Q3 2024 Allegro MicroSystems Inc Earnings Call

Okay.

Okay.

Good morning, and what I can say Allegro Microsystems third quarter fiscal 2024 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone you didn't hear it automated Mr device in their hand as race to withdraw your question. Please press star one again.

Please be advised today's conference is being recorded I would now like to turn the conference over to Charlie <unk>, Vice President of Investor Relations and corporate communications.

Thank you Kevin Good morning, and thank you for joining us today to discuss <unk>.

Third fiscal quarter of 2024 results.

I'm joined today by <unk>, President and Chief Executive Officer, Vineet, Naga wallet, and Chief Financial Officer Derek.

They will provide highlights of our business review, our quarterly financial performance and share our fourth quarter and full fiscal year 2024 outlet.

We will follow our prepared remarks for the Q&A session.

Our earnings release and prepared remarks to include certain non-GAAP financial measures the non.

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 in the Investor Relations page of our website at Www Dot Allegro micro 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 and 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 are subject to risks and uncertainties that could cause actual results or events to differ materially from projections.

Important factors that can affect our business, including factors that could cause actual results to differ from our forward. Looking statements are described in detail in our earnings release for the third quarter of fiscal 2024.

And in our most recent periodic filings with the 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 changes to assumptions or other events that may occur except as required by law.

It is now my pleasure to turn the call over to Allegra, President and CEO Vinny Vinny.

Bonnie.

Thank you Julian and good morning, everybody and thank you for joining our third quarter fiscal year 2024 conference call.

I am pleased to report that we delivered another solid quarter against the weaker backdrop in fiscal Q3, consistent with expectations and our guidance.

While we expect continued inventory digestion across markets in the short term.

Our design win momentum continues at record levels and reinforces our confidence in our ability to grow above market over the mid to long term consistent with our target financial model.

Furthermore, we are actively managing the business to optimize profitability and cash flow throughout the cycle.

In Q3, we delivered sales of $255 million up 2% year over year, reflecting continued strength in automotive.

Sales in our strategic growth areas, including E mobility, and industrial which includes clean energy and automation.

Were up approximately 20% year over year to $150 million or 59% of total sales.

Innovation with purpose as I've talked about here.

During the quarter, we announced the launch of a second product for high voltage isolated gate drivers portfolio.

Although gross newest power through solution as crucial safety features designed to protect against high operating temperatures and electric powertrain systems.

It also provides high performance in noisy environments, President and micro Inverters and solar applications.

Our suppliers and datacenter applications and onboard Chargers for electric vehicles.

Recall that our high voltage isolated gate driver technology came to us through our acquisition of Hay day, just over a year ago.

The progress, we're making with our powerful product family demonstrates our ability to effectively integrate acquired technology and bring it to market quickly.

We are applying the same approach and intensity to our recent acquisition of <unk>, which further strengthens our magnetic sensing oxy portfolio and extends our leadership in this very important product category.

I am pleased to report that the integration of the Crocker steam as TMR technology is progressing really well.

The acquired business is fully transitioned into our systems and processes.

Product sales are underway with sampling activity accelerating in E mobility and industrial markets.

Both the Allegro in Caracas TMR offerings are now combined under a common Brian extreme SaaS, which now represents the world's leading and most comprehensive portfolio offering the highest accuracy the lowest power consumption and the highest sensitivity for the world's most demanding applications.

Feedback across the customer base has been very encouraging and a strong majority of our customer discussions recently at CES featured TMR.

Moving on to the broader macro environment industry estimates indicate that calendar year 2020 for automotive demand will be stable with continued growth in <unk>, which includes battery electric vehicles and full hybrids.

While <unk> adoption varies greatly by geography.

Growing number of exited launches proves that the momentum is strong and increasing.

Recall that the Allegro is well represented in all automotive segments with our solutions supporting all powertrains.

Today David.

That represents the majority of E mobility sales and X to be the fastest growing component.

