Allegro MicroSystems Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to Allegro Microsystems Third Quarter Fiscal 20 Please be advised today's conference is being recorded. I would now like to hand the conference over to Jolene Hoover, Vice President, Investor Relations and Corporate Communications.

Speaker 1

Thank you, Kevin. Good morning and thank you for joining us today to discuss Allegro's 3rd fiscal quarter 2024 results. I'm joined today by Allegro's President and Chief Executive Officer, Vineet Nargawala and Allegro's Chief Financial Officer, Derek Dantilio. They will provide highlights of our business, review our quarterly financial performance and share our 4th quarter and full fiscal year 2024 outlook. We will follow our prepared remarks with a Q and A session.

Speaker 1

Our earnings release and prepared remarks include certain non GAAP financial measures. The non GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results. A reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release, which is available in the Investor Relations page of our website at www.allegromicro.com. This call is also being webcast and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward looking statements regarding future events or the future financial performance of the company.

Speaker 1

We wish to caution that such statements are based on current expectations and assumptions as of today's date and as a result are subject risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause Actual results to differ from our forward looking statements are described in detail in our earnings release for the Q3 of fiscal 2024 and in our most recent periodic filings with the Securities and Exchange Commission. Our estimates or other forward looking statements may change and the company assumes no obligation to update forward looking statements to reflect actual results, changes to assumptions or other events that may occur except as required by law. It is now my pleasure to turn the call over to Allegro's President and CEO, Vineet Nargawala. Vineet?

Speaker 2

Thank you, Jalene, and good morning, everybody, and thank you for joining our Q3 fiscal year call. I'm pleased to report that we delivered another solid quarter against a weaker backdrop in fiscal Q3 consistent with expectations our guidance. While we expect continued inventory digestion across markets in the short term, our design win momentum continues at record levels and reinforces our confidence in our ability to grow above market over the mid to long term consistent with our target financial model. Furthermore, We're actively managing the business to optimize profitability and cash flow throughout this cycle. In Q3, We delivered sales of $255,000,000 up 2% year over year reflecting continued strength in automotive.

Speaker 2

Sales in our strategic growth areas including e mobility and industrial, which includes clean energy and automation, We're up approximately 20% year over year to $150,000,000 or 59% of total sales. Innovation with purpose is our core value. During the quarter, we announced the launch of the second product of our high voltage isolated gate driver portfolio. Allegro's newest power through solution adds crucial safety features designed to protect against high operating temperatures in electric powertrain It also provides high performance in noisy environments present in microinverters in solar applications, power supplies in data center applications and onboard chargers for electric vehicles. Recall that our high voltage isolated gate driver technology came to us through our acquisition of Heyday just over a year ago.

Speaker 2

The progress we're making with our PowerThru product family demonstrates our ability to effectively integrate acquired technology and bring it to market quickly. We are applying the same approach and intensity to our recent acquisition of Crocus, which further strengthens our magnetic sensing IC portfolio and extends our leadership in this very important product category. I'm pleased to report that the integration of the Crocus team and its TMR technology is progressing really well. The acquired business is fully transitioned into our systems and processes. Product sales are underway with sampling activity accelerating in e mobility and industrial markets.

Speaker 2

Both the Allegro and Crocus TMR offerings are now combined under a common brand ExtremeSense, which now represents the world's leading and most comprehensive portfolio offering the highest accuracy, the lowest power consumption and the highest sensitivity for the world's most demanding applications. Feedback across the customer base has been very encouraging and the strong majority of our customer discussions recently at CES featured TMR. Moving on to the broader macro environment, Industry estimates indicate that calendar year 2024 automotive demand will be stable with continued growth in XEVs, which includes battery electric vehicles and full hybrids. While XEV adoption varies greatly by geography, the growing number of XEV launches just proves that the momentum is strong and increasing. Recall that Allegro is well represented in all automotive segments with our solutions supporting all powertrains.

