Q1 2024 Allegro MicroSystems Inc Earnings Call
Yes.
Hum.
Yeah.
Yeah.
Good morning, and welcome to Allegro Microsystems first quarter fiscal 'twenty 'twenty four earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one and one on your telephone.
You built in here and automated message advising your hand is raised to withdraw your question. Please press star one again.
Be advised that today's conference is being recorded I would now like to hand, the conference over to gelling older Vice President of Investor Relations and corporate communications.
Thank you Carmen good morning, and thank you for joining us today to discuss.
First fiscal quarter 2024 results.
I'm joined today by <unk>, President and Chief Executive Officer.
Oh wallet.
As Chief Financial Officer Derek.
They will provide highlights of our business.
Review, our quarterly financial performance and share our second quarter outlook.
We will follow our prepared remarks for the Q&A session.
Our earnings release and prepared remarks include certain non-GAAP financial measures. The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release, which is available on the Investor Relations page of our website at Www Dot Allegro micro dot.
Dot com.
This call is also being webcast and a replay will be available in the events and presentations section of our IR page shortly.
During the course of this conference call, we will make projections or other forward looking statements regarding future events or the future financial performance of the company.
We wish to caution that such statements are based on current expectations and assumptions as of todays date.
And as a result, as a result are subject to risks and uncertainties that could cause actual results or events to differ materially from projections.
Factors that can cause our business, including factors that could cause actual results to differ from our forward. Looking statements are described in detail in our earnings release for the first quarter of fiscal 2024.
Our most recent periodic filings with Securities and Exchange Commission.
Our estimates or other forward looking statements may change and the company assumes no obligation to update forward looking statements to reflect actual results changed and assumptions or other events that may occur except as required by law.
It is now my pleasure to turn the call over to <unk>, President and CEO .
Sorry go wallet Vineet.
Thank you Julian and good morning, and thank you all for joining us for our first quarter 2024 conference call.
Im pleased to report that we had a strong start to fiscal year 2024.
Record sales of two <unk>.
$178 million up 28% year over year.
On a trailing 12 month basis, we achieved a $1 billion in sales, marking a new milestone.
We also achieved record non-GAAP earnings per share of 39, an increase of 63% year over year.
Our financial performance demonstrates the progress, we're making towards executing the strategy that we laid out at our recent analyst day event.
We continue to sharpen our market focus on E mobility, and select industrial markets, including clean energy and automation.
Sales in these strategic growth areas, increasing 63% year over year to $159 million or 57% of total sales up from 45% in Q1 of 2023.
Yeah.
E mobility, which includes the increasing electrification of vehicles.
Adoption of Adas feature sets.
To drive growth above market growth.
Total Q1 automotive revenue grew 27% year over year outpacing auto production growth of approximately 6% for the same period.
Sales into E mobility applications increased by 58% year over year and represented 48% for Q1 automotive sales up from 39% in Q1 of 2023.
Our solutions based design approach continues to be well received by our customers.
Nearly 60% of first quarter automotive design wins.
<unk>.
Recent example, during the quarter was a multi portfolio a chipset Adas design win with a leading north American OEM further validating our strong value proposition.
Our design win momentum and a significant content opportunity associated with those design wins continues to drive above market performance in automotive.
Moving on to the industrial market growth in clean energy and automation drove 70% year over year sales increase in Q1, resulting in record industrial sales.
First quarter industrial design wins leverage our sensor technology for D C charging residential solar and water and energy storage applications, where we see expanding opportunities for our solutions.
We continue to align our investments in R&D and customer support capabilities to focus on high growth secular megatrends in automotive and industrial markets that intersect with our technical expertise and market, leading sensor and power product portfolios.
Okay.
I am excited about the launch this quarter or the first device in our new power through portfolio that Leverages technology from our acquisition of integrated circuits last October .
In addition to validating our ongoing commitment to innovation and execution. This launch serves as a proof point for the rapid pace at which our team to integrate new technologies into commercially viable and market ready products.
Our new power through isolated gate driver offers a single package solution with an up to 50% smaller footprint and a 40% efficiency improvement competitor committed competitor offerings.
This helps designers achieved efficiency and power density goes in clean energy and E mobility applications.
This is especially important for highest switching speeds inherent in Gan and Sig. We're powered through helps unlock the full potential of these wide bandgap technologies.
This is the first of many new products to come in our new powerful portfolio and I want to congratulate the team on this first and very important milestone.
