Allegro MicroSystems Q4 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

Key Takeaways

  • Allegro beat its fiscal Q4 guidance with $193 million in sales—above the high end—and non-GAAP EPS of $0.06, while automotive sales returned to growth, up 8% sequentially led by e-mobility.
  • For Q1 FY26, the company expects sales of $192–$202 million (an 18% YoY increase) and non-GAAP EPS of $0.06–$0.10, marking the first year-over-year revenue gain since Q3 FY24.
  • New CEO Mike Duke plans to accelerate product innovation around TMR magnetic sensors and high-voltage isolated gate drivers to capture a $12 billion SAM with double-digit growth in automotive and industrial markets.
  • A new restructuring program will deliver at least $15 million in annual cost savings—split between COGS and OpEx—and alongside BOM and supply-chain optimizations aims to push gross margins toward the long-term 58% goal.
  • Customer inventories have continued to decline and distributor inventories are down 25%; bookings rose 20% sequentially and backlog is growing, suggesting a recovery in end-market demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Allegro MicroSystems Q4 2025
00:00 / 00:00

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Operator

Good morning and welcome to the Allegro MicroSystems fourth quarter and full fiscal year 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then wait for hearing an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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.

Jalene Hoover
Jalene Hoover
VP of Investor Relations and Corporate Communications at Allegro MicroSystems

Thank you, Brianna. Good morning and thank you for joining us today to discuss Allegro's fiscal fourth quarter and full fiscal year 2025 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 quarterly and annual financial performance, and share our first quarter outlook. We will follow our prepared remarks with a Q&A session. 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 is included in our earnings release, which is available on the Investor Relations page of our website at www.allegromicro.com.

Jalene Hoover
Jalene Hoover
VP of Investor Relations and Corporate Communications at Allegro MicroSystems

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 for the future financial performance of the company. 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 to 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 fourth quarter of fiscal 2025 and in the most recent periodic and other filings with the Securities and Exchange Commission.

Jalene Hoover
Jalene Hoover
VP of Investor Relations and Corporate Communications at Allegro MicroSystems

Our estimates, expectations, 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, Mike Doogue. Mike.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Thank you very much, Jalene, and good morning, and thank you all for joining our fourth quarter and full fiscal year 2025 conference call. Let me start by saying that it is truly an honor and a privilege to assume the role of President and CEO at Allegro. My journey started 27 years ago when I joined Allegro as a chip designer working on cutting-edge technologies, which we then turned into disruptive product lines. I then expanded my focus into business leadership, eventually running all three of our business units as SVP of Technology and Products. In this role, I led the growth of company revenue and gross margin. Following our IPO, I became Allegro's first-ever Chief Technology Officer responsible for technology development, corporate strategy, and M&A.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Along the way, I also led our global operations teams, including oversight of our internal factory and quality teams, while also working closely with our OSAT and Fab partners around the globe. Collectively, I believe the breadth and depth of my experience provides a rich opportunity to accelerate and implement product innovation and efficiency initiatives that will drive sales growth and gross margin improvements for Allegro. Recently, as you might imagine, I've been asked about my strategic priorities as CEO. At the highest level, here is my response. I will work with our teams to accelerate new product development and unlock SAM expansion, to secure impactful design wins with leading customers in growth markets, and to leverage my innovation expertise to drive a meaningful impact on both top and bottom-line growth.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

More specifically, relentless innovation that drives leadership in new and existing markets and applications will be a top priority. Innovation with purpose is central to everything we do at Allegro. Through innovation, we will strengthen our competitive advantages and drive double-digit sales growth in automotive and industrial markets. During fiscal 2025, we demonstrated accelerated innovation by releasing 50% more products compared to our IPO year. These innovative new ICs are truly important to our journey as they will positively impact gross margins and help fuel our multi-billion dollar SAM expansion initiatives as we target a $12 billion market opportunity. It is also a priority to extend our leading magnetic sensing market position. With an estimated 30% CAGR through 2030, TMR magnetic sensors present a unique opportunity for continued share gains for Allegro. We have recently demonstrated an ability to drive share gains through our ExtremeSense TMR technology.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

In fact, in Q4, we secured new TMR wins in the biomedical market and a new automotive win in an XEV thermal management application. We also released new ExtremeSense TMR current sensors in the quarter. These ICs deliver high-precision current measurements and 4x noise reduction compared to competing Hall solutions. For these and many more reasons, we are deeply excited about the future of TMR. Moving on to power, we will also expand our leadership in select power applications. For example, we are introducing a new family of high-voltage isolated gate driver ICs to the market. These gate drivers represent a nearly $3 billion SAM expansion opportunity for Allegro and can significantly augment our long-term automotive and data center growth rates. In FY2025, we launched initial drivers enabling GaN solutions and also began sampling our silicon carbide isolated gate drivers to market-leading customers.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