Speaker 2

Today, ADAS represents the majority of e mobility and XUV, the fastest growing component. And while eMobility is a key strategic focus, nearly half of our automotive sales are in other automotive applications such as ICE powertrain and safety, comfort and convenience, which is agnostic of the choice of powertrain. Additionally, OEMs use of both hybrid and full electric platforms to meet fuel economy and emissions regulations positions us well. Allegro's content in full hybrid vehicles is similar to that in BEVs with both significantly higher than that in ICE. And so Allegra wins no matter which platforms OEMs invested.

Speaker 2

While automotive demand remains stable and we see continued strong momentum in e mobility, we are seeing certain inventory dynamics with tiers and contract manufacturers are pairing back inventory from the 8 to 10 weeks during the supply chain crisis to pre pandemic levels of 4 to 6 weeks as carrying costs become a factor and OEMs and support premiums for inventory. Despite these dynamics, we expect our automotive business to deliver above market growth for fiscal year 2024 consistent with our target financial model. Our 4th quarter sales outlook comprehends macroeconomic conditions, including ongoing inventory digestion in industrial and consumer markets as well as pockets of inventory rebalancing in automotive. Looking to the future, We continue to see strong design win activity with 80% of our Q3 design wins in our strategic growth areas and more than 50% in the area of e mobility. Key highlights from our 3rd quarter design wins include the following.

Speaker 2

In automotive, We were awarded multiple programs by a leading Japanese OEM for an XUV platform. This was for current sensors on onboard chargers and AC inverters and for a magnetic position sensors for electronic power steering systems. In China, We were awarded multi solution design wins for XEV powertrains and EPS systems with the leading automotive OEM using our current sensor and power technology. In the industrial end market, we won several designs using our current and isolation sensor technology for clean energy applications including solar and EV charging. In data center applications, we recorded several design wins with our motor drivers with a major OEM for cooling high performance AI servers using both traditional fans as well as liquid cooling.

Speaker 2

We remain focused on serving our customers and extending our market leading positions. We're investing for the future with a focus on maximizing growth in these strategic focus areas while positioning the business to scale and grow profitably. This focus is being rewarded by our customers with more business and our record design wins indicate that we are winning in the market. In fact, for fiscal year 2024, we're on track to close over $1,000,000,000 in design wins with the majority turning to revenue over the next 3 years. This is proof that our strategy is working underpinning our confidence in our ability to deliver above market performance over the long term.

Speaker 2

I want to thank our teams globally for serving our customers and the continued execution of our strategy. I'll now turn the call over to Derek to review the Q3 financial results and provide guidance for our Q4. Derek?

Speaker 3

Thank you, Vinit. Good morning, everyone. Starting with a summary of our Q3 financial results, sales were $255,000,000 gross margin was 54.6%, Operating income was 27.2 percent and adjusted EBITDA was 34% of sales. As a result, earnings were $0.32 per share, 10% above the midpoint of our guidance range and exceeding the high end. Total Q3 sales increased by percent compared to Q3 of fiscal 2023 and sales to our automotive customers were $195,000,000 an increase of 18% year over year and representing 76% of Q3 sales.

Speaker 3

EMobility sales increased by 6 percent sequentially and 45% year over year, representing 54% of 3rd quarter auto sales, up from 44% a year ago. Industrial sales were $46,000,000 declining 25% sequentially and 14% year over year. Other sales, which includes consumer applications, were $14,000,000 down 17% sequentially and 53% year over year. Sales through our distribution channel, which comprised the majority of the industrial and other sales were down 10% sequentially as expected. We continue to monitor channel point of sale sell through closely to manage inventories to appropriate levels.

Speaker 3

From a product perspective, magnetic sensor sales were $154,000,000 declining 13% sequentially and flat year over year. Sales of our power products were $101,000,000 increasing 2% sequentially and 7% year over year. Sales by geography were again well balanced with 30% of sales in China, 24% in the rest of Asia, 17% in Japan, 15% in Europe and 14% in the Americas. Now turning to Q3 profitability. Gross margin was 54.6% and in line with our expectations for the quarter.

