Q3 2023 Allegro Microsystems Inc Earnings Call
Good day, and thank you for standing by welcome to the Allegro.
Q3 fiscal 'twenty to 'twenty three financial results 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.
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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.
Hey, Julien Hueber. Please go ahead.
Thank you Tania and good morning, and thank you for joining us today to discuss Allegra.
Third quarter fiscal 2023 results.
I joined Allegra at the beginning of January and with more than two decades in semis I'm thrilled to join at such an exciting time in their lifecycle.
I look forward to working with the team as well as with all of you.
I'm joined today by <unk>, President and Chief Executive Officer, Vineet Snorkeled wallet.
And our language Chief Financial Officer, Derek done Julio They will provide highlights of our business review, our quarterly financial performance and provide a summary of our outlook we will follow.
Our prepared remarks with a Q&A session.
The earnings release, and the accompanying financial tables are available on the Investor Relations page of our website at Www Dot Allegra micro dot com.
This call is being webcast and a replay will be available on our IR page shortly.
Please note that comments other than statements of historical fact made during this conference call, including forward looking statements for purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
These forward looking statements may 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 differ materially from anticipated results 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 as amended on Form 10-K filed on August 29, 2022, and subsequent 10-Qs.
While we may elect to update forward looking statements at some point in the future.
<unk> assumes no obligation to update any forward looking information presented even if our estimates or assumptions change.
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 the press release posted to our website for information regarding our non-GAAP financial results and a reconciliation of our GAAP to non-GAAP financial measures.
The non-GAAP financial measures that are discussed today are not intended to replace to all 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 core ongoing operations.
It is now my pleasure to turn the call over to your language President and CEO , the neat nautical wallet vineet.
Thank you Julian and welcome to the Allegra team.
Good morning, and thank you all for joining US this morning for our fiscal third quarter Conference call.
I'm pleased to report that electrical had another record quarter with sales, increasing 5% sequentially and 33% year over year to $249 million and near the high end of our guidance range.
Our growth continues to be driven by ongoing momentum in our E mobility and industrial markets with sales in these strategic focus areas increased 11% sequentially and 56% year over year.
Gross margin also expanded in the quarter due to higher sales of feature rich products.
Would've continued favorable foreign exchange.
This allowed us to deliver record operating margins of 30% in the quarter.
Further highlighting our operating leverage earnings per share increased more than 80% year over year on revenue growth of 33%.
Coming off the strong quarter, along with our fourth quarter guidance, we're increasing full year sales growth expectations to 26% over fiscal 2022.
In support of this growth, we're also making progress in alleviating the supply constraints that limited our ability to serve our customers over the past several quarters.
Let me expand on this with some proof points.
We view this as a positive step as it improves order lead times for our customers.
We have also continued to work with our customers to allow for rescheduled and cancellations within certain parameters.
Second channel inventory has begun to normalize with certain distributors approaching historical levels.
Finally, we've been able to grow our internal supply of wafers in die bank during the quarter to support anticipated growth.
Another positive and very important stepping down last week, our U S. Based fab partner polar semiconductor is expected to receive a $150 million equity investment to expand its 200 millimeter wafer fabrication capacity, which positions polar and allegra to support anticipated growth in customer demand.
Shifting to key business highlights for the quarter.
Sales in our automotive business increased 8% sequentially to a new quarterly record and represented year over year growth of 80%.
Our focus on the secular mega trends of mobility, which includes the increasing electrification of vehicles and the higher adoption of data Thats feature sets continues to drive a net gross growth above market.
In fact, even move into the application has expanded to a record 42% of Allegra third quarter automotive sales, reflecting the combined contribution from our sensing and power products.
In addition, the majority of the third quarter automotive design wins, what in E mobility.
We continue to focus efforts across the company on the strategic fast growing opportunity.
Notable design wins include a large adas applications for our power products and a steering system for a north American OEM.
<unk> has multiple wins with the Chinese EV manufacturer.
We also achieved another record and our industrial business with sales growing 6% sequentially and 60% year over year.
Continued growth of clean energy and industrial automation end markets drove our performance in the third quarter.
Overall design win traction has remained strong and well balanced across target markets as well as our magnetic sensors and power IC product portfolios.
I'm equally pleased with our performance from a product line perspective.
We continue to reinforce our market leadership in magnetic sensors, which grew 25% year over year.
