Q2 2023 Allegro Microsystems Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Good day and thank you for standing by welcome to Allegro Microsystems Q2 fiscal 2023 financial results. 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 be.
Press Star one one on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Dan Sievers President Shelton Group. Please go ahead.
Good morning, and thank you for joining us today for Allegra second quarter fiscal 'twenty three results I'm joined today by <unk>, President and CEO , Nathan I'll go wallet and our luggage Chief Financial Officer, Derek do you want Telia. They will provide highlights of our business review, our quarterly financial performance and provide a summary of our outlook after the.
<unk> will answer the questions in the Q&A session our.
Our earnings release, and the accompanying financial tables are available on the Investor Relations page of our website at Www Allegra micro Dot Com. This call is being webcast. It is 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 anticipations and projections.
Please refer to the earnings press release, we 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, and subsequent 10-Qs while we may elect to update forward looking statements at some point in the future. The company assumes no obligation to update any.
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 sales 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 and a reconciliation of our GAAP and non-GAAP financial measures. The non-GAAP financial measures that are discussed today are not intended to replace albeit substitute for the presentation of <unk> GAAP financial results and may be 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 core ongoing operations.
Now my pleasure to turn the call over to <unk>, President and CEO Vineet Naga Wala Denise. Please go ahead.
Thank you.
Good morning, and welcome to our fiscal second quarter earnings call.
Before getting into my prepared remarks, I want to take this opportunity to recognize the later with team members in your brain.
To acknowledge the tremendous courage and extend my appreciation for their dedication in the face of very real.
Gotcha.
Our team in Ukraine is an integral part of electric global operations and we will continue doing all that we can do to support our colleagues and their families.
Shifting gears to the overall business, we had an excellent quarter.
Highlighted by the team's strong execution debate continuously robust demand.
Slide seven cross currents and the macroeconomic environment.
Revenue was another quarterly record at two <unk>.
<unk> hundred $37 7 million, representing sustain sequential growth and an acceleration of growth year over year.
Our better than expected top line performance in the quarter.
Largely due to continued momentum in our strategic focus areas mobility and select industrial markets. I think you mentioned improvement in supply from our foundry partners.
Margins also came in strong on the back of operational execution.
Foreign exchange.
This highlights the substantial operating leverage in our morning contributing to significant bottom line growth.
Having now been in the role for four months I wanted to briefly expand on some of my observations and actions taken to date.
On our previous quarterly call.
Indicated that my initial client centered around electrical getting even closer to our customers and finding new ways to energize that growth, while also executing better and the team.
And that has underpinned the activities of our entire leadership team over the past few months.
This has been meeting with a broad swath of our teams and customers, including a global sites in Europe Asia and the Americas.
In fact, Eric and I just returned from two consecutive weeks.
Faith meetings with our teams customers and strategic partners in Asia.
These meetings have underscored the tremendous growth available to us and the.
Opportunities to expand our customer relationships.
As Bob for that to improve customer intimacy, we have created OEM focused business development teams for both the automotive and industrial end markets.
These global teams will engage directly with Oems and tier ones on hard to do with mission critical problems leveraged our global engineering organization to develop solutions and our partner network to deliver that we.
We have terrific capabilities across our global team.
Augment and expand our expertise in specific areas and geographies. For example, today, we are working to establish additional resources and geographies, such as Europe , and Japan to bring us closer to multiple strategic customers.
And further support of this strategy and to accelerate our future growth. We recently completed an agreement to transition our go to market approach in Japan that would allow for a more direct customer engagement.
Going forward, we would.
Directly lead our engagements with Japanese auto Oems, which is particularly meaningful as a transition to a fully electric future.
In addition, we have commenced a series of steps to accelerate our innovation.
Hence the execution of our product roadmap.
Fluids, establishing a new role and the appointment of Mike too.
First ever Chief Technology Officer.
Mike will lead a dedicated team to incubate new technologies, both organically as well through partners and our strategic growth areas.