In Q4, we were pleased to secure our first automotive isolated gate driver win in an exciting new XEV charging program in China. Now let's drill in on automotive. We have served the automotive market for more than 30 years. In that time, we've established a reputation for offering premium solutions, and we've demonstrated a right to win. We continue to accelerate our wins in the e-mobility market, which offers a $5 billion SAM opportunity and an estimated 16% CAGR. In Q4, we secured a new current sensor win in an XEV inverter application in Europe, which represents an important share gain for Allegro. Our e-mobility growth opportunity is supported by industry analysts' continued expectations for double-digit growth in XEV powertrain production, where our content is meaningfully greater compared to an ICE powertrain.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Our content is also meaningfully greater in emerging ADAS applications, where we see significant opportunity in steer-by-wire and electromechanical braking systems, and where Allegro's dollar content per system can exceed $20. In Q4, we were thrilled to secure multiple new design wins in high-growth electromechanical braking systems that represent a strong new growth vector for Allegro. Pivoting now to industrial priorities, we will capitalize on emerging opportunities in high-growth sectors, including robotics, data center, clean energy, and medical markets. These markets offer an approximate $3 billion SAM opportunity and a 15% CAGR. Industrial customers, they value and recognize our differentiated automotive-grade technologies. For example, there is an ever-increasing need to efficiently manage server power demands. This need is driving a return to growth in our data center products. High-growth AI data centers require more of our motor drivers, current sensors, and isolated gate drivers.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

We are excited about our data center future because AI servers have more than 2x the Allegro content opportunity relative to legacy servers. We continue to expand our TMR solutions into medical applications and today are designed into leading blood glucose monitoring solutions with multiple customers. With a $300 million SAM, we see additional opportunities to expand our participation in this market. As we look to the future, we have emerging business and excellent relationships with market-leading companies in the robotics market, where our precise motion control solutions and high-resolution sensors offer space and control advantages in every joint throughout a robot. As humanoid robots are adopted in factories or in homes, a new rapid-growth SAM will emerge for Allegro. Experts estimate the size of this robotic SAM to exceed $10 billion between 2030 and 2035.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

We are establishing our leading products and technologies within this SAM and doubling down on our focus in this market. As a final priority as CEO, we will execute operational efficiency initiatives to enhance gross margins and profitability. One such initiative in the next 12-18 months, we are excited to release a multitude of new products with optimized supply chain, test flow, bill of materials, or design architectures that unlock significant manufacturing cost reductions. These ICs represent cost innovations, a different but important type of innovation that has the potential to drive a meaningful gross margin uplift for Allegro starting in the very near future. This is an exciting time with many growth opportunities ahead for Allegro.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

While I don't expect to materially change the strategies which I helped develop as CTO, I believe that as Allegro's CEO, I can accelerate our strategies and unlock additional shareholder value. I will share more in the coming months and quarters, but we have a strong conviction in our near-term financial targets and our long-term model, which is based on double-digit sales growth, 58% or greater gross margins, and more than 32% operating margins. We see a credible path to progressing towards these targets over the next few years. I'm thrilled to be backed by an outstanding team here at Allegro, and I'm confident in our collective ability to advance our mission while creating value for stakeholders.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Turning now to fiscal fourth quarter results, we delivered strong execution overall with fourth quarter sales above the high end of our guidance at $193 million and non-GAAP EPS of 6 cents above the midpoint of our guidance. It is worth noting that we do not have any indication that this upside revenue performance was due to any pull-ins in response to tariffs. In addition, during the quarter, automotive sales returned to growth, increasing 8% sequentially, led by e-mobility. In Q4, we saw particular strength in power solutions for ADAS applications, and we expect to continue to leverage our strong market position at applications including electric power steering, advanced braking systems, and XEV powertrains, as well as 48-volt systems.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