Next I wanted to talk about another important milestone.
First in our ESG journey.
I am pleased to have released our inaugural ESG report just last week.
Which highlights the significant steps, we have taken thus far towards building a more sustainable future.
Our commitment to ESG is directly aligned to our corporate strategy and growth clients sort of products, we innovate and the applications to enable which in turn support a greener and more sustainable world.
In addition to solving customer challenges like reducing emissions, making applications more energy efficient and harnessing renewable energy. Our innovative teams are also imagining ways to enhance our impact on the communities, where we live and work.
As we add to the need for more clean energy with innovative efficient socially responsible and environmentally conscious solutions. We're building long term value for all our stakeholders.
I want to thank our teams who delivered another outstanding quarter, while further accelerating our strategy with the launch of innovative new products and moving our ESG initiative forward.
Could not be prouder of our team and what we continue to build everyday executing our strategy and serving our customers.
Now I'll turn the call over to Derek to review, the Q1 financial results and provide guidance for our second quarter Derek.
Thank you Manny good morning, everyone.
Starting with a summary of our Q1 financial results Q1 sales were a record $278 million gross margin was 57, 8% operating expenses were 27% of sales operating income was 38% and adjusted EBITDA was $36 three.
3% of sales.
As a result earnings were 39 per share an increase of 63% compared to Q1 of fiscal 'twenty three.
Sales in the first quarter increased by 28% compared to Q1 of fiscal 'twenty, three and 3% sequentially.
As a reminder, our Q4 had 14 weeks and on a comparable 13 week basis first quarter sales increased by 11% sequentially.
Please keep this in mind with respect to all sequential comparisons.
Sales to our automotive customers were $190 million or 68% of Q1 sales.
An increase of 4% sequentially and 27% year over year.
Within automotive E mobility sales increased by 7% sequentially and 58% year over year, representing 48% of first quarter sales up from 39% a year ago.
Industrial sales were $68 million.
Increasing 18% sequentially and nearly 70% year over year.
Led by automation and clean energy.
Other sales, which includes consumer and computer applications were $20 million declining, 30% sequentially and 27% year over year.
From a product perspective magnetic sensor sales were $174 million.
Increasing 4% sequentially and 27% year over year.
And sales of our power products with $104 million, increasing 1% sequentially and 29% year over year.
Sales through distribution represented 56% of our first quarter sales, reflecting the transition from <unk> to a Japanese distribution channel during the quarter.
Excluding Japan Q1 distribution sales were approximately 41% of sales compared to 43% in Q4, and 37% a year ago.
Once again, no single end customer represented more than 10% of Q1 sales.
Sales by geography were well balanced.
With 22% of sales involve China and the rest of Asia.
21% in the Americas, 20% in Europe , and 15% in Japan.
Now turning to Q1 profitability.
Gross margin was 57, 8% consistent with Q4 and above our guidance range of approximately 56% due to favorable product and channel mix as well as favorable foreign exchange.
Operating expenses were $75 million or 27% of sales compared to 28% in Q4, and 30% a year ago.
First quarter R&D expenses were 14% of sales and SG&A was 13% of sales.
Operating margin was 38% compared to 32% in Q4, and 25, 3% a year ago.
Operating margin dollars increased by 56% year over year on a comparable sales increase of 28%.
Demonstrating the continued leverage in our operating model.
The effective tax rate for the quarter was 12, 6% slightly higher than our guidance of 11% due to the geographical mix of income.
The first quarter diluted share count was $194 9 million shares and net income was $77 million.
Or <unk> 39 per diluted share an increase of 5% sequentially.
63% year over year.
Moving to the balance sheet and cash flow we.
We ended Q1 with cash of $362 million.
Cash flow from operations in the first quarter was $49 million consistent with Q4 and free cash flow was $4 million.
We also significantly enhanced our liquidity by closing a new $224 million revolving credit facility to replace an expiring $50 million revolver.
From a working capital perspective first quarter DSO was 40 days compared to 45 days in Q4 and days of inventory were 132 days compared to 127 days in Q4.
As discussed in our last call, we continue to rebuild our wafer and die bank, which allowed us to reduce our delinquent backlog and improve our lead times, which declined by approximately 30% in Q1.
We are also investing to expand our operations in the Philippines to support anticipated future growth and first quarter capital expenditures were $45 million.
Before I turn to Q2 guidance I'll provide some color on what we're seeing in the business environment.