<unk> proven concepts to scale.
In conjunction with this appointment.
So pleased to have someone now Ryan.
The execution of our product Roadmaps and customer programs as senior Vice president of products.
<unk> worked closely with our global sales teams to execute our product strategy in the market.
That's what our operations teams on initiatives to improve the customer experience and expand margins.
Also during the quarter, we successfully closed the acquisition of Hey, the integrated circuits and early stage Fabless company.
As a reminder, <unk> focuses on the design of fully integrated isolated gate drivers for applications that leverage high voltage gallium nitride and silicon carbide materials.
Hey, there not only complements <unk> existing sensor IC solutions for energy efficiency. It also meaningfully expands our future SaaS to include applications across FCB solar Inverters datacenter and broad industrial markets.
Don't expect material revenue contribution in the near term we are fully committed to capitalizing on this opportunity.
Pointed one of our most experienced executives to lead the scaling of the disruptive technology and bring it to market.
At the foundation of Allegro success.
<unk> focus on secular mega trends that are driving outsized growth with specific end markets that include E mobility data centers clean energy and industrial four point out.
While we are primarily developing new technology platforms for E mobility.
We have great opportunity to leverage our technology as we solve similar problems for customers in our targeted industrial markets.
And across all of these end markets.
A unique opportunity for allegro that extends beyond providing superior technology and service.
Perfect opportunity to enable our customers to transition to a more sustainable future.
Turning to the key highlights for the quarter.
We continue to realize growing traction with our new products targeting our strategic growth areas.
Momentum was strong.
So our demand continues to outpace near term capacity and we exited the quarter with over a year's worth of order backlog.
Our automotive business had another strong quarter with sequential and year over year growth led by accelerated adoption of our solutions for FCB and water and onboard charging applications.
Complementing our traction in vehicle electrification, we saw continued customer adoption of our cross portfolio of content and Adas solutions for advanced steering and braking applications.
E mobility, which represents our SVP of Ddos applications expanded to a record 41% of <unk>.
Automotive sales in the fiscal second quarter.
And we are pleased with the balanced contribution of both our sensing and power products to this growth.
E mobility design wins increased 68% compared to fiscal Q1.
Of note is the teams work directly with a major EV manufacturer to incorporate electronic Ics into one of the newest morning steering system.
Our industrial business achieve record sales with solid double digit growth sequentially and year over year.
Growth was driven by a target markets of industrial for.
Clean energy and data centers.
Data center continues to offer significant opportunities for long term growth as highlighted by our two new multi year design wins in the quarter.
From a product line perspective, we continue to extend our market leadership in magnetic sensors as our innovative and best in class products are adopted by automotive Oems building of the electrified platforms.
We are also very pleased with our power IC business, which grew 21% sequentially and almost 50% year over year.
We continue to make strides with these products efficiency story, especially in bars.
I'll now turn the call over to Derek to review the financial results and provide guidance for our fiscal third quarter.
Thank you and good morning, everyone before we discuss the financial results I'll provide an update on what we are seeing in our business environment as.
<unk> highlighted we had a great quarter with strong growth, resulting from our focus on markets that we believe offer long term secular growth, we continue to see robust demand across our strategic focus areas within both the automotive and industrial markets.
We also once again ended Q2 with more than a year of backlog and extended visibility.
While we expect our positive trajectory to continue we do acknowledge there is increasing uncertainty relating to the broader macroeconomic environment, including pervasive inflation and clear signs of slowing consumer demand.
Similar to many peers, we have noted a softening of demand specific to some of our computer and consumer applications. However, I would like to emphasize that these end markets traditionally represent less than 50% of our total sales in any given quarter.
That said, we continue to be very vigilant and proactively monitor a series of leading indicators for potential changes in demand.
And supply dynamics across each of our end markets.
We regularly regularly review key metrics, including design wins to ensure our pipeline remains robust and we continue to have extended visibility into the future.