Speaker 3

Gross margin has remained healthy Through this sales decline as a result of our fabless and our flexible manufacturing model, operating expenses were $70,000,000 or 27% of sales, down from 28% of sales a year ago and included 2 months of Procus. 3rd quarter R and D expenses were 15% of sales and SG and A was 12% of sales. Operating margin was 27.2% of sales compared to 31.3% in Q2 and 30% a year ago. The effective tax rate for the quarter was 10%, slightly better than expected due to the geographical mix of income. We are now projecting our full year non GAAP tax rate to be approximately 12%.

Speaker 3

The 3rd quarter diluted share count was 194,600,000 shares and net income was $62,000,000 or $0.32 per share. Moving to the balance sheet and cash flow. We ended Q3 with cash of $224,000,000 Cash flow from operations in the quarter was $77,000,000 and free cash flow was $42,000,000 an increase of $27,000,000 or more than 170% sequentially. From a working capital perspective, DSO was 41 days compared to 40 days in Q2 and inventory declined by $8,000,000 and days in inventory were 124 days compared to 136 days in Q2. Capital expenditures in the 3rd quarter were $34,000,000 as we are completing a capacity expansion of our operations in the Philippines.

Speaker 3

Also in the Q3, we opened a new Philippines tech and shared services center and made investments in R and D Labs in strategic locations. I'd like to take a few moments Now to speak to the actions we are taking to optimize our financial performance with a focus on free cash flow. First, we continue to prioritize investments in our strategic growth areas, specifically in R and D and sales. However, in response to the recent slowdown in sales, we have aligned factory costs with production levels and taken actions which have contributed to an 8 to decline by approximately 9% in the second half of fiscal twenty twenty four compared to the first half. To further optimize cash flow, we are managing our material purchases, including wafers to align to current production levels.

Speaker 3

We are also nearing the end of our most recent capacity expansion in the Philippines. And as a result, we expect CapEx to decline by approximately $25,000,000 or 30% in the second half of fiscal twenty twenty four compared to the first half of the year. Now I'll provide a few additional updates on the Crocus acquisition. As Vineet mentioned, integration is progressing well and planned synergies are on schedule. In Q3, we completed the full systems integration and a number of tax and legal steps to allow us to utilize significant pre acquisition tax net operating losses and enable us begin to realize tax and operating benefits.

Speaker 3

Finally, I'll turn to our Q4 and full year 2024 outlook. We expect 4th quarter sales to be in the range of $230,000,000 to $240,000,000 which reflects continued inventory digestion. At the midpoint of our Q4 guidance, we are projecting sales growth of 7 for fiscal 2024 with auto sales expected to grow in the high teens of fiscal 2024. Based on our current view and historical cycles, we estimate continued inventory digestion for a couple of quarters and we expect Q1 of fiscal 2025 or the June quarter to be our trough quarter. We expect Q4 gross margin to be between 53% and 54%, reflecting the projected product and channel mix.

Speaker 3

We expect operating expenses to be approximately 31% of sales. And Q4 operating expenses include a full quarter of Crocus and the annual payroll tax reset. We expect our non GAAP tax rate to be approximately 12% and our diluted share count to be approximately 195,800,000 shares. As a result, we expect non GAAP EPS to between $0.19 $0.23 per share. Now, I'll turn the call back to Jalene for the Q and A session.

Speaker 3

Jalene?

Speaker 1

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our 4th Fiscal quarter conference line up with you. We are attending Wolfe's inaugural Semiconductor Conference on February 15 at the Jay Autograph Collection in San Francisco, California Susquehanna's 13th Annual Technology Conference on March 1st with attendance virtual and Morgan Stanley's TMT Conference on March 4th at the Palace in San Francisco, California. We will now open the call for your questions.

Speaker 1

Kevin, please review the Q and A instructions.

Operator

Thank you. Our first question comes from Chris Costa with Wolfe Research. Your line is open.

