Q1 2023 Allegro Microsystems Inc Earnings Call
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Good day, and thank you for standing by.
I'll come to the Allegro Microsystems Q1 fiscal 2023 financial results Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
To ask a question during that session you will need to press star one one on your phone.
Today's conference is being recorded and I would now like to hand, the conference over to your speaker today Ms. Leah.
N Sievers President of Shelton Group Investor Relations receivers. Please go ahead.
Good morning, and thank you for joining us today for <unk> first quarter fiscal 'twenty three results I'm joined today by <unk>, President and Chief Executive Officer, <unk>, <unk> and Chief Financial Officer, Derek began telia. They will provide highlights of our business review, our quarterly financial performance and provide a summary of our out.
After the presentation, we will answer questions in a Q&A session.
Our earnings release, and the accompanying financial tables are available on the Investor Relations page of our website at Www Dot Library micro Dot Com. This call is being what tested and a recording will be available on our IR page shortly.
Please note that comments other than statements of historical fact made during this conference call include forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
These forward looking statements include projections and other statements about future events that are based on current expectations and assumptions and as a result are subject to risks and uncertainties that could cause actual results to vary materially from our anticipation and projections. Please.
Please refer to the earnings release issued today and other documents filed by us with the SEC.
Including the risk factors discussed in detail in our most recent 10-K filed on May 18th 2022, while we may elect to update forward looking statements at some point in the future. The company assumes no obligation to update any forward looking information presented even if our estimates or assumptions change.
Also unless otherwise noted during the call all references to income statement related financial measures other than revenue will be to financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
Please refer to our press release posted to our website for information regarding our non-GAAP financial results, a reconciliation of our GAAP and non-GAAP financial measures and certain pro forma financial information and non-GAAP financial measures that are discussed today.
Did you replace or be a substitute for the presentation of <unk> GAAP financial results and maybe calculated differently than similar measures used by other companies. We are providing this information because it may enable investors to make meaningful comparisons of core operating results and more clearly highlight the results of our ongoing operations.
It is now my pleasure to turn the call over to <unk>, President and CEO Vineet Ogallala beneath please go ahead.
Thank you Leann.
Good morning, and welcome to our fourth quarter earnings call for fiscal 2023.
I'm pleased to join you for my first earnings call as our legacy.
It is an exciting time to lead the company as I believe Allegro is at a key inflection point in its growth journey.
Before diving into the quarterly business update I want to take a minute to share with you what compelled me to join the Allegra.
In the various industrial markets, including automotive industrial automation and clean energy.
It might in a gross product and technology focus and has deep relationships with its customers.
He has built on that by becoming a high quality business with strong fundamentals and solid execution.
<unk> has a talented team with a culture of innovation and a strong partner network.
The company's solutions and Roadmaps are very bad.
Aligned to a number of secular mega trends that include electrification autonomous capabilities safety and efficiency.
You can have a profound impact across automotive and industrial markets.
These markets before from different vantage points in the value chain and I believe theres, a real opportunity to meaningfully scale, the business and accelerate the company's growth.
Since formally assumed the role in mid June Ive spend a significant portion of my time meeting with our global teams and customers to gain a deeper understanding of our business technology market positions and more importantly, what can make us a better partner and employer.
These interactions have reinforced my hypotheses and turn them into conviction.
I'm fully aligned with our core value of innovation with purpose and believe our products and technology unlock significant growth, including expanded applications in existing markets and new end markets and global expansion.
As I consider what has made the company successful so far it is a niche.
<unk> unique value proposition with innovative solutions that meet customers' exacting performance requirements as villa agility and responsiveness to their customer needs.
Fundamental to this value proposition is a commitment to sculpsure centered around innovation.
Including the introduction of differentiated technology and products.
I believe that innovation leads to market leadership, which in turn delivers differentiated margins and financial performance.
Well I don't anticipate major changes to the overall strategy that has served us well so far.
I do believe there is an opportunity to do more.