Bookings and cancellations.
And inventory levels at our distributors and our end customers.
We have seen some increases in inventories of individual distributors and in certain regions. However weeks on hand is still well below targeted and pre pandemic levels.
In addition, based on recent and ongoing discussions with our OEM customers. We do not believe they are building inventories of our products.
In order to further confirm the integrity of our backlog and ensure that we are shipping the majority of our products into production. We recently opened our reschedule and cancellation window to allow customers with past due orders orders shippable beyond 180 days to reschedule or cancel orders with certain parameters.
This action in Q2 did not significantly change our overall backlog.
Further cancellations and rescheduled orders were largely within our other end markets, such as the computer and consumer segments and the broader industrial market.
We believe this is a good health check of our backlog it helps us with efficient order scheduled.
From a supply perspective, we still expect 200 millimeter wafer supply to remain tight for the remainder of our fiscal 'twenty three.
Our supply chain teams continue to work very closely with our fab partners on improvements in future capacity for <unk>.
24 and beyond.
In Q2, we are pleased that our wafer ramp with TSMC is progressing well and about a quarter ahead of schedule and as a result, our shipments in the quarter exceeded our guidance range.
Now turning to Q2 results.
Please note that all income statement related measures, except sales are stated here on a non-GAAP basis.
In Q2, we achieved record sales of $238 million or <unk>.
Gross margins were 56, 2% opex.
Opex was 28, 3% of sales and EBITDA was 33%.
Our business model continued to deliver strong operating leverage with sequential operating income growth of 20% more than two times the growth in sales and EPS was <unk> 31 per share.
Sales in the second quarter increased 9% sequentially and 23% compared to Q2 of fiscal 'twenty two.
Sales were above the high end of our guidance range. A result of the incremental supply from our foundry partners and solid execution at our internal Assembly and test facility.
Automotive sales increased 5% sequentially and were up 25% compared to Q2 of the prior year.
Within automotive ex EV, and Adas or E mobility represented 41% of sales up from 35% a year ago.
Industrial sales increased by 20% and were up 33% versus last year.
We saw sequential growth in all areas of our industrial market, including data center, which increased another 13% sequentially.
Around 230% compared to Q2 of fiscal 'twenty two.
Other sales, which include the computer consumer and smart home applications.
<unk> increased in terms of shipment and sales to $32 million and were approximately 14% of sales in the quarter.
Sales through distribution continued to be robust and with 37% of sales in the quarter consistent with Q1.
Sales by geography, where again, well balanced with 26% of sales in China.
19% of sales in Japan, 24% in the rest of Asia, 17% in Europe , and 14% North America.
Now turning to profitability gross margin in the quarter was 56, 2% exceeding the high end of our guidance range.
Gross margins included a benefit of approximately 120 basis points from favorable foreign exchange, which we expect to continue into Q3.
Excluding foreign exchange gross margins were at the high end of our guidance range and on a previously stated operating model of 55%.
Operating expenses were 28, 3% of sales compared to 29, six in Q1 contributing to our increasing operating leverage.
We continue to invest in innovation, particularly in research and development and sales and our strategic focus areas.
Both R&D and SG&A expenses represented approximately 14% of sales each in the second quarter.
Operating income increased to 27, 9% of sales compared to 25, 3% in Q1 'twenty.
24% in Q2 of fiscal 'twenty two.
Our operating margin increased by 380 basis points compared to a year ago, continuing to demonstrate the leverage in the model.
Our effective tax rate in the quarter was 10% and we expect our full year non-GAAP tax rate to now be 12%.
This is lower than our previous guidance of 14% to 15% due to recent state tax changes.
The Q2 share count was 192 6 million shares.
Net income was $59 $8 million were <unk> 31 per share and.
An increase of 27% sequentially on a comparable sales increase of 9%.