Speaker 4

Yes, thank you. Good morning. I guess just a first question on The guidance for the March quarter and some of the commentary you had on the June quarter as well, could you characterize that between the auto and the industrial Obviously, industrials already pulled back quite a bit here from the peak. In terms of the sequential decline that you expect for March and it seems like you're also implying a sequential decline in June. How would that be broken out between the 2 segments?

Speaker 3

Yes, Chris, this is Derek. So when I look at we don't really guide by market, right? But when I think about Q4, We're seeing that be across all end markets and it's really the inventory digestion continuing, particularly in industrial. Other is starting to come to a trough. And then in auto as Vinit mentioned, there's some dynamics of inventory kind of clearing out in the auto market.

Speaker 3

We expect that to continue into Q4 and Q1.

Speaker 2

Yes, great. This is Vinit. Thanks for the question. So I think the we have been pretty transparent and have communicated The inventory digestion in the industrial and other markets, I think the auto dynamic is more recent and it's really a rebalancing. As I've engaged with CEOs of the various OEMs and the tiers.

Speaker 2

It's clear that the automotive OEM Demand continues to be pretty stable and indeed the XEV production estimates continue to be very robust. Really the pressure is coming from the contract manufacturer and the tier side where there's a rebalancing of inventory back into the pre pandemic levels. And that's a little bit of what we're seeing here in fiscal Q4. And as Derek alluded to, we'll see some of the same dynamics continue into the next quarter.

Speaker 4

Thank you. As a follow on to that, Vineet, you made also a comment that you expect Can outgrow the market within auto, when you say that, are you defining the market as Sort of auto units, which is still expected to grow this year, were part of the auto semiconductor peers. Take into account that The end market still grows, but inventory comes down. Said more simply, do you expect that in calendar 2024, you'll be able grow the auto market on a year on year your auto revenue on a year on year basis?

Speaker 2

Yes, Chris. So a couple of clarifications there, right? So anytime we talk about outgrowing the market, it is from an auto perspective, it's based on auto production, right? So that's the basis. And if you recall, when we talked at our Analyst Day, we laid out a model which talked about 7% to 10% growth above auto production, right.

Speaker 2

That's how we categorize the market. Our comment, which I think Derek made in the prepared remarks was with respect to full year fiscal 2024, including our Q4 guidance where we expect For the full year fiscal 2024 top line to be about 7% year over year growth, when within that to be exceptionally strong high teens. And so that's consistent with our model. And as a reminder, we are long cycle. The quarter to quarter, we'll see some perturbations, but really what we're focused on is full year growth and really with how the team has executed our strategy to deliver that kind of growth considering the backdrop.

Speaker 4

Okay. Thank you.

Operator

One moment for our next question. Our next question comes from Gary Mobley with Wells Fargo. Your line is open.

Speaker 5

Hey, guys. Thanks for taking my question. Derek, you're guiding the 4th quarter gross margin down about 110 basis points sequentially. Can you bridge that the delta for us between lower distribution mix, pricing and contribution of Crocus and the other factors that are affecting that. And then as it relates to the Start to the fiscal year 'twenty five, I would assume that with June quarter revenue trending down again sequentially, Should we expect another leg down in the gross margin as well?

Speaker 3

Yes, Gary. So our Q3 gross margin came in about basis points better than sort of the guidance. Some of that was mix. We did see some pricing dynamics, particularly in the channel in Q3, which is the first place you usually see the pricing pressure because that's market based. We saw that start in Q3.

Speaker 3

Going into Q4, we're starting we're having negotiations in their calendar year contracts with our customers. So there will be some pricing going into Q4 before we get the benefit from our vendor pricing negotiations for about a quarter or so. So that's a part of the Q4 guide down by, call it, 100 basis points off of Q3. Some of that is also the distribution mix, which we expect to be again down in Q4 as we continue to manage channel inventories. And then the last piece, you're right, Procus is an element of that with their fixed costs as we start to see synergies come in the second half of calendar twenty twenty four.