Our power IC portfolio continued to see very robust sales growing 50% on a year over year basis.
These results underscore our core value innovation with purpose the strong alignment of our R&D investments and portfolio with our strategic focus areas as well as our initiatives to accelerate new product philosophy.
And finally <unk>.
Yes, you're reading our continued investments in innovation last week, we announced plans to open our newest R&D Center.
In Texas, which will expand the led gross research and development efforts.
I'll now turn the call over to Derek to review the financial results and provide guidance for our fiscal fourth quarter Derek.
Thank you Bonnie and good morning, everyone before we discuss the financial results I will again provide an update on what we are seeing in our business environment.
As Bonnie mentioned demand and order patterns remained robust across our focus areas. We again exited Q3 with more than a year of backlog and extended visibility based on design wins.
Never we acknowledged the macroeconomic uncertainty and as business conditions continue to evolve we are continuing to monitor leading indicators changes in our markets and sales channels.
Looking at our end markets and beginning with auto which represents nearly 70% of our sales.
We continue to see significant opportunities for growth.
According to recent third party reports and adjusted to align to our fiscal year.
Global auto production is projected to be 83 million units.
An increase of 8% compared to fiscal 'twenty two.
And is projected to increase by another 4% in fiscal 'twenty four.
Further in highlighting the significant E mobility opportunity.
Production is projected to increase by 50% and our fiscal 'twenty three.
Another 30% in fiscal 'twenty four.
We also continue to see growth in our targeted industrial markets, while demand in our other markets, which include consumer applications has continued to soften as expected.
Moving on to the supply environment in Q3, we began to see additional wafer capacity and towards the end of the quarter, we started to rebuild our wafer and die banks.
We expect to continue to build wafer in die Bank in Q4, and believe this will allow us to improve lead times and further reduce our past due backlog.
In addition, our supply chain team continues to make progress on securing capacity for fiscal 'twenty, four and beyond considering technology.
Cost and fab location.
Now turning to Q3 results.
Sales were $249 million gross margins were 58% operating income was 33% and adjusted EBITDA was 35, 4%.
Record sales combined with strong gross margin performance contributed to EPS of <unk> 35 per share and 84% increase year over year.
Sales to our automotive customers with $170 million or 68% of Q3 sales an increase of 8% sequentially and 30% year over year.
Within automotive E mobility sales increased 15% sequentially and 54% year over year.
Highlighting the transition to EV and Adas features our E mobility sales were 43% of Q3 auto sales up from 37% a year ago.
Industrial sales were $51 million, an increase of 6% sequentially and 60% year over year.
And other sales were $28 million, a decrease of 14% sequentially, but an increase of 15% year over year.
From a product line perspective magnetic sensor sales were $154 million.
An increase of 10% sequentially and 25% year over year.
Sales of power products were $95 million.
A decline of 3% sequentially and an increase of 50% year over year.
The sequential decline was driven by data center, where we allocated wafers to other areas of our business as we see some near term inventory consumption.
Sales through our distribution remained strong and with 39% of Q3 sales and we continue to work with our partners to restock inventories to more normalized levels versus the trough levels. We saw earlier this year.
Once again, no single customer represented more than 10% of sales.
And sales by geography, where again, well balanced with 26% of sales in China.
84% of sales in the rest of Asia, 18% in Japan, and 16% in both Europe and North America.
Turning to profitability gross margin was 58% an increase of 180 basis points compared to Q2, driven by favorable mix continued positive foreign exchange and leverage in our assembly and test facility.
Foreign exchange contributed an incremental 50 basis points compared to Q2, and 180 basis points compared to rates at the beginning of our fiscal year.
Operating expenses increased by 2% sequentially on a dollar basis and declined as a percentage of sales to 27, 7% compared to 28, 3% of sales in Q2 and 31, 7% in Q3 of fiscal 'twenty two.
Third quarter research and development expenses were 15% of sales and SG&A expenses was 13% down sequentially and contributing to strong operating leverage.
Operating income was 33% of sales up from 27, 9% in Q2, and 23, 1% a year ago.
Operating income increased by 14% sequentially on a comparable sales increase of 5%.
The effective tax rate in the quarter was 9% lower than our guidance due to a change in the treatment of certain foreign R&D credits.
We now expect our full year fiscal <unk> non-GAAP tax rate to be approximately 11%.
The Q3 share count was $193 9 million shares and net income was $68 8 million.