In our industrial and other end markets, we saw growth in data center and robotics and automation revenue in the March quarter and are encouraged by continued signs of increasing activity in industrial markets. Turning now to design wins in the fourth quarter, we achieved record-level design wins with more than 70% of those wins in strategic focus areas, which include e-mobility, robotics and automation, data center, clean energy, and medical. I'm pleased to see the diverse nature of these wins as this diversity highlights the resilience of our portfolio while also positioning us well for growth. I'm truly excited to lead Allegro through this next chapter of growth as we build on a strong foundation, accelerate our strategic priorities, and deliver on both our near and long-term financial targets. I'd like to thank Allegro's employees, partners, customers, and investors for their continued support.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Before I hand the call over to Derek, I'd like to briefly comment on onsemi to offer some further clarity on the situation. As you likely know, it became public knowledge during the quarter that we had received several proposals from onsemi to potentially acquire Allegro. Our board takes its fiduciary duties very seriously, and naturally, our board will consider any credible outreach to acquire Allegro that might be in the best interest of our stockholders. Accordingly, our board spent extensive time considering onsemi's proposals. We laid out a path to onsemi for further engagement, and onsemi ultimately determined to withdraw its interest instead. I'll now turn the call over to Derek to review the Q4 and full fiscal year 2025 financial results and provide our outlook for the first quarter.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Thank you, Mike, and good morning, everyone. I'd like to start with a brief comment about tariffs. It is obviously a rapidly evolving environment, and quantifying the potential impact of tariffs remains challenging. As of today, we believe there are currently immaterial direct impacts on Allegro. Our products are classified as semiconductors, and we ship all of our products from our back-end facility in the Philippines. The indirect impact of tariffs is just harder to predict. So far, we have not seen any abnormal customer behavior, which could be associated with any tariffs. We will, of course, continue to monitor the situation closely and expect to have better clarity moving forward. Tariffs aside, we are encouraged by the positive forward-looking indicators we are seeing across our business. I'll share a few data points that further reinforce our belief that we are entering the beginning of an upcycle.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

First, our customer inventories have continued to decline, and our distributor inventory levels have actually declined 25%, exiting the fourth quarter compared to the beginning of FY2025. Fourth quarter bookings were up another 20% sequentially and have now increased for the fifth consecutive quarter to the highest they have been in more than two years. Orders within lead time continue to increase. Backlog has resumed growth, and we are actually starting to see select component or raw material shortages. Now turning to a summary of our fourth quarter financial results, sales were $193 million, and non-GAAP earnings per share were $0.06. Gross margin was 45.6%, operating margin was 9%, and Adjusted EBITDA was 14.8% of sales. Total Q4 sales increased by 8% sequentially but declined 20% year-over-year. Sales to automotive customers increased by 8% sequentially, led by e-mobility sales, which increased 16% sequentially.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Auto sales declined 23% year-over-year. Industrial and other sales increased by 9% sequentially and for the third consecutive quarter, led by continued growth in data center as well as in robotics and automation. Industrial and other sales declined 11% year-over-year. Sales throughout distribution channel increased by 4% sequentially and represented 50% of Q4 sales. This, combined with continued strong POS and normalizing inventory levels, provides us additional evidence that we are coming off the bottom. From a product perspective, magnetic sensor sales increased by 3% sequentially to 61% of sales. Sales of our power products increased 19% sequentially, led by growth in motor drivers for ADAS and data center applications. Sales by geography were again well-balanced, with 27% of sales in China, 24% in the rest of Asia, 20% in Japan, 16% in the Americas, and 13% of sales in Europe.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Now turning to Q4 profitability, gross margin was 45.6%, below our expectations due to a combination of mix and lower absorption as we fulfilled some orders from finished goods. Also, as we discussed in our last call, in our fourth quarter, we generally have customer price adjustments before our cost reduction cycle through inventory and into the P&L. We expect to begin to see this normalize in Q1 and into Q2. Operating expenses were $70 million, up $2 million or 3% sequentially due to annual payroll tax resets. Operating margin was 9% of sales compared to 10.8% in Q3 and 23.8% a year ago. Throughout fiscal 2025, we took actions to optimize our cost structure, including rationalizing our global footprint, closing our photonics business, and moving functions to our shared services center in the Philippines.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

