priorities. While operating leverage is a significant factor contributing to gross margin improvement, we continue to drive factory efficiencies, work through product bill of material transitions, including gold to copper wire bonding and have taken selective price actions. Collectively, these efforts provide a clear path to our target gross margin of 55% and beyond. Operating expenses were $82 million and declined by $2 million sequentially, largely due to the reset of annual incentive compensation plans at the start of our new fiscal year. Operating margin was 19.4% of sales compared to 15.6% in Q4 and an increase of 830 basis points compared to 11.1% in Q1 of fiscal '26. The effective tax rate for the quarter was 9.7%. Interest expense was $4 million. The first quarter diluted share count was 188 million shares and net income was $42 million or $0.23 per diluted share. EPS increased by 35% sequentially and 156% over the year ago quarter on sales increases of 7% and 27%, demonstrating the significant operating leverage in our business model. Moving to the balance sheet and cash flow. We ended Q1 with total cash of $170 million. Q1 cash flow from operations was $22 million, CapEx was $8 million and free cash flow was $14 million. We ended Q1 with term debt of $285 million and net debt of $115 million. From a working capital perspective, first quarter DSO was 35 days and inventory days were 128, both consistent with Q4. Finally, I'll now turn to our Q2 fiscal 2027 outlook. We expect second quarter sales to be in the range of $265 million to $275 million. At the midpoint of this range, it equates to a 26% year-over-year increase. Additionally, we expect the following all on a non-GAAP basis. Gross margin to be between 50.75% and 51.75%. Operating expenses are expected to be $84.5 million, plus or minus $1 million, and the sequential increase reflects targeted investments in R&D, including in potentially disruptive technologies and higher variable compensation estimates for the year. Interest expense is projected to be $4 million, and we expect our non-GAAP tax rate to be approximately 10%. We estimate that our weighted average diluted share count will be 188 million shares. And as a result, we expect non-GAAP EPS to be between $0.23 and $0.26 per share, with the midpoint of this range implying an 88% year-over-year increase. Now I'll turn the call back over to Jalene for your questions.

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our second fiscal quarter conference line up with you. We will attend Needham's Seventh Annual Virtual Semiconductor & SemiCap Conference on August 19; Jefferies Semiconductor, IT Hardware & Communications Technology Conference on August 25 and 26 in Chicago; Wolfe Research's TMT Conference on September 10 in San Francisco; and finally, StoneX's 13th Annual TMT Conference on September 17, which we will attend virtually. We will now open the call for your questions. Sarah, please review the Q&A instruction.

[Operator Instructions] Our first question comes from Joe Quatrochi with Wells Fargo.

Maybe just a little bit of help wondering in the puts and takes of the September quarter guide for revenue. I think you said mid-single digits for both industrial and auto. But just curious if you could help us understand just kind of what the data center growth expectation is for this quarter.

Yes. Thank you, Joe. So to start, we continue to feel we have a great data center story, growing market. We have strong content growth. And the signals that we're seeing from customers show continued signs of strength. And to remind everyone, when we look at our dollar content evolution going from $150 all the way up to $425 we're really encouraged by the fact that 2/3 of that $425 of content per rack are coming from the fan drivers and the current sensors. We're seeing very strong momentum from current sensors themselves, as we discussed in the prepared remarks. But we continue to see growth in the data center, and that growth is reflected into the mid-single-digit growth number we gave for FQ2.

And Joe, I'll provide a little more color on the Q2 guide when we talk about mid-single digits for both auto and industrial. That's based upon what we did ship. That's based upon what's in our backlog for that particular quarter. And what we saw in Q1 actually is we continue to receive within lead time orders, both in data center and in auto. And so some of those orders couldn't be shipped in Q1, and we're building a little bit of delinquency we'll ship over the next couple of quarters.

That's helpful. And maybe as a follow-up to that, I mean, can you talk about just like the plans to increase capacity? Is it front-end or back-end capacity that's maybe the bottleneck of those orders that can't be shipped within lead time?

Yes, sure. So most of what we're seeing, we have a good strategy to have not only a geo-diverse supply chain, but with enough capacity to grow. When you have in lead time orders, it ends up being the back end where you have constraints. And we did have plans and executed those plans to expand capacity on the back end. And that we continue to have back-end equipment rolling on each and every quarter.

Our next question will be from Chris Caso with Wolfe Research.

I guess the first question would be with regard to some of what you said on pricing, and you did talk about some pricing actions. Could you elaborate a bit on what you're doing there? What -- will that have any effect on gross margins going forward? And we know that particularly with your auto customers, you have some annual negotiations that occur at the end of the year. Is this in place of that? How will price increases be factored in as we go through the year and into next year?