Moving to the balance sheet and cash flow. We ended Q2 with cash and equivalents of $303 million in terms of working capital DSO. In Q2 was 46 days compared to 51 in Q1 and days of inventory were 85 days compared to 81 in Q1 still below our target of around 110 days.
Yes.
From a cash flow standpoint cash flow from operations was $56 million.
Capital expenditures largely for assembly and test capacity was $21 million and free cash flow was $35 million.
Finally, turning to our Q3 outlook.
We expect sales to be in the range of $240 million to $250 million.
In Q3, we expect auto sales to grow slightly above the midpoint of that midpoint of that range.
Industrial to be in line with the midpoint and sales to our other markets could be flat to down sequentially.
We are also increasing our sales growth expectations for FY 'twenty three to approximately 24% up from our previous guidance of 20%.
From a profitability standpoint, we expect gross margin in Q3 to be approximately 56%.
Which includes projected favorable foreign exchange into our third quarter.
Additionally, we expect operating expenses to be approximately 28% of sales, which includes the first full quarter of expenses associated with the acquisition of Hay day four.
<unk> Q3, assuming no changes to tax legislation, we expect our tax rate to be 12% and.
And we expect our diluted share count to be approximately 193 million shares.
Based upon these assumptions, we anticipate earnings per share to be in the range of 31% to <unk> 33 per share.
Ill now turn the call back over to Denis.
Denis.
Thanks, Derek we are pleased to have delivered record performance this quarter.
As previously mentioned I believe Allegro 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 we believe will continue to expand and drive growth for allegro in both the near term and over the next decade.
We acknowledge the challenging cross currents in the global economy and have reinforced our situational awareness and management operating system to monitor leading indicators and respond to any changes.
That said, we continue to be very positive on our growth expectations as reflected by our third quarter guidance and increased revenue outlook for fiscal 'twenty three.
And we are confident in electrodes ability to outperform underlying markets as we execute our strategies.
With that we will be glad to take your questions.
Thank you Bonnie 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 you initiate the Q&A session.
Thank you as a reminder to ask a question you will need to press star one on one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from the line of Gary Mobley with Wells Fargo. Your line is open.
Good morning, everybody. Thanks for taking my question.
Let's start out by asking about the new revised growth projections for the fiscal year 'twenty quarter versus 20, it sounds like the incremental contribution or upside I should say is coming from additional supply.
Mainly from TSMC, I presume or maybe UMC as well, maybe you could just speak to that and as it relates to.
The outlook into.
The next calendar year.
Near term sales being governed by.
Lack of supply and how do you see incremental supply coming on as we progress through the conclusion of this calendar year and as well into next calendar year.
Yes, Gary this is Derek Thank you for the question.
Within this fiscal year, we still see constrained on the 200 millimeter and we continue to get some incremental supply we're about a quarter ahead with TSMC, which allowed us to ship ahead, a little bit in Q2 here above our guidance range, we are working on incremental supply with.
And we're at about the wafer receipts level on a run rate with TSMC, which turns into full shipments about a quarter. Later, so that'll that will factor in our Q3 and Q4, we have been able to get some incremental supply from some of our other partners here for the remainder of fiscal 'twenty three and that's really what's driving this increase from the 20% to 24% and that's what's been driving it all year.
When we started with the year just below mid teens and raised that to 20 in now to about the 24 range, that's really all incremental supply the backlog and the demand hasnt really changed other than thats pockets that we talked about going into fiscal 'twenty for our supply chain th chain teams are really working pretty diligently with all of our partners on incremental supply.
And we are working to align that now with certainly with our past due backlog and to align that with demand.
Thanks Derek.
And this is my follow up question I wanted to ask about your exposure to China.
From an end market perspective, or from a domestic China production standpoint.
I'm curious if you can share with us your best sense of the exposure there with respect to your supply chain and it.
Just general China consumer related demand.
And the impact that you may experience because of Covid mitigation export restrictions and all the different headwinds that U S companies seem to be dealing with with respect to China.