<unk> 35 per diluted share and.
An increase of 13% sequentially and 84% year over year.
Moving to the balance sheet and cash flow, we ended Q3 with cash and equivalents of $344 million.
In terms of working capital DSO was 47 days consistent with Q2 and days of inventory one 102 days up from 85 days in Q2.
Cash flow from operations was $54 million.
Capital expenditures, primarily for wafer probe and test equipment were $14 million and free cash flow was $40 million.
Finally, turning to our Q4 outlook.
We expect sales in the fourth quarter to be in the range of $260 million to $270 million and at the midpoint of this range. We are projecting a full year sales increase of 26%.
We expect Q4 gross margins to be approximately 57%.
And expect operating expenses to be between 27 and 28% of sales.
Based upon current tax legislation, we expect our non-GAAP tax rate to be approximately 11% and.
And our diluted share count to be approximately 194 million shares.
Using these assumptions, we anticipate non-GAAP earnings per share to be in the range of 35 to 37.
As a reminder, our fiscal 'twenty three fourth quarter includes 14 weeks and ends on March 31.
I will now turn the call back if any.
Thank you Derek we're pleased to have delivered another quarter of record performance. These results are a testament to our market focus.
As well as our innovative product portfolio and considerable engineering talent I want to thank our teams across the world for their hard work and dedication and going above and beyond to serve our customers.
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 through the next decade.
Our continuous innovation and differentiated solutions for our strategic focus areas gives us confidence in <unk> ability to outperform the markets we serve.
I will close on a very positive and satisfying node.
As evidence of our emphasis on customer intimacy and pushed to cultivate more direct OEM engagement Allegra was recently awarded the best cooperation supplier of 2022 by midyear a tier one.
And Geely a major Chinese OEM.
We're pleased with this recognition and will continue to find ways to get even closer to our customers as we have them tackled challenging problems with that we will be glad to take your questions Julien.
Thank you Bonnie This concludes management's prepared remarks, we will now open the call for questions.
Please review Q&A instructions.
As a reminder to ask a question. Please 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, please standby, while we compile the Q&A roster.
Okay.
And our first question will come from Gary Mobley of Wells Fargo. Your line is open.
Good morning, everybody.
Welcome Julian will be good.
Talk with you again.
I wanted to start out by <unk>.
Probing a little bit deeper into comment Derek made with respect to backlog still at a year's worth.
Backlog.
I know earlier this summer or I guess in the summer you stress tested the backlog, giving customers an opportunity to cancel or defer some of those orders have you stress tested more more recently that backlog and what was the outcome itself.
Yes, Gary this is derrick thank you.
We've continued to work with our customers throughout Q2 and throughout Q3 and continue to work with them to better align our lead times to deliver what the customers want and quite frankly to work down our past due backlog as a result of that we have continued to allow cancellations here into Q3.
Installations in Q3 was slightly higher than Q2.
And backlog is coming down as we expect it to come down that it's not getting to normalized levels will continue to work with our customers on that we still have well over a year's worth of backlog and approximately 20% of that is still past due.
Yeah.
Thanks for the color Eric wanted to ask about gross margin and the outperformance there I know in the.
First half of the year, there was a tailwind from foreign exchange, but if I'm not mistaken.
Foreign exchange wasn't as favorable throughout the third quarter or was it.
And.
With 57% gross margin guidance for the fourth quarter, obviously 200 basis points or.
A little bit less above your targeted range is there a new view on the long term targeted range there.
Thank you.
Yes, so foreign exchange continued to be a pervasive tailwind in Q3, and if I look at our gross margins in Q2, there were 56, 2% and if I took out foreign exchange Q2 was about 55% Q3, you had about 180 basis points of foreign exchange, if I compare that to rates at the beginning of the year. So excluding the complete <unk>.
In exchange compared to the beginning of this year. It was about 56, 2%. So the mix did contribute.
When extra 120 basis points in Q3 here Q4 still has some foreign exchange and Gary So if I take out the foreign exchange in Q4, it's probably somewhere between 55% and 56 gross margin on an operational basis.
Thank you.
One moment.
And our next question comes from Joshua Buchalter of Cowen Your line is open.
Hey, Dave Thanks for thanks for taking my questions and congrats on another solid quarter.
I wanted to ask about the polar investment.
I know youre, working with with UMC and TSMC to expand your capacity.
Sort of I guess, a realistic timeline where.