As part of my initial plan, we will aim to get even closer to our customers and find new ways to energize our growth while also executing better as a team.
While we will continue to focus on and grow with secular growth trends in automotive I see a future photo thank Joe that reaches well beyond auto and extends our growth with these mega trends to industrial markets like clean energy data centers and industrial for pointed out.
Our experience and technologies, serving to strengthen automotive will be leveraged to help us grow in these other markets.
Electrification and autonomous functionality are large secular growth stories that will play out over the next decade, and I believe Allegro can play a pivotal role and move.
And technology and awarded to what's this exciting future.
You can expect us to enhance our focus and align our R&D investments to whats more growth in these areas.
You can also expect us to deploy our capital towards selective M&A to accelerate our strategic growth initiatives.
I also believe we have a terrific opportunity to make ESG, a foundational part of our value proposition going forward.
I look forward to providing more updates as I learned more about the business and the opportunities that lie ahead of us.
Yes.
Now, let me turn to our results for the fiscal first quarter.
The company achieved another record quarter revenue of $217 8 million.
Sequential and year over year increases.
Customer demand remains very strong, especially in our automotive and industrial target markets and we continue to ramp the capacity of our integrated supply chain to meet it.
The top line performance reflects solid growth strategic alignment to fast growing markets, our continued content and share gains as well as sustained design win momentum.
In terms of underlying business trends and drivers we continue to realize growing traction with our new products targeted at our strategic growth areas design.
Design win momentum was strong.
<unk> continued to increase and we exited the quarter with record order backlog.
Our automotive business had another solid quarter with sequential and year over year growth in all of our automotive applications led by accelerated adoption of our IC solutions for FCB, Edgewater and onboard charging applications.
Complementing our traction in vehicle electrification, we saw continued concern customer adoption of our cross portfolio content in.
Adas solutions for advanced braking and steering applications.
Combined <unk>.
Mobility, which represents our HCV and Adas applications expanded to a record 38% of automotive revenue in the fiscal first quarter.
Key design wins include VLCC motor drivers and electric vehicle HPLC systems, and battery cooling with Electra, winning multiple sockets per system.
Our industrial markets saw record revenues with solid double digit growth sequentially and year over year.
Growth was broad based punctuated by growth in electric vehicle charging infrastructure and sustained momentum in data center, which increased sequentially for the fourth consecutive quarter and more than doubled year over year.
The superior energy efficiency offered by <unk> power IC solutions for data center cooling continues to resonate with customers are.
Our overall pipeline of both secured and prospective design wins is very robust and we expect our recent growth momentum and datacenter to continue over the coming quarters.
This quarter, we were pleased with multiple design wins from our current sensors in solar and motors for renewable energy systems, and we closed key motor driver wins with a leading power tool company with high voltage <unk>, where required to support the next generation battery technology.
Yes.
From a product line perspective growth contribution remained well balanced across both our magnetic sensor and power IC solutions with each increasing sequentially two quarterly records.
Specific to magnetic sensors third party research has independently confirmed our market leadership accelerated by our recent gains in current sensing across a broad set of automotive and industrial applications and GMO based solutions delivering leading performance in vehicle Adas.
We see this as a confirmation of our commitment to innovation and our focus on our global customer base that sees electrical as a trusted innovator partner and supplier.
At the census converged conference in June .
Introduced two new magnetic position sensor ic's for Adas applications.
These new angle sensors leveraged the first ever combination of our hall magnetic sensing technology together with cutting edge TMR technology in a single package.
I think it is significantly improved resolution accuracy and safety for vehicle driving automation.
Lastly, I want to provide a quick update on <unk> planned acquisition of <unk> integrated circuits were excited about the hidden team, joining allegro and bringing products based on their technology to our customers.
All required approvals remain on track and we look forward to closing the acquisition this fall.
In summary, we had a great start to our fiscal year <unk>.
<unk> of our first quarter results is a testament to electro strong alignment with large secular growth trends persistent innovation and solid execution.
Together with that team I look forward to building on this foundation and accelerating our growth and our strategic focus areas.