Yes, Gary I'll start with the supply side and the mini can talk little bit about the demand side in China, but.
Our sales in China were pretty robust this quarter, they were 26% of sales and on the supply side, we do use a subcontractor in China, It's a relatively low percentage of our overall sub contracting about half of our assembly is done in house in the Philippines at our facility at the other half is done.
At subcontract as most of those subcontractors are either in Malaysia, or the Philippines. There is one in China to support our Chinese customers and I'll, let Danny talk a bit about demand in China sure Gary.
What I would add is that demand in China continues to be really strong across our target markets.
In automotive I think everybody's aware, China is already the leading manufacturer of Evs electric vehicles, and so we're getting great take rates for our products as those platforms continue to.
Grow and ramp.
We're also seeing great progress in industrial four point or factory automation, where increased increasing automation in the factories in China, resulting in higher take rate for our motion control products.
As well as on our clean energy with EV charging.
You also had a question in there around sort of the export climate for China, and obviously, it's an area that we're watching very closely.
The export restrictions into China involving China had been fluid for a few years.
At this point, we believe the actions taken largely targeted advanced computing and other advanced semiconductor items, our products are not falling under those regulations today and given the nature of our supply chain activities and product. We don't expect that these new controls will affect us in the near term.
Yes.
Thank you.
Okay.
Thank you please standby for our next question.
And our next question comes from Joshua Buchalter with Cowen Your line is open.
Hey, guys. Thanks for taking my question and congrats on the great results and execution.
I wanted to double click on gross margins, which have improved materially sequentially in the quarter and are expecting sustained in the guidance I know you called out FX as providing a tailwind but.
Anything under under underneath the hood, whether it's pricing or mix. It also contributed as we start up.
Try to understand how sustainable these levels are or was it more or anything on the cost side as well. Thank you.
Sure.
Yes, Josh this is Derek good question, so going from Q1, when we finished at about 54, 9% non-GAAP gross margins of 56 to that.
It was largely FX kind of when you net everything out but within that there's quite a few things that can move gross margin around average asps and mix is probably the biggest determinant of our gross margin right now and on the cost side.
<unk> continues to persist so we have had pricing throughout the year and throughout last year, but actually going from Q1 to Q2 pricing was relatively insignificant portion of that increase in both sales and gross margin. It was almost largely volume and the gross margin piece was largely foreign.
Foreign exchange when you net all the other pieces.
Got it thank you and I wanted to ask about the thank you distribution agreement in particular can you walk us through why now was the right time to end that agreement and I know you talked about.
The opportunity to work more directly with Oems.
Should we expect you to add any other.
Distribution partners in Japan.
Is this due I guess to the long term opportunity within Japan.
Thank you.
Sure happy to take that Josh.
As I stated in my previous earnings call. Our goal is to develop more customer intimacy to really be close to the customers as they tackle some of the hardest problems in the transition to an electrified future.
Our change in Japan.
A direct result of that initiative.
And what it allows us to do is bring our engineers, even closer to our customers engineers as they start to build out electrified platforms and really transition that entire portfolio to an all electric future you must have seen some reports coming out of Japan around the total group.
Making you are wrapping up their latest EV platform and also contemplating a change in strategy to an all electric future.
Good news there is that.
We are very close to all of the suppliers that are enabling that transition and this change will allow us to be even closer to the engineering teams as they build those platforms out. So we're really excited about the change.
We've been very pleased with the partnership with <unk>, So far and we will continue to be a supporting offer us but this change is more about our engineers, becoming more directly involved and engaged with our customers engineers going forward.
Understood. Thank you I'll hop back in the queue.
Thank you please stand.
Please standby for your next question.
And our next question comes from the line of Blayne Curtis with Barclays. Your line is open.
Hey, good morning, and Great results, maybe I'll start with just following up on that last question in terms of the transition is that a wash a headwind or a tailwind obviously I'm, assuming you've got a ramp down and then put that product somewhere else. So sometimes that has an effect I'm. Just curious if we should we think of anything for you.