This incremental investment at polar could.
You start meaningfully contributing to your total output potential and I guess.
I assume it is going to be a little bit. So could you update us on how you're feeling about your ability to get more output out of TSMC and UMC in the in the shorter term. Thank you.
Yes, Hi, Josh Thanks for the question.
First on polar.
We're really excited about this new development, we believe that it's going to be really important.
It's a really important development for us and for our customers as we will be able to making the necessary technology investments and capacity enhancements to serve our customers for many years to come.
Timeline in terms of getting the new capacity and technology online, we're still probably two to three years out it's largely based on lead time for equipment and qualification of those lines. So we don't expect it to be a meaningful contribution to our wafer capacity for at least the next two to three years in.
Meantime, we are working with our other foundry partners to get increased allocation for the coming fiscal year.
And as we get into.
The guidance for the upcoming year will shed more light on that.
I appreciate the color. Thank you for my follow up I wanted to ask about inventories I think in the past we felt to do sort of 100 to 110 day target it sounds like Youre, making good progress on building up the die bank and slowly.
Lowering lead times, but there's still work to do so I guess is that a fair assumption that at least for the near and medium term that 100.
<unk> 10 day target.
I guess two low thank you.
Yes, Josh Good question. This is Derek we're going to continue to build wafer bank in particular here in Q4, and that's really an area that during the pandemic and coming out of the pandemic, we struggled with being able to build any wafer in die bank. As a result, our lead times went out of our past due backlog went up so we have a real focus on trying to reduce that past due backlog.
Improved lead times, we're making allocation decisions to put product in the right place. So we're not building inventory at customers.
I'd expect that our wafer bank in particular will continue to build here over the next the short term.
Got it thanks.
Hello, Matt.
And our next question comes from Blayne Curtis of Barclays. Your line is open.
Thanks, Tim My question I had two.
I just want to ask one on the datacenter you mentioned a bit of a pause and reallocating.
Those wafers, maybe you can just elaborate on where you're seeing that and then the second one I just kind of youre hearing more about 48 volt servers and some changes of data center plans, if any thoughts for that data center business.
As you look to the calendar year.
Yes, Blayne. Thank you for the question. So data center continues to be a really important growth vector for us and.
We see some really strong momentum continued momentum with our design wins, having said that and we've alluded to this before we do see a little bit of an inventory digestion in data center and so we've made some very proactive and cautious efforts to allocate our wafer supply to areas, where we have been stressed for a while.
And as Eric pointed out earlier.
Four.
We still have a significant amount of our past due backlog that we are trying to serve so thats really what went into making those decisions. When we think about the 48 40.
<unk> 48 volts trajectory in data centers.
We don't really see any change in momentum there and thats actually underpinned by the design wins, we are seeing in that in that segment.
Okay got you and then I just wanted to follow up on the prior question on the polar investment I think the prior arrangement kind of inserted you guys kind of positive transfer payments. So if polar had lower utilizations. There wasn't really impactful to you I'm kind of curious with this new investment.
Would you be kind of sharing in the utilization and kind of the cost structure any different or is it similar to what you had in place before.
Yes, Blayne this is derrick.
The cost structure, we have I would say market based competitive pricing with polar right now it's probably in between the pricing of our other partners.
That's part of the reason why we're excited about this I think the investment will allow them actually overtime to reduce the cost with scale with that fab, we have not been paying transfer pricing.
Larger ONR pace transfer pricing for polar and in fact as a result of this transaction will go from owning about 30% of polar right now to around 14%. So it'll be some slight benefits in accounting.
And there won't be any transfer pricing, it's largely market based pricing with a.
Long term wafer agreement that's market based.
Thanks.
One moment.
Our next question comes from Quinn Bolton.
From Needham <unk> Company. Your line is open.
Hey, guys. Congratulations on the 30% op margin just one quick follow up on the polar investment as a minority shareholder or you guys required to contribute any capex to this expansion or is that all handled.
Separately by bipolar.
Quinn this is Derek we're not required to contribute any capex will own about 14% of polar we've owned 30% right now and have not been required to contribute any capex and thats really one of the wonderful things about this is the polar fab, we will get the investment they need to improve their technology from both one equity partners coupled with some proposed chipset.
Funding.
Got it my.
Question is.
Your lead times, starting to compress as you build Thai Bank and you said in the near term it sounds like youre going to be rebuilding some channel inventories can you just I know youre not giving guidance beyond the March quarter, but how are you thinking about the next several quarters.