We also continue to implement operational efficiencies across the business to drive gross and operating margin improvements. Ongoing initiatives include advancing our China-for-China localization efforts, continued rationalization of our global manufacturing and support footprint, and executing our new manufacturing efficiency initiatives. In the fourth quarter, we initiated a restructuring program, which is expected to result in annualized cost savings of at least $15 million beginning in fiscal year 2026. We expect half of these savings to drive a reduction in our cost of goods sold, and the other half will reduce OPEX. A portion of the savings is expected to fund strategic sales and R&D investments. In connection with this restructuring program, we incurred approximately $6 million in restructuring charges in the fourth quarter. The effective tax rate for the quarter was 4%, resulting in a fully effective tax rate of 3%.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Our effective tax rate was lower than the statutory rate, primarily due to research and development credits. The fourth quarter diluted share count was 185 million shares, and net income was $12 million or $0.06 per diluted share. Now turning to a brief summary of full year 2025 results. Fiscal 2025 sales were $725 million, a decline of 31% year-over-year, reflecting significant customer inventory reductions. Gross margin was 48%. Operating margin was 9.5%. Adjusted EBITDA was 15.6%, and earnings per share were $0.24. Sales to automotive customers declined by 28% year-over-year, and industrial and other sales declined 38% year-over-year. During fiscal 2025, we also entered a new phase as a public company with a repurchase of 39 million shares from our largest shareholder, Sanken Electric.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Recall this transaction reduced Sanken's ownership from 51%-33%, increased our free float by 30% while also reducing the total shares outstanding by 5%, and continued to improve our corporate governance. Moving to the balance sheet and cash flow, we ended Q4 with cash of $131 million and debt of $345 million. Cash flow from operations was $20 million, CapEx was $5 million, and free cash flow was $15 million. From a working capital perspective, DSO was 40 days compared to 43 days in Q3, and inventory days were 148 days compared to 182 days a quarter ago. Inventory dollars declined by $9 million sequentially, largely due to reductions in finished goods and wafer inventories. During Q4, we also made another voluntary debt payment of $30 million and repriced our term loan down a further 25 basis points.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Finally, during fiscal 2025, we made a total of $105 million of voluntary debt payments. I'll now turn to our Q1 2026 outlook. The following guidance range contemplates minimal direct impact of tariffs in Q1. We expect first quarter sales to be in the range of $192 million-$202 million. The midpoint of this range equates to an 18% year-over-year increase and would be the first year-over-year increase since the third quarter of fiscal 2024. Additionally, we expect the following all on a non-GAAP basis. We expect gross margin to be between 46%-48%, an increase of 140 basis points at the midpoint, which factors in anticipated cost reductions described earlier, as well as vendor pricing negotiated in Q4 that begins to impact the P&L in Q1.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

OPEX is expected to be approximately $72 million, an increase of $2 million or 3% sequentially due to planned annual salary increases and the reset of variable compensation plans with the start of our new fiscal year. We expect interest expense to be approximately $5 million, inclusive of a $25 million voluntary debt payment made on April 30th. We expect our tax rate to be 8% and our weighted average diluted share count to be 186 million shares. As a result, we expect non-GAAP EPS to be between $0.06 and $0.10 per share. At the midpoint, this equates to 1.7x improvement year-over-year on a sales increase of 18%, demonstrating the potential operating leverage in the business model. Now I'll turn the call back over to Jalene for questions.

Jalene Hoover
Jalene Hoover
VP of Investor Relations and Corporate Communications at Allegro MicroSystems

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our first fiscal quarter conference lineup with you. We will attend TD Cowen's 53rd annual TMT conference on May 29th at the Intercontinental New York Barclay and Mizuho's 2025 Technology Conference on June 10th at the Conrad New York Downtown. Looking further into the year, we are targeting hosting an Analyst Day event following our October 2025 fifth year anniversary as a public company, and we'll provide more details as we get closer to the event. We will now open the call for your questions. As a reminder, with the primary purpose of today's call to discuss our fourth quarter and full fiscal year 2025 results and fiscal Q1 outlook, we appreciate you keeping your questions focused on these topics. Brianna, please review Q&A instructions.

Operator

Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. To provide the opportunity for everyone to ask a question, please limit to one question. Please stand by while we compile the Q&A roster. Our first question comes from Timothy Arcuri of UBS. Your line is now open.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

Thanks a lot. You did talk about your China-for-China strategy. I know you're working with SMIC. I think you're taping on new products in that fab. Can you talk about that? I think you're supposed to get some chips from them by the end of last year. Can you just update us on that and sort of how that's going to progress and what the key milestones there are?