Speaker 3

Going into Q1, I'd expect gross margins to remain in that 53% to 54% range, Gary, for the short term here. The good news is when we model our gross margins Now that we have a really variable cost structure and a flexible manufacturing model, they hold up significantly better than they would have when we had multiple facilities and multiple fabs. So I expect gross margins to hang in that 53% to 54% range in the short term. And of course, over time, as the distribution normalizes, it will come back up to 55% and then heading towards our model of 58%. And the last thing I'll mention is in Q3, organically, our gross margin over 55% for Allegro.

Speaker 5

Got it. Okay. Vineet, I want to ask more of a longer term focused question. China is a very important market in the overall automotive market for sure. And so my question to you is, What sort of investments are you making there in terms of forging relationships with localized boundary partners, back end partners and whatnot, how are you showing China domestic customers that you're willing to invest in the market in an effort to win their trust and maintain their business?

Speaker 2

Gary, thanks for the question. And you're right, China is incredibly important to And actually in the most recent quarter, we saw some really nice growth in China despite all sort of the macro noise which just reinforces a belief we have to be in China to win with the Chinese customers and we're really pleased with the progress we're making. To the question you asked, We are investing in localizing a part of our supply chain in China. We have inked an agreement with local OSATs and we expect in the next 12 to 18 months we'll start shipping from our China partners locally. And we are also working with a foundry partner in China, which will take a little bit longer to qualify wafers, but it's part of the plan.

Speaker 2

And so it's important for us to demonstrate to our Chinese partners and customers that we are indeed investing in the region, not just for supply chain resilience from their perspective, also to take advantage of economies of scale locally. And so we're really excited about the progress we're making and we'll continue to update everybody as we make progress.

Operator

Thank you. One moment for our next question. Our next question comes from Quinn Bolton with Needham and Company. Your line is open.

Speaker 6

Hi, this is Nick Doyle on for Quinn. Thanks for taking our questions. So sentiment around EV is low, at least in the U. S. I think the China data points continue to be strong.

Speaker 6

And I understand Allegro is a bit agnostic to EV versus ICE, But wanted to get your sense on customer sentiment. What are you seeing from U. S. EV customers? Is there better design than the recent data point suggests from guys like Tesla and GM?

Speaker 6

Thanks. [SPEAKER A. D.

Operator

BAER PETTIT MSCI, INC.:] D. Baer Pettit MSCI, Inc.:]

Speaker 2

Yeah, Nick, thanks for the question. And Let's take a step back. I think as you look at emissions and fuel economy regulations globally, the End outcome is pretty clear that all OEMs will have to move towards a pretty high mix of battery electric vehicles or some sort of emissions free vehicle in order to comply with those regulations. The path there is going to be different for each OEM. Some OEMs are investing completely and totally in battery electric vehicles.

Speaker 2

Others are taking more of a mixed approach with plug in hybrids, an equal part of their focus and strategy. And as you point out, The positive for Allegro is that we are really agnostic to whether the platform is plug in hybrid or it's full battery electric. Our content is very similar and it's about 1.5 to 1.7 times that of a pure ICE vehicle. So we're really pleased regardless of the direction any OEM takes. And we're ready to support the OEMs and the tiers with a really broad portfolio of magnetic sensing and very targeted power applications.

Speaker 2

From a design activity standpoint, I would tell you that Every OEM is investing significant amounts of capital in R and D into electrifying their fleet and its various degrees of electrification as I've just pointed out. Can't comment very on any specific OEM, but suffice to say that every OEM is working on A bunch of new models which will hit the market over the next 2 to 3 years. And so I think from a consumer standpoint, it's going to be a really exciting time because There will be a ton of choice when it comes to battery electric vehicles or plug in hybrid vehicles at all price points and from every brand.

Speaker 6

Great. And maybe you could talk about the design win activity in data center, specifically the AI liquid cooling. I think your exposure there was something new we kind of heard at the start of the year. What is it about your power solutions that enable you to win these AI liquid cooling sockets?