Automotive in certain industrial markets, including clean energy and automation have been resilient in the first half of calendar 'twenty three.
Double digit market growth projections for our strategic growth areas.
And our design win momentum continue to give us confidence in the low double digit long term growth targets that we articulated at our March analyst day.
Global Auto production remains robust and is expected to increase by 5% in calendar 'twenty three to nearly 87 million units and EV sales are projected to grow by approximately 30%.
In the industrial market government policies regulations and investments are driving the clean energy market with an estimated one seven trillion and investments announced this year.
We are however, cautious in the near term given the macroeconomic uncertainty with increasing interest rates inflation and geopolitical concerns.
More specifically, we are monitoring China closely where auto production declined 15% in the first half of calendar 'twenty three.
Our sales in China in Q1 declined 13% sequentially or.
Or 7% on a comparable 13 week basis.
We are seeing multiple factors at play in China.
But we haven't finished goods inventory is higher than normal due to the transition to more stringent emission standards.
And at the same time Chinese renewal of its new energy vehicle tax incentives combined with OEM price reductions are expected to increase sales volumes in the midterm.
And as a reminder, our sales a very well balanced geographically China represents about a quarter of our sales.
We believe that our products and strategy will drive long term above market growth.
But macro uncertainty and rapidly changing business environment, particularly in China. It makes it difficult to predict precisely predict quarter to quarter impacts.
We are watching these macroeconomic factors and leading indicators in our business closely. So we can best serve our customers and continue to execute to our target financial model.
Now with that backdrop, I'll turn to Q2 outlook.
We expect sales in the second quarter to be in the range of $270 million to $280 million.
The midpoint of this range is a 16% increase compared to Q2 of fiscal 'twenty three.
We expect gross margins to be between 56 and 57%.
Reflecting the projected product and channel mix.
And we expect operating expenses to be between 26 and 27% of sales.
We expect our non-GAAP tax rate to be approximately 13% and.
And our diluted share count to be approximately 196 million shares.
Based upon these assumptions, we anticipate non-GAAP earnings per share to be in the range of 35% to 39 per share.
Now I'll turn the call back over to Julien for questions Julien.
Thank you Derek this.
This concludes management's prepared remarks before we open the call for your questions I'd like to share our second fiscal quarter conference lineup.
We are attending needham's virtual semiconductor and semi cap one on one conference on August 20 <unk>.
And Jefferies semiconductor semiconductor hardware and communications summit on August 30th at the four seasons hotel in Chicago.
We will now open the call for your questions Carmen. Please review the Q&A instructions.
Jeremy.
And I will ask our participants to please keep your questions to one and one follow up to do so please press star one on your telephone and wait for your name to be announced to withdraw the question simply press Star one again.
While we compile the Q&A roster.
Our first question comes from the line of Gary Mobley with Wells Fargo Securities. Please proceed.
Thank you good morning, everybody. Thanks for taking my question.
Eric I appreciate the qualitative comments with respect.
Visibility, but maybe if you can quantify things a little bit more.
And quantify what your customer order lead times are given that lead delinquent backlog as you cited is down 30% sequentially and maybe if you can quantify where your backlog today relative to where it has been recently and.
Sort of revenue coverage you might be.
Contemplating in the in the second quarter revenue guidance.
Hey, Gary This is bill thanks for the question.
No.
You asked for.
Few questions in that.
So let's take it one by one.
I would say that I think starting with lead times, we're really pleased with the work. The teams have done to bring our lead times back into Warner with football industry standard lead times. There is a few packages I would say is still constrained we're working through those but on the whole.
We are very pleased with the progress we've made and as we've said before as lead times come back into normal range. We expect the backlog to moderate so I would say the backlog is now back in what I would consider normal levels as well.
That said our order patterns continue to be very strong.
Design wins continue to be really good and so on the mid to long term and some of the visibility we get into our forward looking business.
It makes us feel really confident about the growth rates that we committed to at the analyst day.
Doug I don't know if you want to add more to that yes, Gary with respect to Q2, we feel really good about the Q2 guidance that is largely covered by our backlog and within that we'd expect auto to be up marginally and industrial and other kind of be flat to down slightly in Q2 based upon the projected shipments that we have scheduled in our backlog.
<unk>.
That is helpful and if I could ask a follow up question about gross margin I believe the beat in the first quarter was about 180 basis point, maybe if you can.
Single out the contributing factors between mix revenue mix and FX tailwind in <unk>.