I'll now turn the call over to Derek to review the financial results and provide guidance for our fiscal second quarter Derrick. Thank.
Thank you Bonnie and good morning, everyone before we discuss the financial results I'll provide an update is what we are seeing in the terms of the business environment from.
From a demand standpoint, we continue to see robust demand, particularly in the auto and industrial markets and demand in certain parts of the computer and consumer market has certainly softened as expected.
We again ended Q1 with record firm backlog that is largely noncancelable and it provides us with extended visibility.
We continue to review, our order patterns as well as inventory levels, including channel inventories, where we have good visibility we have not seen evidence of an inventory build we also continue to align our supply with what we believe to be true demand and our strategic focus areas.
While we recognize that the global macro environment is uncertain. We believe our business is well aligned to the electrification and autonomous functionality megatrends within automotive and industrial markets. These markets together represent nearly 90% of our total sales and we continue to see robust demand in these markets.
Within these broad markets, we have a strategic focus on the areas of ex EV and Adas, whereas we've said E mobility and industrial our focus has been on data center clean energy and industry for Plano.
We believe these strategic focus areas offer long term secular growth opportunities for Allegro for example, within the automotive industry. While light vehicle production is expected to grow in the mid to high single digits in fiscal 'twenty three ex EV production is projected to grow by 45%.
The acceleration of these Mega trends is also evident in our business results, while our <unk>.
Automotive sales increased 19% on a last 12 month basis Rx EV sales increased by 65% on an LTM basis. In addition, total sales to our strategic focus areas increased by 13% sequentially and now represents 45% of total sales compared to 43% in Q4.
And 41% a year ago.
From a supply perspective demand continues to exceed supply with near term tightness still largely related to 200 millimeter wafers availability. We continue to work closely with our manufacturing partners to ramp this supply and as a result of our strong supplier relationships, we've been able to expand our available supply with the.
Incremental committed capacity, we are increasing our sales growth expectation for fiscal 'twenty three to approximately 20% over fiscal 'twenty two.
Now turning to Q1 results.
Please note that all income statement related measures, except sales are stated here on a non-GAAP basis in.
In Q1, we achieved record sales of $217 $8 million, our gross margins were 54, 9% nearing our target of 55% and Opex was below our target of 30% of sales.
As a result, we had strong operating leverage with sequential operating income growth of 18, 3%.
More than double the growth in sales and EPS was <unk> 24 per share.
Sales in the first quarter increased by eight 7% sequentially and were above the high end of our guidance range as a result of higher overall asps.
Both mix and price incremental supply from our foundry partners and very good execution of our internal assembly and test facility.
Automotive sales increased by 6% sequentially to $149 $6 million and were up 12% compared to Q1 of the prior year.
Within automotive ex EV and Adas represented 38% of sales in Q1 up from 35% in Q1 a year ago.
Industrial sales increased 16% sequentially to $40 million up 32% year over year.
We saw sequential growth in all areas of our industrial market and data center in particular grew another 40% sequentially and over 250% compared to Q1 of fiscal 'twenty two.
Other sales, which include computer consumer and smart home applications increased by $3 $5 million sequentially to $28 million.
Sales through distribution continued to be robust and with 37% of sales in the quarter.
We are also pleased to have just recently entered into a new distribution partnership with global semiconductor and electric component retailer Mouser electronics.
This partnership enhances our commitment to creating and supporting a diverse global customer base.
Sales by geography were again, very well balanced with 25% of sales in China, 19% in Japan, 23% rest of Asia, 16%, North America and 16% in Europe .
Turning to profitability gross margin in the quarter was 54, 9% and near the high end of our guidance range gross margins in the quarter benefited from higher sales volume as well as favorable mix and pricing.
In Q1, we continued to see cost inflation increases as well as the impact of cost increases from Q4 that cycled out of inventory in Q1.
We do have committed wafer pricing for the remainder of calendar 'twenty two and our annual wage increases were also effective in Q1.