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Sure. Thanks, Timothy. We've been hard at work on our China-for-China supply chain initiative for a number of years now. It's a multifaceted strategy with both wafer fab and back-end partners, all of which would be within the borders of China, which would largely meet the needs of our growth customers in China. We've made significant progress on the wafer technology perspective, qualifying various products along the way. Additionally, we have a robust portfolio of products in China. We have various package types that we need to stand up in China. Those activities are going well, along with the activities testing products in China. Across the board, we're feeling good about where we stand. As we progress through the year, we expect to have first revenues, meaningful revenues, shipping out of the China-for-China supply chain later in the year.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

Got it. Thanks for that. Derek, just on the gross margin, it's a little less than what I had anyway. Can you talk about, I know that there's these pricing issues and you had to negotiate price down and then costs take a while to catch up with that. Is that still sort of weighing on March? And when do you see the costs catching up to the price decline and sort of how maybe how to think about gross margin? I'm not asking you to guide for the following quarter, but sort of what are some of the puts and takes? Thanks.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Tim, that's exactly right. Contemplated in our fourth quarter guidance here, when we guided to about a 47% midpoint, in that was the pricing negotiations that usually take place in the first calendar quarter of the year. We also negotiate lower costs with our vendors, but it takes about two quarters or the days in inventory to cycle into the P&L. That dynamic happened the same a few years ago. If you went back and looked at our 2022 and 2023 years, we had the same dynamic on the upside where we had an artificially higher gross margin in the first calendar quarter of the year. Coupled with that, we have brought our production levels down pretty low in Q4, and we are able to reduce finished goods by more than 10%. That is a good thing. We are fulfilling orders from finished goods.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

As we go into Q1, we expect mix to start to normalize a little bit better. We do expect to continue to maintain our production levels at Q4 levels and continue to bring down finished goods. We expect the stock to see the benefit of those cost reductions we have negotiated start to impact the P&L in Q4, in addition to the restructuring program benefits in Q1. Beyond that, looking longer term, that 60%-65% variable contribution margin that I have talked about, that still holds pretty well. It could actually be higher than that in the near term as we get these cost reduction benefits.

Timothy Arcuri
Timothy Arcuri
Analyst at UBS

Okay, Derek. Thank you. Thank you.

Operator

Thank you. In the interest of time, we will allow one question and one follow-up per participant. One moment for our next question. Our next question comes from Joe Quatrochi of Wells Fargo. Your line is now open.

Joe Quatrochi
Joe Quatrochi
Equity Research Analyst at Wells Fargo

Yeah. Thanks for taking the question. I was curious, you are talking about seeing some pretty good growth in your backlog or return to growth in the backlog and starting to see that pull from customers. Can you talk about just the specific areas and how we think about that relative to the increased design wins and opportunities there versus just kind of seeing an improvement in the cycle?

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Yeah. Thanks, Joe. I'll start with a little more commentary on the design wins. Yet again, we continue to see more than 70% of those design wins exactly where we want to see them in e-mobility and focus industrials. When you think about how the backlog will then start to trend as you rack up wins, as the bookings come in strong, as Derek mentioned, they've been coming in strong, you obviously get the commensurate uplift in backlog. It's where you'd expect to see it. We're seeing good gains in the e-mobility side of the business and particular strength in data center on the industrial side of the business.

Joe Quatrochi
Joe Quatrochi
Equity Research Analyst at Wells Fargo

That's helpful. Then as a follow-up on the tariffs, I think some of the tariffs are based on the location of where the wafer origin is. Can you remind us how to think about what's coming from the U.S. and going into China, given that the SMIC relationship is still kind of ramping?

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Yeah, Joe, this is Derek. Right now, we ship all of our products from our back-end facility in the Philippines. Approximately 15% of our sales are shipped to the U.S., which currently those are exempted right now as semiconductors. From a wafer perspective, a little bit more than half of our wafers come from UMC in Taiwan, about 10%-15% from TSMC in Taiwan. The remainder, about 35%, come from the U.S. from Polar Semiconductor. So far, those have not been subject to tariffs. We have the ability to move wafers between fabs to satisfy different geographies.

Operator

Thank you. Our next question comes from Gary Mobley of Loop Capital. Your line is now open.

Gary Mobley
Gary Mobley
Analyst at Loop Capital

Good morning, everybody. Thanks for taking my question. I want to ask about inventory in the channel, in particular in the distribution channel. Did I hear correctly that point of sale was greater than point of purchase in the fourth quarter? Does your first quarter revenue outlook contemplate a continuation of undershipping into the distribution channel? Maybe you can also comment on where your inventory is at direct-to-customer set.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Yeah. I'll start with the distribution channel, Gary. As I mentioned, exiting our Q4, our distribution channel inventories globally were down 25% year-over-year, which obviously is a good sign. It does vary a bit by region, as I talked about on our last call. We think we're in really good shape in most parts of Asia from an inventory declining standpoint. There's still some work to be done in Europe, still a little bit of work to be done in the United States, I think. On the distribution side, our guidance for Q1 contemplates that. On the direct side, we continue to see the same dynamics.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

I think inventory has come down across the board a lot more in Q4, as we saw in our December quarter in the U.S., as sales were down 25% in the U.S. That rebounded nicely in Q4, up 23%. We're seeing a lot of in-quarter orders, particularly in the United States and for auto. That's also a good sign. We think we're in pretty good shape in most regions. I think there's some work to be done in Europe.