Do you as you see lead times compressed you expect.
Period of.
Sort of a pause in sales or do you think you can.
To grow through this.
Period of compression in lead times, and the backlog normal normalizing over the next several quarters.
Yes, Greg that's a really great question I would say.
What we're trying to do with building wafer in Die Bank is really about improving lead times for our customers. It's a customer service issue for us.
Having said that we would expect.
No real pause in our sales growth as Derek wanted out we have.
With a backlog.
Keep reducing past due and make sure that we are servicing customers the way we.
Want to service them and so thats really what the wafer in the <unk> cloud.
Understood. Thank you.
One moment.
Yes.
And our next question will come from Matt <unk>.
Jay Rakesh Mojito group your line is open.
Yes.
And Vijay your line is open.
Yes, hi.
Great quarter and guide here just a quick question on the EV side I think you guys mentioned EV growing 30% in fiscal 'twenty. One is that right and just wondering if that's conservative if you start to see the EV side start to expand faster given all the price cuts in the channel.
Yes, Vijay that's a great question.
Using third party data at this point.
So I think it remains to be seen if the price cuts actually accelerated the EV penetration.
We think there is potentially lastly to see elasticity there so.
At this point, we're just relying on the third party data here with a 30%.
And in terms of applications.
You talked about higher content.
Much higher on the EBIT side.
The sensors, you talked about $90.
Unit on the EBIT side do you see broadly.
Broadly that driving.
<unk> market share higher as you go into.
Into calendar 'twenty fiscal 'twenty forward I guess the question is do you see that application space expanding in Evs.
Yes.
Richard just to just to be clear so the $90.
Our content opportunity and that includes our newest acquisition heyday, which brings to us isolated I worked at the gate drivers.
I would say that broadly and directionally our content opportunity on Evs is one 6% or twice that of what we have in our standard ice vehicle and certainly as you look at the application set.
We believe that we have leadership in the applications that are specific to an EV around current sensing around motor drivers and then isolated gate drivers and so we would expect to see share expansion as we as Evs take off.
The heyday revenue is probably two to three years out at this point. So that's just a nuance there.
Got it and just a quick last question I think in the past you had mentioned.
The foundry capacity has been one of the gating.
Factors on your.
Top line are you seeing better capacity allocation now from your foundry.
Yes, so it is incrementally getting better VJ and I would say the long term looks really good we have to work through the near term here as the increased allocation starts to make its way through our backend, but that's the dynamic we're dealing with.
Got it great. Thanks, a lot.
Thank you.
One moment.
And our next question will come from Alexandra Becky.
Of William Blair Your line is Covid.
Sorry, I echo the congratulations on the strong quarter and Vijay took a couple of my questions on EV. So maybe Derek just one for you a housekeeping question more so just on Opex you guys dug a tremendous job kind of getting opex down to that 27% to 28%.
On a scale that you guys had alluded to at the beginning of the year.
Even with inflationary pressures how should we think about that as we look forward to next year and maybe walk us through some of the puts and takes.
Yes, Thank you Alex good morning.
The way to look at it is that 27%, 28% that we had in both Q3 and going into Q4 still include some elevated variable compensation as well, which will reset at the beginning of our fiscal year on April one so that will be a natural decrease in that.
At the beginning of the year and as I said before we expect to invest significantly in research and development, particularly in these focus areas, where we have leadership and want to maintain that leadership. So the target is to invest about 15% of sales and research and development and we were about there in Q3 <unk>.
SG&A came down to about 13% of sales and I would expect that as a percentage of sales to continue to come down as that won't grow any more than inflation, what I mean by inflation as sort of normalized inflation. So that's the way to look at Opex.
Perfect that was very helpful. Thank you.
Again, ladies and gentlemen, if you do have a question. Please press star one on your telephone.
Ken Please press star one one for questions.
Okay.
And I'm showing no further questions I would now like to hand, the conference back to Julian <unk> for closing remarks.
Thank you Tanya before closing out the call. We are excited to announce that allegra plans to host its inaugural analyst day event on March 14th.
Rockefeller Plaza in New York with virtual accessibility.
Stay tuned for additional information for this invitation only event.
We appreciate your taking the time to join US today. This concludes this mornings conference call.
Yes.
This concludes today's conference call. Thank.
Thank you for your participation you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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