We have been successful in maintaining our gross margins and improving our operating margins with the sales mix towards more feature rich products, expanding our supply chain implementing select price increases and effectively leveraging our fixed cost structure.
As a result, we expect to maintain our gross margins in this 54% to 55% range in the short term as we continue to progress towards our target of 55% on a sustainable basis.
Operating expenses were $64 4 million.
29, 6% of sales compared to $64 8 million or 32, 4% of sales in Q4.
We continue to invest in innovation, particularly in our strategic focus areas and R&D expense was $32 5 million.
We're approximately 15% of sales and SG&A expense was $31 9 million.
Operating income increased to $55 million or 25, 3% of sales compared to $46 5 million in Q4, and $41 9 million or 22, 3% of sales in Q1 of fiscal 'twenty two.
We continued to demonstrate the leverage in our operating model as our operating margin increased by another 300 basis points compared to a year ago.
The effective tax rate in the quarter was $14, 3% below our guidance of approximately 16% as a result of recent U S tax legislation.
The Q1 share count was 192 4 million shares.
And as a result, net income was $47 1 million or 24 per diluted share an increase of 17, 3% sequentially on a comparable sales increase of eight 7%.
Sure.
Moving to the balance sheet and cash flow, we ended Q1 with cash and equivalents of $296 million.
DSO in Q1 was 54 days consistent with Q4 and inventory increased marginally by $2 8 million.
Which represented 84 days also consistent with Q4 and still well below our target of 100 to 110 days <unk>.
Channel inventories continue to remain at low levels and consistent with the prior several quarters.
Finally from a cash flow standpoint cash flow from operations was $37 7 million capital expenditures for capacity expansion were $14 4 million.
And free cash flow was $23 4 million.
Now turning to our outlook for Q2, we.
We expect sales in Q2 to be in the range of $220 million to $230 million.
We expect gross margin to be in the range of 54% to 55% and we expect operating expenses to be approximately 29% of sales.
For Q2, assuming no changes to tax legislation, we expect our tax rate could be approximately 14, 5% and we expect that diluted share count in Q2 could be approximately $192 6 million shares.
Based upon these assumptions, we anticipate earnings per share will be in the range of 25 to 27.
Now I will turn the call back over to <unk> for some closing comments Vinnie.
Thank you Derrick this is a great time to be at Toledo, and I'm very excited to be here as previously mentioned I believe a Lego is at a key inflection point with an incredible opportunity to scale the company.
We have a great product portfolio and considerable engineering talent and there is a very real opportunity to do even more with what we currently have.
The markets and applications that we serve are underpinned by strong secular trends, which will continue to expand and drive growth for allegro in both the near term and over the next decade.
Automotive, including <unk> and Adas will remain core strategic drivers for our business. We are also focused on further aligning our portfolio to unlock expanded opportunities in industrial markets, which are undergoing similar secular trends.
As reflected by our second quarter guidance, we're seeing growing momentum and continue to be very positive on our growth expectations for fiscal 2023.
With that we'll be glad to take your questions Liana.
Thank you Denise that concludes management's prepared remarks, and we'll now open the call for questions. Operator could you. Please review the instructions for asking a question and initiate the Q&A session.
Yes. Thank you.
As a reminder to ask a question you will need to press star one one on your phone standby as we compile the Q&A roster.
Our first question will come from Gary Mobley of Wells Fargo. Your line is open.
Yes.
Good morning, everybody. Thanks for taking my question.
I have a multipart question is Scott with as it relates to the pending <unk> acquisition.
So I presume that the second quarter guidance does not assume any contribution on the expense side or revenue side from the acquisition I was hoping you can clarify that and then longer term how do you view this as being a contributor to.
Revenue.
<unk> accretion or dilution and what distinguishes the company in the isolation IC market.
Yes, Gary this is derrick. Thank you so you're right we have not closed that transaction, we expect it to close in the fall, it's going through French regulatory approval right now.