Speaker 2

Yes. Nik, thanks for the question. So this has been a pivot from our partners that we work with that serve the data center infrastructure market as AI Data centers or AI chips are proliferating through data centers. The cooling approach or the cooling solution is much different than a traditional data center. AI chips are larger and they run hotter.

Speaker 2

And so the power consumption and the heat dissipation is orders of magnitude higher than a regular data center chip. And so just air cooling is not enough and that's why a lot of our partners are innovating and coming up with really clever liquid cooling solutions. And so when we look at the data center market, our design win activity through this inventory digestion period has actually stayed pretty strong. And now we're starting to see the first design wins on liquid cooling solutions where essentially our motor drivers are used not just now for fans, but also for the pumps that are used to pump the liquid and to make sure that the level and the pressure of the liquid is staying consistent. So, So really excited about what the potential is here and I think we're just getting started.

Operator

Thank you. One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Speaker 7

Yes. Hi, just Vinit and Dereg. Just a quick question here. If you look at your outlook, I think it looks like the key is inventory destocking, especially on the margin line. As you look at June quarter, do you think disti and OEM inventories get back to normal in that 4 to 6 week range that you talked about?

Speaker 3

Yes, Vijay. Thank you for the question. It usually takes Couple of quarters, right? Historically, it's taking, generally speaking, about 3 quarters. So I'll call the December quarter the Q1, March is the Q2 and June is the Q3.

Speaker 3

So if history has any guidance that would be the case that Q1 will get back to normal. So we expect right now that Q1 will be a trough quarter. And we're going to see that across all end markets. We're starting to see it. It's really kind of a rolling cycle as you know.

Speaker 3

So Within our consumer business, that's getting to a trough right now and that could come sooner, right? And that could start to rebound a little bit sooner. And then I'd expect industrial to rebound in auto. The dynamic, as Vineeth mentioned, it's relatively new with the auto inventory rebalancing at tiers and subcontractors which will be I think last to kind of complete that rebalancing.

Speaker 7

Got it. And then on the auto side, Obviously, big chunk of your sales is 75% or something. But the outlook for fiscal 2024 up 15% to 18% versus Where LVP is, can you talk to what's driving that? That's it. Thanks.

Speaker 7

Yes.

Speaker 3

So let me give you the numbers. So our fiscal 2024, which ends in March, we expect our auto sales to be up high teens overall sales to be up 7%. And for that same period, LVP is about 8%. So we're about double that, a little bit more than double that consistent with our model, so 7% to 10% outgrowth on top of that. And really what's driving that has been the continued design wins and the growth within EV and XEV and the e mobility side.

Speaker 3

So the e mobility side of our business go from 44% of auto a year ago to 54% of auto the same quarter this year.

Speaker 7

And then would you expect to continue that into fiscal 2025 that same Above LVP, 10% above LVP growth? Thanks.

Speaker 3

Yes. We're not guiding for 25% right now. And we're going you to watch the market closely for 25, Ajay.

Speaker 7

Thank you.

Operator

One moment for our next question. Your next question comes from Blake Friedman with Bank of America. Your line is open.

Speaker 8

Hi, thanks for taking my question. Just kind of wanted to approach the comments on June from a different perspective. So when I look at your auto and industrial peers a peak to trough basis, most are down anywhere from 20% to 35%. And when I look at your March quarter guide, it implies declines on a peak to trough basis closer to mid teens. So I know you mentioned June would mark the trough of the cycle, but is it fair to say Allegro peak to trough declines the cycle can finish at the lower end of that range?

Speaker 3

Yes. So the way we haven't given any guidance Blake with respect to the June quarter, right? But we had a decline of about 8% in the December quarter, our guidance is about a decline of 8% in the March quarter. And so again, if history is any guide, we're expecting that these 3 quarter cycles We'll continue to see that kind of a decline in the March quarter as well.

Speaker 8

Got it. And then just more of a longer term question on gross margin. I know you outlined the puts and takes to kind of in the short term recovery. But to get to your 58% target, can you maybe describe that bridge from percent to 55% to 58% the puts and takes from there? Thanks.