Yes. This is derrick play and from a sort of a profitability standpoint, its a wash there might be a little bit of geography between the gross margin line and the Opex line as we start to bring some of the folks onboard there to directly support our customers and we expect it to be and actually an increase eventually in the top line and that's why we're doing this to get closer to customers and <unk>.
Improve our EV sales in E mobility sales in Japan.
Gotcha, and then I wanted to ask I thought I heard you say that power of the 21% and obviously you had a good data center tailwind, but it seems to be a lot larger than that could you just comment on the strength in your power products.
Yes, Blayne, we're seeing really good strength across our end markets for our power products, Obviously data center gets a lot of play.
The big area of focus for us.
When we look at.
Application of our gate drivers on onboard Chargers.
And EV charging applications.
And the safety comfort and convenience section of our automotive segment, where our motor drivers going to the HVAC system is that sort of cadence.
Cooling, we're seeing some really high take rates. There. So we're really pleased with the progress our power products segment is made and we continue to be bullish about our future.
Thanks for that.
Thank you. Please standby for your next question.
One moment please.
Yes.
Please standby.
Alright. Our next question comes from Alessandra Vecchi with William Blair. Your line is open.
I ask I echo the congratulations on the really strong quarter in this environment.
One question on the data center to a new multi year design wins you mentioned.
How do we think about the products that you're selling into that.
Extend beyond three phase plan or is this a continuation of the strength we've been hearing about for multiple quarters now on that front.
Yes, Andrew Thank you for the question. It is really an extension of the success, we've been seeing with our three phase with our motors for three phase fast.
Other piece here is the transition to 48, 4% as well. So that is also contributing to our success here in design wins.
Mentioned reflect both those product segments.
Okay, and then on the <unk>.
As well on the sort of opening of the rescheduling cancellation window understanding and didn't make much of an impact to the current quarter have you seen any sort of decrease or increase in movement through the month of October .
Well this is Derrick Alexander we have not really when we talked about it being a inconsequential decrease in our overall backlog that was low single digits decrease in the backlog and that includes of course, having additional bookings offset by some of the cancellations and rescheduling. So we don't see that having an impact here in the fiscal year 'twenty three and in <unk>.
It's allowed us to really sit back and reschedule some of our own orders internally to make sure. We're shipping to the right places and into production and where we have customers asking for things more more in the near term.
Perfect. That's really helpful. And then one quick last one if I may there.
You guys have done a really good job on the Opex, Brian even even the coming quarter with with the with the integration of heyday and inflation. How do we think about the puts and takes on Opex as we look to a much higher inflationary environment. Thank you.
Yes, it's a great question I'll Sandra so as we stated in the past we expect to be able to continue to invest in research and development first and foremost and Thats, where our capital is going right now into research and development.
Capacity Capex.
And really within that we kind of targeted 15% of sales our research and development were a little below that right now at about 14%. So I would expect that number could move towards that 15% number. If we continue to find the right people continue to invest in the right technologies on the SG&A side I would expect that to go up at just below inflationary rates. It also includes <unk>.
Now an elevated level of variable compensation, which will reset as we move into fiscal 'twenty four.
Perfect. Thank you with that I'll go back into queue.
Thank you please standby for our next question.
And our next question comes from Quinn Bolton with Needham <unk> Company. Your line is open.
Thanks, and I'll Echo congratulations as well I guess my first question is some of your automotive competitors from Alexis and Infineon have both talked about starting to see some movement in backlog for the automotive products set.
Great have it may not be on allocation and I guess I'm just kind of wondering as you look across your automotive.
Portfolio is there any part of the portfolio.
Where are you seeing changes in demand or or <unk>.
Increased cancellations or push out of activity.
This is binnie. Thank you for the question. So demand continues to stay strong across all of our automotive product segments and in fact, as we look at our quarter over quarter backlog changed our backlog has actually gone up for automotive.