And that is not in our guidance for Q2, we expected in the short term to have a pretty immaterial impact on our operating expenses and then we expect to see material revenue beginning about two and a half years out from right now and I want to talk up a little bit about the business itself.
Gary Thank you for the question.
As I said before we are really excited about the prospect of heyday in electro coming together.
And just to put it in perspective today, our gate driver solutions really operate up to a 200 volt range.
And what <unk> brings to US is the ability to operate from 200 board all the way up to 1200 to 500 board.
This really unlocks about a $2 7 billion dollar addressable market for us as all of our end markets move towards higher voltage solutions.
Labeled us to bring our current solutions together package with Hay days.
Drivers to be able to address this expanded market.
Okay.
Thank you.
One moment for our next question.
Our next question will come from Alessandra Vecchi of William Blair. Your line is open.
Congratulations everybody on the on the really strong results and it's nice to see.
The CEO baton.
Past and the strong fundamental backdrop.
With that can you give us a bit of an update on the ramp up at TSMC I think in the past.
Your predecessor pointed to an inflection point in the Q3 Q4.
Timeframe, so I'm not sure. It is some of the upside in Q1 Q2 was an acceleration of capacity ramp or if there were some <unk>.
Strengthening fundamentals.
Hi, Alex Good morning, this is derrick.
In Q1 really the upside in Q1 came from two pieces that came from incremental wafers from our other suppliers not TSMC and it also came from some incremental pricing and mix. So that really where Q1 came from the beat in Q1. The TSMC ramp is still as expected and planned we will see that in Q3 and into our Q4 some of the upside in the <unk>.
The percent that we're talking about for the year versus the high teens last time is really from our other wafer suppliers.
Understood that's very help.
Well. Thank you and then just on data center and the data center rents, there with 100% growth year over year and 40% sequentially. Similarly, Thank you guys talked about that that line item doubling this year, but it sounds like maybe it's tracking a little bit ahead can you walk us through some of the puts and takes of aware of.
The strength is coming from is it primarily three phase fans are there other contributors.
Any detail there would be helpful.
So Alex I'll start and then we'll talk a little bit about some of the content, but it was up really strong 40% here sequentially, 250% quarter over quarter compared to last year and if you look at it on an LTM basis, what we were referring to before on an LTM basis, it's about 116%. So that's that doubling right. There that we're talking about and it really is those three.
We face fans that's driving this here and this is this is a business thats been in our backlog, but we continue to see strong demand in that space as well.
Yes.
The only thing I would add is that as data centers continued to transition to 48 board and three phase.
Cooler for the cooling fans.
We'll continue to see a great day trade off our.
Portfolio, and it's really across the portfolio current sensing as well as our power management Ics.
Okay. Thank you so much with that I will drop back into queue.
Thank you. Thank you.
Thank you.
<unk> for the next question.
And our next question will come from Joshua Boot Alta Cowen your.
Your line is open.
Hey, guys. Thanks for taking my question and congrats on the results and congrats to have an Eaton.
Mostly most of the way through your first earnings call.
I just wanted to follow up on Alessandra question.
If I look at my model and what's implied in the guide there's a good amount of upside in the first half and then some more modest in the second half.
With TSM coming online as you said in the third quarter.
Is there any sort of macro conservatism baked into the second half and I know you mentioned some slowing consumer orders.
How fungible are those parts to other markets did you see similar.
Similar incremental softening as we think about the second half. Thank you.
Yes, Josh good morning. Thank you good question so.
The consumer and the computer market represents approximately 10% of our overall business and while we have seen softening there. It was actually up marginally in Q1 from a sales standpoint due to the backlog that we have in that market and when you look at the first half versus the second half we had planned on the TSMC ramp that's still planned for the second half of the year that hasnt materially changed.
<unk> the upside is coming from incremental wafers, we're getting from our other two foundry partners and so really this forecast of 20% is fully aligned with what we believe we are confident in from a committed wafer standpoint, we have more than a year worth of visibility on backlog and when I look at each quarter growth quarter over quarter, we would expect the.