Speaker 3

Sure. Good question. So when I look at our Q3, we were actually above 55 on an organic basis before we start to get synergies for Crocus. So that was about a 70 basis point headwind for the Crocus, the Q1 of Crocus. And we're continuing to work to get synergies on their business.

Speaker 3

And as that business scales, we'll also get gross margin. The other piece of it is Our distribution sales are obviously down. And as we've talked about in the past, that's about 800 to 1000 basis points higher than the OEMs just because of the volumes. So, as that starts to normalize, that's generally about 100 basis points. So, that kind of brings us back up to that 56% to 57% range.

Speaker 3

And then our supply chain teams continue to work on a flexible manufacturing model by moving product or standard product to subcontractors as Vineet talked about China supply chain and then continuing to leverage our back end facility in the Philippines where we continue to we have opportunities for optimization And we just finished a large capacity expansion in the Philippines and that's something that happens every few years. That's not going to continue into next year. So we'll continue to leverage the Philippines. So we think with our vendor leverage as we scale our Philippines facility and getting synergies from Crocus and as the distribution sales start to normalize, we get to that 58% level and we were there of course 2 quarters ago.

Speaker 8

Very helpful. Thank you.

Operator

One moment for our next question. Our next question comes from Joshua Buckhalter with TD Cowen. Your line is open.

Speaker 4

Hey guys, thanks for taking my question. I guess I wanted to follow-up on the previous one and I apologize for beating the inventory digestion to death. But Did you just say that you expect the June quarter to be down as much as the December March quarter? And I guess big picture, Can you talk to confidence that you'll be able to get this inventory cleaned up by the June quarter? And any anecdotes about where inventory levels are at your end customers would be helpful.

Speaker 4

Thank you.

Speaker 3

Yes, Josh. So right now inventory levels in the channel where we have direct visibility and contractual visibility are elevated. Those are above our target ranges and that's why distribution sales are down. We continue to manage distribution sales down and watching that POS and watching the inventory in the channel. We're starting to see that clear in consumer.

Speaker 3

And as I said, I expect that consumers probably had a trough first, which is the March quarter. Industrial continues to clear, particularly parts of the data center, parts of solar that may take another quarter to clear out of there. Auto is a relatively new dynamic, of course, with the rebalancing of the inventories that Vineeth talked about. And yes, we do expect, if history is any guide, that the June quarter decline would be similar to the decline we saw in the December quarter and the March quarter.

Speaker 4

Okay. Thank you for clarifying that. And then as a follow-up, I wanted to ask about Crocus. I believe you mentioned some initial traction in the prepared remarks on e mobility. Are those products that indicate that the products are close to or are auto qualified and maybe you could talk to bigger picture about how your engagements with your customers have changed now that you've got Crocus in the company and expanding your current sensing portfolio?

Speaker 4

Thank you.

Speaker 2

Hey, Josh. This is Vinay. Thanks for the question. So I can Indeed confirm with pleasure that we have now auto qualified the Crocus product. It is what we call a generic qual.

Speaker 2

Now we will as we are engaging with each individual customer, obviously, there's a qualification cycle as per the unique design. But We are very actively engaged across automotive and industrial customers. And I'd characterize the engagements and some of the excitement in 2 ways. 1 is With the industrial base that Crocus had where maybe there was a little bit of trepidation on engaging with a smaller company, a start up company, That's gone away and now we are able to engage with a much more comprehensive portfolio around sensing and power with those customers. And so those customers are really excited to engage with us and really take advantage of the whole portfolio.

Speaker 2

On our customer base, where perhaps Some of the more challenging applications, we were working through some of those technical challenges. The addition of the Crocus TMR stack has now made the solution very obvious and very easy. And so we're accelerating the adoption of the TMR stack onto our parts. And really as I mentioned, we are now going to market through a common brand. Extreme Sense TMR is now the world's most comprehensive magnetic sensing portfolio in TMR really addressing the most demanding challenges around sensitivity, around speed of response, around low power consumption.