Yes, Chris, thank you. This is Derek. So as we said in our call at the end of April, you're absolutely right. The majority of our auto customer contracts begin in the beginning of the calendar year. And as is normal, we saw low single-digit declines in majority of those auto customer contracts. Like many in the industry, we're seeing inflationary headwinds from commodity costs and other costs. So we are taking selective price actions that really began in earnest here at the end of our first quarter, largely in the distribution channel. So very little bit of that pricing benefit was in Q1. The slight beat on gross margin in Q1 really had to do with positive mix, and that also had a slight beat on the revenue in terms of having the long tail of distribution and general industrial sales with higher gross margins. As we move into the back half of this year, Q3 and Q4, we expect our pricing actions that we're taking now to be more impactful and beneficial to gross margins.

Got it. As a follow-up question, it sounds like you're getting some good traction on current sensors within data center. Can you talk as the data center business grows, what do you expect for current sensing as a percentage of your data center business? I guess it sounds like we should expect that to grow by how much? And is there a relative mix difference, margin difference in the fan controllers versus the current sensing part of the data center business?

Yes. So the current sensors do have a higher gross margin profile than the fan drivers. And from a growth rate perspective, I won't put a hard number on it, but we have multiple positive dynamics going on here. We know that the power levels consumed by the data centers are increasing. And these current sensors are used in power supplies. So to the extent that power levels go up, the need for current sensors goes up as well. We have an additional tailwind here because we are gaining share in the market as well. The traditional solution in these power supplies might be a transformer or an isolated amplifier. But because of Allegro's innovations, because of our TMR technology, we were able to make these small form factor current sensors with very high bandwidth, very high speed capability, and that's why we're taking share in the space. So we're confident that it will be an attractive growth rate, but we're not putting a number to that rate at this time.

And Chris, I mentioned on the call here that our gross margins now in the data center business are now in the mid-50s as a result of current sensors now being 22% of that business.

Our next question is with Tom O'Malley from Barclays.

I just wanted to do a health check on auto. It looks like it was pretty strong across both the quarter and kind of indicated in the guide. But just maybe what you've seen over the last quarter, any areas of strength or weakness? And then you've seen some of your larger competitors be a bit lighter on the auto side. Anything that you would call out that's differentiated from them?

Thanks, Tom. So we're feeling very good about our auto business. We said in the prepared remarks, we believe we can achieve our model of double-digit growth, growing 7% to 10% above SAAR. And there's many reasons for that. One of those reasons, just to remind everyone, our xEV and ADAS SAM, it grows at a CAGR of about 18%, layer some more good numbers onto that, which Derek and I covered in the prepared remarks, but with FQ1 sales up 15% year-over-year, FQ1 bookings up 30% and FQ1 design wins up 30%. We're seeing momentum. The thing that I always like to check, I've been on the road a bunch. I was in Europe, North America, Japan and China recently. And as we spoke to customers, our dollar content growth story is very much alive and well. I was able to meet with one of the Tier 1s out there that was first to market with electromechanical braking systems. They're shipping in production, very high dollar content increase for Allegro. I was in China talking to an inverter manufacturer. Our market share with that very sizable customer in the Chinese market has increased significantly over the last few quarters. So we continue to see signs of positivity in auto, and we're confident we can deliver our growth rate.

Helpful. And then not to get super specific on numbers, but you talked about the data center business more than doubling in this coming year. I think at the Analyst Day, many people walked away kind of with that strength in mind, and so a lot of numbers have gone there. Is that just a starting point to doubling? I know, obviously, a really big number already? Or do you think that as the year goes along, you may revise that? Is this something that you have a lot of visibility on? Or maybe talk to the lead times and your ability to upside that number?

Yes, sure. We look at all kinds of data center statistics and one of them being CapEx spend, which still for calendar year 2026, you can find quite a range on that number. But generally, you see numbers close to 80% year-over-year growth in CapEx spending. If that were to flex up or down, our provided number would flex up or down. Really, we've been securing tremendous design wins with short time to market. It's driving, like we said, the more than doubling within the year. And as we go through the quarters, we'll give a little bit more color, but the things that would drive it would be CapEx spend and some of the design win activity we have in the funnel.

Our next question will be from Vijay Rakesh with Mizuho.