Have to be higher than the first half in each quarter incrementally be higher Q3 higher than Q2, and Q4 higher than Q3 from a mixed standpoint, we'd expect that auto will be up about in line with that 20% overall growth of course higher for things like ex EV and Adas industrial will be higher than auto for us and then that other.
<unk> could be flat to marginally up for the year.
Thanks, that's very helpful color and then Vineet.
Tangible the increased focus on industrial in your prepared remarks, I was hoping you could maybe expand on your thoughts here.
Obviously data center has been an important growth vertical.
Is it a function of leaning in here into the data center market in particular may be expanding.
Similar to power delivery products or are there other verticals.
That are driving your bullishness on the industrial opportunity. Thanks, guys.
Josh Thanks for the question.
I'd say that I think.
I'm really excited by what we can do in the markets that we've already highlighted in targeted so whether it's.
Electric vehicle charging infrastructure data centers or automation within industries.
There is so much more we could be doing.
We're just scratching the surface when it comes to opportunities whether we are talking about more penetration within the customers, we serve expanding to new customers that we don't serve today or even geographies that we don't serve today, so as I've come in and and granted it's only been six weeks.
Everything I'm seeing continues to make me even more excited and convinced that we've got a great opportunity here to continue to expand with the same technology set into these industrial markets.
And to boot Delta.
Sure. Thanks, I'll hop back in the queue.
Thank you Josh.
Thank you.
One moment for the next question.
Our next question will come from Blayne Curtis of Barclays. Your line is open.
Hey, good morning, guys. Thanks for taking my question I want to ask my gross margin obviously.
That has been your target to get to 55%.
At that level or even above last couple of quarters and the guidance I guess, it's down to 54 and a half on higher revenue.
Maybe why they took like dip in margin.
I think youre, saying that range.
For the rest of the fiscal year I wanted to make sure I heard that right yes.
Yes Blayne. This is Derek thank you for the question.
That range really factors in all the puts and takes that go into gross margin and just like everybody else, we're seeing increasing inflationary pressures, we had wafer pricing increase at the beginning of this calendar year. Those are committed to for the rest of the calendar year, we had wage price increases in Q1, we continue to see fuel and power increases and you take all of that with the favorable mix that we.
Moving to higher ASP type products and the price increases we've done we're confident that we'll be in that 54% to 55% range and our target is certainly to work towards that 55% level towards the end of this year, which is ahead of our original schedule.
And we certainly won't stop at 55% Blaine, there's other opportunities that are a little bit further out with design capabilities and other things that will improve that gross margin in the future as well.
Thanks, and then for my follow up I, just wanted to ask on that balance of supply demand you were able to get a bit more supply.
For the back half of the fiscal year, just kind of curious.
With that supply you are finally correct.
Ill be able to rely on supply and demand. Some companies are a lot of us look at that I'm, just curious where you're at.
Yes, great question, Blaine not quite yet the incremental supply is reflected in us increasing our annual outlook from high teens to 20%, but we're not quite there yet not even near there yet in terms of having supply equal demand our backlog goes out beyond a year, we again have record backlog and there's still a lot of tightness in 200 millimeter wave.
Our capacity right now.
Okay.
Thank you.
One moment for the next question.
Our next question will come from Vijay Rakesh Hotel.
Hotel The hotel group your line is open.
Yes, Hi, Tim Dimock, good quarter and guide here just a question on the automotive side I know you mentioned EMEA at us.
Great question No revenues now can you talk towards the design pipeline looks like how much how has how has that been growing year on year.
And how do you see that.
Going forward.
Yes, Hi, Jay Thank you for the question.
Having.
We had a great start to our design wins in the first quarter.
Our pipeline of opportunities continues to be at record levels.
I think if you look at.
Take rates and the projected penetration of electric vehicles as part of total automotive production.
It's no surprise that our products both on the current sensing IC side as well as on the power management side continue to see pretty high to me.
And so that's reflected in our design wins in fact, we are already well ahead of our target for this year and we continue to see really good momentum.