Gary Mobley
Gary Mobley
Analyst at Loop Capital

Okay. My follow-up, I want to circle back onto gross margin. We've already talked about a lot of the different variables to the improvement. Do you think, given the Axiom and the variable contribution margin, that assuming revenue continues to improve on a sequential basis, a 50% gross margin is possible as we move through the balance of fiscal year 2026?

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Yeah, certainly. The way we look at it, our long-term target is 58%, but internally, we've broken that down into time fences. The immediate-term goal is to get back to 50%. The guidance for Q1 is 47%, Gary, at the midpoint. As I mentioned, the variable contribution margin on that, you could take revenue at 65%. That holds pretty true. I expect that 65% could be even better here in the next couple of quarters, given those cost reductions, both from the restructuring program, the ongoing initiatives, and the vendor-negotiated pricing that will start to cycle into the P&L, could be higher than that 65%. It is plausible that it will be in the short term, that 50%.

Gary Mobley
Gary Mobley
Analyst at Loop Capital

Thank you.

Operator

Thank you. Our next question comes from Chris Caso of Wolfe Research. Your line is now open.

Chris Caso
Chris Caso
Wolfe Research at Wolfe Research

Yes, thank you. Good morning. Mike, first one for you. I know you've been with the company for a while, but kind of as you enter the seat here with CEO, just interested in any kind of strategic changes or kind of different direction, anything you might do differently now that you've taken the seat. Obviously, you've been with the company a long time. Whatever strategy has been in place, I'm sure you've had a hand on it. Just any kind of thoughts about the things that might be different going forward?

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Sure. Thanks, Chris. I'll summarize some of what I said in the prepared remarks, saying that it's really a priority for me to lean in a bit more on innovation. What I mean by that, within the same R&D spending envelope, I think we can reprioritize where we spend our money to make sure our products become even more differentiated and we stay two steps ahead of the competition. I was part of the acquisition of the TMR technology through Krokus, the high-voltage isolated gate driver business through Hay Day. They're actually experiencing and demonstrating strong traction with customers. My priority is to accelerate the ramp of some of these exciting new areas.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

We're truly differentiated in those spaces, and they do represent new areas of high-growth SAM expansion. When I look at things we can do from an operational efficiency perspective, there's a lot we can do on the tried-and-true innovation side of the house. On this cost innovation side of things that I mentioned, there's some low-hanging fruit. I'll just give one example, converting from gold wire to copper wire, that will drive margin benefits both in the short, medium, and long-term gains. I'm a hawk for things like that. I get excited about driving those changes. We're going to accelerate some of those initiatives as well. That just gives you a bit of a feel, scratches the surface on some of the priorities and differences.

Chris Caso
Chris Caso
Wolfe Research at Wolfe Research

Got it. I guess as a follow-up, and I'll ask this because I know you're going to get asked, and we're certainly asked quite a bit from investors. If you could revisit the on-offer and kind of what the thought process was around that, is it safe to say that simply the offer was not high enough value for what you thought the company was worth? You said in your opening remarks that the board and you folks are open to things. Maybe just kind of now that it appears to be over, just kind of some hindsight of what your thinking was with regard to that.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Yeah. We've said to the largest extent what we're going to say today. Maybe what I'll just reiterate is that we really believe in our future. We have a strong growth potential ahead of us, both on the top line and on the gross margin line. As I said in the prepared remarks, the board was very mindful of their fiduciary duties. We did lay out a clear and constructive path to engage with the other side. We opened doors for greater value. Ultimately, onsemi declined to pursue that path. That is really where it ends.

Chris Caso
Chris Caso
Wolfe Research at Wolfe Research

Got it. Thank you.

Operator

Thank you. Our next question comes from Joshua Buchalter of TD Cowen. Your line is now open.