Embedded in your Q2 gross margin guide is there an expectation of continuation to the foreign exchange tailwind.
Yes. Thank you Gary this is Derek so it's really the larger pointed out Q1 beat was on the product mix and that will vary from quarter to quarter. So we had a very favorable product mix. In Q1. We've also benefited from the transition in Japan for <unk> is that distributor is a tier one distributor to the distribution channel and Thats been margin all the foreign exchange.
<unk> was a smaller piece of Q1. It was still impactful we do expect that to start to normalize in Q2. So Q2s guidance reflects our projected shipment mix along with normalization of the U S dollar and the Philippine peso.
Got it thank you all.
Thank you one moment for our next question. Please.
And it comes from the line of Joshua <unk> with TD Cowen. Please proceed.
Hey, guys. Thanks for taking my question I wanted to follow up on the segment guidance you just gave.
Maybe sandy.
Back into the numbers correctly, which is a big if.
The industrial segment it seems like it's going to be down after a couple of quarters of very strong growth is there any sort of inventory digestion going on there and then.
Same thing with the other segment it suggests down pretty sharply again in the fiscal second quarter.
Are we how close can refer that.
To that bottoming. Thank you.
Yes, Josh this is Derek so the results the last couple of quarters, particularly the mix between market and even in Q1 were really a result of what we've shipped shipping out of backlog, making allocation decisions going into Q2. There is still some of that from a distribution channel standpoint, we're at target levels right now will continue to rebuild that distribution channel over the last.
Four quarters.
You know that trough at about a year ago. We've continued I think to work with our distributors were at target levels right now and our distribution channels. So within Q2, I would expect sales to distribution to be down marginally and sales to Oems to be up slightly.
Okay got it. Thank you for that color and then I also wanted to ask about <unk>.
China from your prepared remarks.
You mentioned declined 7% in the quarter was that.
Commentary, mainly focused on autos or was it more broadly across your other segment and do you expect China to grow into the back half of the year as some of the auto numbers have picked up in recent months. Thank you.
Hey, Josh this is Ernie so I'll take that one I think before.
Jump into some China specific remarks.
Context here is that anytime you've got a big technology a market transition.
It's never a straight line right it's never linear.
And the transition to an all electric future is going to be no different now China does have some specific issues that is dealing with.
But we believe that.
In the near term there is going to be choppiness across all our end markets Derek pointed out that auto production declined in China in the first half.
We're certainly seeing some impact of that industrial continues to be.
From an inventory standpoint still elevated.
But make no mistake, China is a very important region for us it's very important for the entire automotive industry is the leader by volume when it comes to orders in Evs.
And local Chinese Oems are Chinese brands and are playing a much bigger role in the global stage. When it comes to <unk>. So we're really confident and have a lot of conviction in our mid to long term pieces around China and the China Oems near term like we said, it's going to be a choppy market, it's a little bit like solving for multi variable calculus right.
Lot of variables at play.
And as Eric pointed out it's a little hard to pinpoint the quarter to quarter transition exactly but we feel really good about the mid to long term perspective in China.
And I'll leave the multi variable calculus for you guys. Thanks for all the color.
Thank you and as a reminder, if you do have a question simply press star one on one to get into Q1 moment for our next question.
And he comes from the line of Chris Caso with Wolfe Research. Please proceed.
Yes. Thank you good morning, I guess, the first question would be around lead times and I think your comment said that they were down about 30%.
In the first quarter can you talk about where that stands against where lead times would normally be.
And our.
Is increasing supply still.
Likely to bring those lead times down further as.
As we go through the year and what impact that may have on your order rates.
Yeah, Hi, Chris This is Nate I'll take that one so our lead times as I said.
Our teams have done a great job of reducing our delinquent backlog and bringing the lead times back into what we would consider a market competitive or industry standard having said that we do have plans to further.
<unk> reduced our lead times, especially targeted around our distribution channel and some of our industrial customers where point of sale really matters.
So you can expect us to continue to bring down our lead times I think from an inventory level that it can add some more but we feel really good about where we are with our inventory levels now.
And the nature of that inventory being in sort of dive back I think gives us a lot of optionality.
Yes, and I think Chris I expect inventory levels from a dollar standpoint to flatten out from here on as many mentioned we have sufficient die bank and it's really there to support our customers from a quick turn standpoint. So we feel good about the current levels, but I wouldn't expect it to increase from here.
Okay great.