Got it and on the inventory side it looks like.
Inventories are pretty low.
During that 3% sequentially I think.
And I think there is probably well below your target 100 to under 10 days.
Are you with the PSM ramp are you able to get more room to build some inventory.
Given the strong outlook on demand on both.
<unk> and power IC side.
Yes, Vijay good. Good question. So we don't expect to be able to build inventory the remainder of this fiscal year that TSM ramp in those wafers in any wafers, we get right now are going right into production being shipped the incremental revenue. We had in Q1 from those wafers came from one of our other two suppliers and those will shift we were able to build a little bit of die bank at the end of Q4 in anticipation of <unk>.
One but.
But we don't anticipate any material increases in our revenue for the remainder of this fiscal year.
Great. Thanks.
Thank you.
One moment for the next question.
And our next question is shall come from <unk>, Hi, Jeremy SMB see your line is open.
Thank you good morning, guys and congrats.
But on your strategic I guess the plan for the company. Thanks, Thanks first of all for sharing with us.
I'm just curious as you look out to I guess, the next few years within auto and outside of auto could you give us some additional color as to where you see the biggest opportunities and in terms of investing in these markets are you thinking more.
In terms of engineering investments or is it more sales and marketing or is it just expanding your <unk> customer relationships I guess any color would be helpful. There.
Yes sure. Thank you for the question and I would say again.
Six weeks in I continue to be impressed with our portfolio.
That's out there today is serving our customers, but also what we've got in the pipeline and we continue to focus on innovation, along our strategic growth vectors. So I want to start by saying that automotive will continue to be our <unk>.
Key focus here, especially the areas of electrification and Adas. We also have a great opportunity to take our existing products and technologies to these other industrial markets as it relates to electrification and automation.
And so.
It's a little bit of.
All the things you mentioned his screening.
We have an opportunity to do more with the resources and the investments we have around R&D.
And really it's about focusing them on these strategic growth vectors in a more meaningful way.
From a sales footprint standpoint, I would say that.
Big portion of our current business and our growth is coming.
Coming from regions outside of North America.
And we will be looking to add more resources and invest closer to that impact.
Customers to support them better and to make sure that we're really partnering with them much more closely to become more agile and more responsive to their needs as they innovate and solve really challenging problems and so distribution in the channel are going to be.
We continue to be very important for us as we grow and scale. The company our distribution partners have done a great job of supporting our customers as we continue to rely on them and partner with them as we scaled the company going forward.
Thank you Scott. Thank you, yes. Thank you and then just to follow up on that.
You've done a I guess the quarter was pretty solid industrial growth very strong I guess the data center strength explains that at the same time I look at auto grew I think 12% year on year, if I compare that with some of your larger peers.
They are definitely growing faster this quarter, maybe this is just a <unk>.
<unk> to quarter Lumpiness I'm, just trying to understand why.
I look at NXP I think they were up like mid <unk> said Theyre 20.
<unk> plus year on year, so whether the supply issue for you or was there anything else or just a quarter to quarter Lumpiness.
Sure. This is Derek good question, yes, there is some quarter to quarter part of patients in there and we're constantly trying to align our supply with the demand and where the line down situations are those sort of things so within our auto business, even though it grew 12% within our auto business, we had high growth in our <unk> business, which grew 71% year over year.
<unk> grew above the auto overall auto industry. So we're aligning our supply with where that real robust demand is and the same thing in industrial industrial obviously really outgrew auto aligned with that supply.
Got it thanks, and one just one clarification Derek.
On the Mauser agreement.
I guess.
You guys probably incorporated.
The sales to mouser in your original guidance, but just trying to understand how the mechanics work. When you have a new <unk> kind of in a rolling out is that going to be a tailwind for you in the short term is that was that originally contemplated in your guidance. Thank you.
So it is contemplated in our guidance, but it's not material in the second quarter screening, but as we start to move forward. We expect that they will add significant contribution to our distribution business.
Got it thank you and good luck.
Thank you.