Just a couple of quick questions. On the data center side, as you go from 400 volt to 800 volt it looks like your content triples per rack. Can you talk to what the mix is of current sensing and the fan motors and the gate drivers? Is it similar? Or does that mix change? And should that margin profile still be in the mid-50s there? And a follow-up.

Thanks, Vijay. This is Mike. So yes, I'll use the same numbers I already mentioned, but it's good to reground ourselves. So in older data racks, we had $150 of content, $425 of theoretical content in AI-forward racks. And like I said, 2/3 of that $425 is coming from our current sensors and our fan drivers. What I didn't say earlier, when you look to the future, we believe there's hundreds of dollars more in content that could be added to the $425 as we layer in the isolated gate drivers, 800-volt topologies. And we're also investing in some new sensor areas that would add dollar content to the rack for Allegro. So we see a long multiyear evolution of dollar content growth. But in the near term, we have full portfolios of market-leading products, namely the fan drivers and the current sensors to drive near-term growth. We think it's an exciting story in both the short term and the long term.

And Vijay, this is Derek. Just to touch on the last part of your question, I would expect the gross margins in that business to remain in the mid-50s, current sensors being above the fleet average and so the motor drivers is slightly below it. As isolated gate drivers come in, we also expect those to be down.

Got it. And just to continue on that same topic, Derek, when you look at the data center side, that's grown from 10% to more like almost 17%, 20% of revenues now and carries a much better margin profile as well. How do you see the overall gross margins trending as you look at next year? Because that data center mix could continue to go up because of the growth on the AI side. So maybe you can talk to how the margins kind of line up.

Yes. As we talked about in our Analyst Day almost 6 months ago, we expect to be trending over the next couple of years towards that mid-50s gross margins, 55% and beyond, right? We're making pretty significant progress, up almost 300 basis points year-over-year in Q1 versus last year, up another 110 basis points quarter-over-quarter from Q4 to Q1, up another 20 basis points to Q2. And within the Q2, the drop-through is only 57%. Some of that's mix as there's more auto in there. There's some mix within industrial. But as I mentioned to one Chris' question, we expect to see pricing layer in more heavily in the back half of this year, which will have an uptick in gross margins. We also expect some of those BOM optimizations like converting from gold to copper on the wire bonding to have more impact later this year and as we move into next year. We're confident we're going to move quickly towards that mid-50s gross margins over the next couple of years.

Our next question is with Blayne Curtis from Jefferies.

I want to ask you about TMR. It's become a big part of your product releases. Just kind of curious in terms of like of your shipments. And I really want to know about the competitive landscape within auto and data center. How much interest are you seeing in TMR versus Hall?

Sure. Thanks, Blayne. This is Mike. So we've been talking about TMR for a while, knowing that as time evolved, the benefits of TMR would start to extend into growth applications really across the business. In my prepared remarks, I spoke about a new win where we were able to get TMR motor position sensor into an ADAS motor, into a steering motor in China. That was the first time that we've accomplished that. There had been other players out there. I don't like mentioning their names in public calls. I think you know who they are. They had been established in that space at certain geos, and we're starting to go in and penetrate the market with our own market-leading TMR solutions in that application. If I -- and that's not the only one in auto, by the way, we took some share recently in oil pumps and other areas with good motor position. In the data center, I mentioned that we're ramping TMR current sensors. And what's happening in the data center is that as customers want to adopt and they are adopting silicon carbide and gallium nitride, the switching speeds in the power converters go up to gain efficiency and reduce the size of the power converter. That means you need a very fast current sensor. TMR current sensors can be much, much faster than Hall effect-based current sensors, and that's why we're winning in the data center power supply space as well. And we do have -- at least we believe we do have the world's fastest magnetic current sensor in the data center space today. So those are some of the examples of where we're taking share in these growth markets and a little bit of color as to why we're taking share.

And then maybe I wanted to follow up on Tommy's question on auto, not to nitpick, but like focus auto has kind of decelerated. Obviously, EVs went through a very tough patch. I was kind of feeling like maybe they're getting a little bit better. I'm just kind of curious your perspective. Obviously, great design wins, so I'm not picking on it, but I wanted to know your perspective on the EV market here.

Yes. We looked at some recent S&P data, and it mentioned that we actually adjusted it to our fiscal year '27. So within our fiscal year '27 EV market, EV production growth was in the neighborhood of 25%. So that remains a healthy number, and we're seeing that with our own customer activity. Obviously, a lot of that activity is coming out of China. I think there's been particular strength in the China export market these days. I know that their domestic market was not growing as robustly, but their export sales are. But across the globe, really, we see continued momentum and strength in the EV space.