As a follow up follow up is on pricing and I guess, we've heard some commentary from others, perhaps some uncertainty about what will happen with foundry pricing.
As we go into next year can you talk about your view of what you think is the cost situation as you go into calendar 'twenty four and if that changes how that may affect.
Your pricing to your customers and your revenue.
On a year on year basis next year.
Yes, Chris maybe I'll start with the second thought for us. So we've been very consistent in our commentary around pricing.
And our pricing, especially in our automotive business, which is about 70% of our business has always been value proposition base. We are in long term agreements with most of our customer base, it's very hard for us to sort of do transactional pricing. So it's not a question of input costs go up or down X and hence price goes up or.
Don why.
So I think our value.
And the innovation, we're driving our products helps drive.
The value proposition and the pricing equation and so we feel really good about the stickiness of that pricing as we go forward from an input cost standpoint, I would say that the pace of change has moderated but inflation hasn't completely gone away and so we are in active dialogue with some of our major suppliers and partners around.
What's changing and what to expect as we go into the next calendar year.
We feel good about balancing sort of the input and the output here from a cost standpoint.
Got it thank you.
Thank you.
One moment for our next question please.
And it comes from the line of Quinn Bolton with Needham and company. Please proceed.
Hey, guys congratulations on the nice quarter and outlook I guess, just wanted to come back to your commentary around the China market. It sounds like Youre seeing perhaps some volatility in the auto business in China, but if you look beyond China I assume the rest of the geographies you are not seeing anything that.
Makes you nervous about.
The outlook for the other geographies is that the right interpretation of your prepared comments.
Yes. Thank you that's exactly right so I would say.
When we look at our other regions.
Order patterns.
Stability is fairly consistent with what we've seen in our past quarters.
It is really China and the commentary was very China specific that it's hard to sort of pinpoint exactly.
Water to quarter transitions, we are really bullish about the mid to long term, but in the near term there are multiple variables at play that make it really hard to pinpoint a quarter to quarter transition. So it is very China specific the rest of the regions I think R. R.
Performing as we expected and certainly we see.
We're watching it closely.
We don't see any.
Near term churn in those regions and Glenn as you know one of the nice parts about our business is that each of the sort of five regions are approximately 20% of our sales so it's pretty well balanced.
Got it and just a follow up on that on the China business I don't know if I missed it but did you make comments about where you thought dealer inventory levels were within China, I know production. It seems like it slowed but do you have any thoughts on on inventory levels of vehicles within the China market are they elevated or are they back to normal I think some of your.
Auto peers had suggested that dealer inventories in China may now back be back to more normal levels.
Yes.
What we what we commented on was that there is a phenomenon happening right now in China, where there is a transition to a more stringent emissions standards.
And that has driven.
And with excess inventory of the leftover models that are perhaps not compliant to the new emission standard. So that's going to take a little bit of time to work through this is pretty consistent with what Oems have commented publicly as well as other tiers have so we're not alone in seeing this phenomenon.
Having said that we see the EV market continued to grow nicely and the added incentives that exist in China were renewed in China around Evs I think are going to be really good for the long term growth with the EV market.
Perfect and then just maybe for Derek just on the wafer allocations among TSMC UMC and polar.
Is there any sort of mix shift that you see this year among your suppliers that.
Could create either margin tailwind or headwinds or do you think that the margin outlook and foundry pricing is pretty stable.
So I don't anticipate a significant shift in the mix in Q1, it was about 20% poll over 70% UFC and give or take 10% TSMC that will vary a bit quarter to quarter and pricing and the revenue per wafer will vary as well. So I don't anticipate that having a significant impact on our gross margins.
As <unk> mentioned, we also continue to work with our customers and our vendors to make sure we're marching towards our target financial model of weight, but I don't anticipate the wafer allocation itself to have a significant impact on our gross margins this year.
Okay. Thank you.
Thank you and for our audience as a reminder, if you do have a question press. The Star then one one to get into Q1 moment. Please.
Right Im not showing any further questions I will turn it back to Alan who will go for her final remarks.
Kevin I'm not sure if you can hear us or not but.
Go ahead.
Okay. Thank you so much we appreciate everybody for taking the time to join US today. This concludes this mornings conference call.
Thank you all for participating and you may now disconnect.
Okay.
[music].
Okay.
Sure.
Yes.
Yes.
Okay.
Okay.
[music].
Okay.
Okay.
[music].
Yes.
[music].