Joshua Buchalter
Joshua Buchalter
Senior Analyst at TD Cowen

Hey, guys. Thanks for taking my question. Mike, congratulations on the CEO role. In your prepared remarks and in response to some earlier questions, you mentioned leaning in on new products, in particular TMR, Hay Day, and high-precision power and sensing parts on both sides of your house.It sounds like inventory is pretty much close to cleaned up. Are we at the point where you think those new products are hitting the model yet and you can hit that growth profile? You laid out your last analyst statement of, I think, 7%-10% above SAR and 5%-10% above GDP and industrial. Thank you.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Yeah. Thanks for the kind words to start, Josh. And to start where you finished, we are confident in our ability on an automotive perspective to achieve SAR+ 7%-10%. We remain confident in our ability to overdrive growth relative to the broad industrial market by 5%-10%. A lot of it comes down to the SAM or the target markets we participate in. It's a $12 billion SAM. 8 billion is auto.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Within that $8 billion, the $5 billion e-mobility SAM is growing with a growth rate of 16%. Within that, XEV powertrain growth rates approach 20%. If we switch over to the industrial side of the house, our focus markets, that is a $3 billion SAM growing at a 15% CAGR. You look at data center, you look at robotics, these are not futuristic applications or technologies. They are obviously here today. We are participating well, and they have a 20% growth CAGR. When you look at TMR and the isolated gate driver products, they just layer on more positivity on the story. We remain committed, and we remain confident in our ability to grow above market.

Joshua Buchalter
Joshua Buchalter
Senior Analyst at TD Cowen

Okay. Thank you. And Derek, I appreciate the color you gave on the restructuring. I think it was $15 million split between COGS and OPEX. Is that sort of immediate from where you just guided the June quarter and we should expect OPEX to be flat and down through the year? How should we be thinking about that layering in? Thank you.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Yeah, Josh, good morning. As I mentioned, that $15 million, that's on an annualized basis. We'll start to see the benefit of that in Q1. As I guided OPEX for Q1, I expect that to be up about $2 million or 3%. That's really a result of the annual salary increases and the reset of our variable compensation. Offsetting that is the beginning of these benefits from this restructuring program, which is really a repositioning. We opened a shared services center in the Philippines about a year and a half ago now, and it's working out really, really well. Seventy percent of our customers are in Asia and the majority of our vendors. We have moved some of the footprint there, and it also has a cost benefit. We expect to continue to see those cost benefits throughout FY2026 and into FY2027. You could expect OPEX will not grow significantly in FY2026, low single digits.

Joshua Buchalter
Joshua Buchalter
Senior Analyst at TD Cowen

Got it. Thank you.

Operator

Thank you. Our next question is from Vijay Rakesh of Mizuho. Your line is now open.

Vijay Rakesh
Vijay Rakesh
Automotive Technologies Analyst at Mizuho

Yeah. Hey, Mike and Derek. Just a quick housekeeping one. What was the e-mobility mix for the quarter, I guess, and a follow-up?

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

E-mobility mix of auto was about 50% of auto in the quarter, Vijay.

Vijay Rakesh
Vijay Rakesh
Automotive Technologies Analyst at Mizuho

Got it. I think, as you look at China-for-China, given all the geopolitical tensions, are you seeing more increased competition in China from the domestic suppliers, or are you seeing them insource more? What are you seeing in terms of those trends? Especially, you have a good position there with BYD and others, but BYD is also a big insourcer, I guess. Any color there? Thanks.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Sure. Vijay, this is Mike. Relative to China, clearly a competitive market. Let me just start by saying we still continue to see very positive signs relative to growth in China. There is just myriad design wins and customer momentum I can talk about. Even within this quarter, off the top of my head, two large inverter design wins for our sensors in the XEV market. We have ADAS wins in China across sensing and power. I talked about an isolated gate driver win in China automotive. We are still seeing good traction and momentum in China. Customers are having a very strong positive response to our China-for-China initiatives.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

That all being said, of course, there are local competitors in China. They're formidable in a sense. I mean, they're relentless. What we're seeing with our premium products, with our temperature-rugged, high automotive-grade products, we are still differentiating ourselves both on actual performance of the IC itself, but also the quality levels we can achieve with our ICs. I met with the CEO of one of our leading China customers in the last few months, and he confirmed, despite plenty of approaches from local China market customers, he's staying with Allegro for the duration of the next cycle. We see strong business growth with that customer. That's just an N of one, but we see that same trend across a broader swath of customers as well.

Vijay Rakesh
Vijay Rakesh
Automotive Technologies Analyst at Mizuho

Got it. Thanks, Mike.

Operator

Thank you. Our next question comes from Quinn Bolton of Needham & Company. Your line is now open.