Speaker 2

And so we see really an endless set of opportunities that we can address together. So really excited about the 2 technologies coming together into one breath.

Speaker 4

Thank you.

Operator

One moment for our next question. Our next question comes from Thomas Amal with Barclays. Your line is open.

Speaker 9

Good morning and thanks for taking my question guys. I wanted to ask about the auto trends into March, But I wanted to ask more specifically on the makeup of those auto trends. So if you look at the December quarter, you're still seeing really strong growth On a year over year basis from the ADAS and XEV rev, but your core non faster growing auto business was down 7%. Could you talk about, when you look into March, what your expectations are for the split between those two businesses? Do you see sequential declines in some of the faster growing ADAS and XEV revenue.

Speaker 9

And just given all of the weaker data points On EV that we've been hearing lately, is that the reason for the incremental auto weakness for the next two quarters? Or is it really more of the core more SAAR kind of levered auto? Thank you.

Speaker 3

Yes, Tom, this is Derek. So in the Q3 quarter, you're right. EMobility was up strong. The traditional auto business was down. And if you remember in our guidance, we talked about the UAW strike in the United States.

Speaker 3

It did actually have some impact. So when we looked at the pull ahead With the Detroit Big 3 sales were down significantly in Q3 compared to Q2. There was some pull ahead we saw in Q2. We expected that. And rolling into Q4, we're not going to break that out guidance by market, but it's really the inventory digestion primarily at the tiers and at the subcontractors.

Speaker 3

It's not specific to end market demand, certainly not in EV and certainly not in ADAS.

Speaker 2

Yes, Thomas, this is Vineet. So I'll just add to that. As Derek pointed out, we had some order push pull dynamic with our North America customers largely around the UAW strike. At the same time, we've seen some really strong growth with our China customers and our Japan customers. And so I think that's the dynamic we're seeing.

Speaker 2

If I take a step back and I sort of look at the mid to long term, we know that Chinese OEMs, Japanese OEMs, European OEMs are really forging fast and furious towards an all electric future. The North American OEMs are taking their own path with a mix of plug in hybrids as well as battery electric vehicles. And we're serving all of them in their own unique way. But I think the path on each region to an all electric future will be slightly different and will take a slightly different timeline.

Speaker 9

Helpful. And And then my follow-up is just on the gross margins, a bit lower into March, but I think you mentioned mix. Can you talk about how you see that margin profile recovering? I mean, if lead times have come down and the channel looks a little bit different than it did over the last couple of years, Shouldn't margins stay kind of more at these levels? And if you look at auto potentially recovering, does that help bring those margins back after The June September quarter time frame, just can you just walk me through the puts and takes of how much recovery do you see in the gross margins and how quickly you think that comes back?

Speaker 3

Yes. As I mentioned, our Q3 gross margin was about 60 points better than we had guided to at the 54.6%. Within that, Allegro's organic gross margin was still over 55%. So, organic gross margin is still very good and very healthy. It holds up well based on flexible manufacturing model that we have.

Speaker 3

Going into the March quarter, we're guiding to 53% to 54% and that projects a continued decline in distribution sales, which as I mentioned generally has significantly higher gross margins than OEM sales because of the volumes they're buying. Product mix also plays a part in that from quarter to quarter. And then the 3rd piece of the March quarter is the continued Crocus integration and Crocus fixed cost before we start to see synergies in the second half of the year. So I'd expect that gross margin to remain in that 53% to 54% range for the near term, the next couple of quarters. And then as we start to get synergies, start to see the normalization of the distribution, I expect that to go back up to 55% in the medium term and then we'll work

Operator

Thank you. At this time, I'm not showing any further questions in the queue. I'd like to turn the call back over to Jolene for any closing remarks.

Speaker 1

Thank you, Kevin. We appreciate you taking the time to join us this morning. This concludes the call.

Operator

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

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Earnings Conference Call
Allegro MicroSystems Q3 2024
00:00 / 00:00