So at this point and I think we've stated this in the past earnings call as well it continues to be the same now.
We're still shipping into our backlog and so.
Any sort of changes in the near term changes in the market won't really get reflected in our backlog for some time to come as we continue to be supply constrained. So hopefully that answers your question.
It does thank you.
Just a couple of.
<unk> one on the on the <unk>.
Foreign exchange benefit Youre seeing here in Q2 fiscal Q3.
Any sense.
If current.
FX stabilizes at current levels does that <unk>.
And just then continue or.
How do you how do you think longer term about those 100 120 basis point benefit that you are seeing near term and FX and second question, just the 12% tax rate for the remainder of fiscal 'twenty three is that a good working assumption now for fiscal 'twenty four thank you.
Yes Quinn.
Good questions. Thank you so on the foreign exchange, we sell the majority of our products in U S dollars and we're buying our largest materials like wafers in U S. Dollars. So there's not a lot of exposure on the top line really with the.
The exposure comes from is our facility in the Philippines, the peso, which is in the Philippine peso, which is in the gross margin all those local expenses are in peso to the extent the U S. Dollar strengthens we get that benefit what your C&I gross margin. So we expect that to continue into Q3, if that went away all else being equal to a 120 basis points goes away and that's why I said excluding.
Leading that were at the high end of our guidance range and kind of where our target operating model was up 55%. We certainly don't expect to stop there. We do have some relatively minor operating expenses in pockets of Europe and Asia that are also in local currencies right now that we're benefiting a little bit from the U S. Dollar.
In terms of the tax rate, yes to 12% is what we expect currently in that 12% tax rate. We started the year at about 16% tax rate and then when the legislative changes with respect to capitalizing R&D. We ended up with a benefit of that bringing us down to about <unk> 14, and then some state tax changes here that a permanent bring us down to 12, so all else being equal.
Now with no legislative changes would be at 12%.
Great. Thank you.
Thank you and as a reminder to ask a question you will need to press star one one on your telephone.
Please standby. Our next question is Vijay Rakesh with Mizuho Group. Your line is open.
Yes, hi.
Good quarter and guide, yes, just a couple of quick questions.
When you look at the.
You mentioned topline.
What's been the TSMC just wondering what the mix of TSMC would be exiting calendar 'twenty two 'twenty three.
Yeah, Great question. So it was above 5% on the receipts exiting fiscal year 'twenty two I will use it in fiscal two out of this the way we think about it.
Got it and then if you roll that forward.
Again like double year on year kind of.
Wolf to Evs, but just could you give some color on how the design pipeline looks that'd be great. Thanks.
Yes.
Thank you for the question.
Really pleased with the progress we're making on our overall E mobility design pipeline.
It's a little hard for us to figure out where some of the advanced Adas functionality is growing but certainly anecdotally, we hear it's largely going into EV platforms. So hence we're talking about <unk> eight us together and our E mobility pipeline design wins increased 68% quarter over quarter. So we are.
Ahead of our target we continue to be engaged with all the major Oems as they are thinking about the next generation of electric platforms. We're also working very closely with the tier so we feel really good about our position and the <unk>.
Competitive aspect of our offering around accuracy robustness.
And obviously, the economic benefit provided to our customers.
Got it thanks.
I am showing no further questions at this time I would now like to turn the conference back to Leann Siebers for closing remarks.
Thank you Amy before closing out the call we want to quickly highlight the allegro will be participating in three upcoming investor conferences, the first of which will be the wells Fargo TMT summit in Las Vegas on November 29, followed by the Credit Suisse Technology Conference in Scottsdale on November 30th and then Barclays Global TMT Conference in San Francisco.
December 7th for those interested in meeting with management at one of these events. We encourage you to contact the respective hosting firms or the Shelton group. Thank you again for joining us today and that concludes this mornings conference call.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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