Thank you one moment for our next question.
Okay.
And our next question will come from Trevor Janovsky.
Needham <unk> company your line is open.
Yes, Thank you and Hey, guys. This is Trevor on for Quinn Bolton. Thanks for taking my question and congrats on the quarter.
I'm wondering it.
Fact that some of your additional wafer allocations from TSMC and other partners may be benefiting from a softening in demand from consumer related end markets in the second half of 2022 and 2023.
Trevor Thank you very much this is derrick.
Not actually Theres sort of two different markets, we're still we're still working on that.
200 millimeter wafers for our high voltage capacity products. So we're not seeing any of that benefit that TSMC ramp that we're talking about is still as planned and thats been planned now for about a year. So we expect that to go as planned we are of course working with our other suppliers, both polar and UFC to work on incremental wafer supply, but we don't really expect in the near term that could come from.
Those other markets, particularly the digital side.
Okay. Thank you and as my follow up have you guys seen any changes in customer order patterns like push outs or cancellations and have there been any weekly order patterns beginning to show greater volatility.
Yes, Great question, Trevor we look at that I look at it daily we look at it weekly and we look at it on a macro basis, we haven't really seen that we continue to have record backlog. We continue to look at the channels, usually a leading indicator there to understand what's happening with your order patterns. We continue to have robust bookings in our channel and in fact most of our back.
Log is noncancelable and non returnable, we have opened up windows for people to have to cancel some of those orders to have a little bit better discipline in the shipping side of things and we Havent had a lot of uptake on that.
Some modest uptick there, but that backlog is really firm. So we continue to watch the channel inventories, we continue to watch our own inventories and then just based upon conversations with our OEM customers. We don't have direct visibility into their inventories, but we haven't seen evidence of that that we're shipping into inventories.
Okay Awesome. Thank you guys.
Thank you.
One moment for the next question.
Okay.
And we have a follow up from Gary Mobley of Wells Fargo. Your line is open.
Hey, guys just a couple of quick follow ups.
Your long term op margin target is in the mid 20%.
And according to your second quarter guidance Opex is expected to increase about one 2% sequentially.
Unless we assume opex accelerates into the second half of the year.
Youre going to be in the high.
20% for operating margins, so how should we think about.
The trend above long term goal for op margin and Opex in general in the second half of the year and then.
Additionally, do you still expect your ramp at TSMC to be gross margin accretive.
Yes, great questions. Gary This is Derek so from an Opex standpoint, we don't expect material increases in our Opex certainly no changes in the structural opex for the remainder of the year, we'll continue to invest in R&D, that's running at about 15% of sales we expect it to remain at 15% of sales. So it will be absolute dollar increases in R&D as we move throughout the year with increase.
And revenue from an SG&A standpoint, I expect SG&A to remain relatively.
Constant with Q1 here. So it will there will be some accretion to operating income as we move throughout the year on higher revenue from.
From a TSMC C standpoint, we expect it to be gross margin accretive, but it's not the largest portion right now it's about 5% of our overall wafers it'll get to be somewhere in that low teens percentage of our overall wafers. So it may not have a material impact on the overall gross margins. So I still expect that and that was contemplated in our full year guidance of 54%.
<unk>, 5%. So we still expect the gross margins to remain in that range given all the puts and takes with inflation and the other factors in gross margin.
Got it thank you.
Thank you.
And that ends our Q&A session I would now like to turn the conference back to <unk>.
Stevens for closing remarks.
Thank you operator before closing out the call I want to quickly highlight with Allegro will be participating in Q upcoming investor conferences, the first of which will be needham's virtual semiconductor and semi cap conference on August 24th.
The company will also attend the Jefferies semi.
Hardware and communications infrastructure summit, which is being held in person in Chicago on August 30th 31 for <unk>.
Is interested in meeting with management at one of these events. We encourage you to contact the respective hosting partners. Thank you again for joining us today and that concludes this mornings conference call.
This concludes the conference. Thank you all for participating you may now disconnect and have a pleasant day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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