Quinn Bolton
Quinn Bolton
Analyst at Needham & Company

Hey, guys. I just wanted to ask, obviously, gross margin has been under pressure, and you've kind of gone through some of the factors there. I guess I'm just kind of wondering if pricing is continuing to be aggressive. You haven't seen that 65% sort of fall through over the last two, three quarters as revenue has increased by about $30 million. I'm just trying to reconcile why gross margin remains under such pressure as revenue has recovered over the past three quarters.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Thanks, Quinn. This is Mike. I can talk a bit about pricing. As you're aware, I think, as we stated in last quarter's call as well, in the automotive market, there's a general expectation in low single-digit price reductions on a year-over-year basis. These are negotiated when you win large awards in automotive. We didn't see anything abnormal as we entered 2025. Low single-digit reductions are what we're seeing in automotive this year. In the channel, a little over a year ago, we talked about how channel pricing softened. It appears that that pricing has stabilized as well. No, we're not seeing any abnormal pricing as we enter calendar year 2025 and our fiscal year.

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

The dynamic on the gross margin side is, as I mentioned in the prepared remarks, the last two quarters we've been able to bring down finished goods. We expect to continue to do that in Q1. While sales are up, production levels aren't necessarily up, so we have a little bit more under absorption.

Quinn Bolton
Quinn Bolton
Analyst at Needham & Company

Got it. I guess there's been some concern by investors that with all of the auto tariff uncertainty and the potential for higher costs, that auto guys may be coming back at a faster-than-annual cadence asking for additional price declines sort of outside of that normal annual cadence. Have you guys seen any evidence of auto customers coming back asking for further price declines, or do you sort of see a normal annual cadence in those negotiations? Thanks so much.

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

We see a normal annual cadence. We see nothing in response to tariffs relative to requests for further price reductions.

Quinn Bolton
Quinn Bolton
Analyst at Needham & Company

Perfect. Okay. Thank you.

Operator

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. One moment for our next question. Our next question comes from Joseph Moore of Morgan Stanley. Your line is now open.

Joseph Moore
Joseph Moore
Analyst at Morgan Stanley

Great. Thank you. You mentioned in your prepared remarks that you're seeing some early signs of potential shortages. Can you elaborate on that? What are the signs in any particular products or markets?

Derek D'Antilio
Derek D'Antilio
CFO at Allegro MicroSystems

Yeah. Joe, good morning. This is Derek. We're seeing potential signs of shortages for us in longer lead raw materials, in particular where we see data center products for us coming back pretty fast and in quarter lead times increasing or in quarter orders increasing. Many of our peers are seeing the same things. There starts to be a crunch on raw materials. We're, of course, managing that. We did do a pretty good job of building strategic wafer and die bank. We've done that with some finished goods as well.I think that's helping us now as we're starting to see the channel return in quarter orders return pretty fast.

Joseph Moore
Joseph Moore
Analyst at Morgan Stanley

Okay. Thank you. With regards to automotive and the potential pull-ins, I mean, you've answered to this, but I guess just if you could characterize what those conversations are like, because I can't imagine running a business when the tariffs are kind of on again, off again in Canada and Mexico and then globally, and then you don't know where they're going to be and how they're temporarily suspended and stuff's going to get more expensive in a few weeks. That all comes after over a year of inventory reduction. Aren't inventories just too lean to deal with all this, and shouldn't there be some indication that those inventories are going to have to start to come up?

Mike Doogue
Mike Doogue
CEO at Allegro MicroSystems

Yeah. I'll take that one, Joe. This is Mike. We've talked at length about increased booking. One thing we've done, we have close relationships with our customers. What we've been doing when we see upside potential coming from customers, we've been having direct conversations to understand what's driving the upside. We have not seen any material evidence that upside demand is coming from tariff situations. I know that's an awfully simple answer, but it happens to be a true one.

Joseph Moore
Joseph Moore
Analyst at Morgan Stanley

Yeah. No, I appreciate that. Thank you very much.

Operator

At this time, I am showing no further questions in the queue. I would now like to hand it back to Jalene for closing remarks.

Jalene Hoover
Jalene Hoover
VP of Investor Relations and Corporate Communications at Allegro MicroSystems

Thank you, Brianna. We appreciate you taking the time to join us. This concludes this morning's conference call.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Executives
    • Derek D'Antilio
      Derek D'Antilio
      CFO
    • Jalene Hoover
      Jalene Hoover
      VP of Investor Relations and Corporate Communications
    • Mike Doogue
      Mike Doogue
      CEO
Analysts
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