And while E mobility is a key strategic focus nearly half of our automotive saves on and other automotive applications, such as ice powertrain and safety comfort and convenience, which is agnostic of the choice of powertrain.

Additionally, <unk> was use of both hybrid and full electric platforms to meet fuel economy and emissions regulations positions as well.

<unk> content and full hybrid vehicles.

Did that in Bv's with both significantly higher than that in ice and so allegra wins, no matter, which platforms Oems invested.

Automotive demand remains stable and we see continued strong momentum in E. Mobility, we are seeing certain inventory dynamics with tears and contract manufacturers are paring. It back inventory from the eight to 10 weeks during the supply chain crisis to pre pandemic levels of four to six weeks as carrying cost big of a factor.

And Oems and support premiums for inventory.

Despite these dynamics, we expect our automotive business to deliver above market growth for fiscal year 'twenty four consistent with our target financial model.

Our fourth quarter sales outlook comprehensive macroeconomic conditions, including ongoing inventory digestion in industrial and consumer markets as well as pockets of inventory rebalancing and automotive.

Looking to the future we continue to see strong design win activity with 80% of our Q3 design wins in our strategic growth areas and more than 50% in the area of E mobility.

Key highlights from our third quarter design wins include the following.

In automotive we were awarded multiple programs by a leading Japanese OEM for an X V platform.

This was for current sensors are onboard Chargers and AC motors and four a magnetic position sensors for electronic power steering systems.

In China, we were awarded multi solution design wins for X TV powertrains, and EPS systems with a leading automotive OEM using our current sensor and power technology.

In the industrial end market, we won several designs using our current and isolation sensor technology for clean energy applications, including solar and EV charging.

In data center applications, we recorded several design wins with our motor drivers with a major OEM for cooling high performance AI servers, using both traditional SaaS as well as liquid cooling.

We remain focused on serving our customers and extending our market leading positions.

We're investing for the future with a focus on maximizing growth and these strategic focus areas, but positioning the business to scale and grow profitably.

This focus is being rewarded by our customers with more business and our record design wins indicate that we are winning in the market in fact for fiscal year 2024, we're on track to close over a $1 billion in design wins with the majority of turning to revenue over the next three years.

This is proof that our strategy is working underpinning our confidence in our ability to deliver above market performance over the long term.

I wanted to thank our teams globally for serving our customers and the continued execution of our strategy.

I'll now turn the call over to Derek to review, the Q3 financial results and provide guidance for our fourth quarter Derek.

Thank you Bonnie good morning, everyone.

Starting with a summary of our Q3 financial results sales were $255 million gross margin was 54, 6% operating income was 27, 2% and adjusted EBITDA was 34% of sales.

As a result earnings were <unk> 32 per share, 10% above the midpoint of our guidance range and exceeding the high end.

Total Q3 sales decreased by 2% compared to Q3 of fiscal 'twenty three.

And sales to our automotive customers were $195 million, an increase of 18% year over year, and representing 76% of Q3 sales.

E mobility sales increased by 6% sequentially.

45% year over year.

Representing 54% of third quarter auto sales up from 44% a year ago.

Industrial sales were $46 million declining, 25% sequentially and 14% year over year.

Other sales, which includes consumer applications were $14 million down, 17% sequentially and 53% year over year.

Sales through our distribution channel, which comprised the majority of the industrial and other sales were down 10% sequentially as expected.

We continue to monitor channel point of sale sell through closely to manage inventories to appropriate levels.

From a product perspective magnetic sensor sales were $154 million declining, 13% sequentially and flat year over year.

Sales of our power products were $101 million, increasing 2% sequentially and 7% year over year.

Sales by geography, where again, well balanced with 30% of sales in China, 24% in the rest of Asia, 17%, Japan, 15% in Europe, and 14% in the Americas.

Now turning to Q3 profitability.

Gross margin was 54, 6% and in line with our expectations for the quarter.

Gross margin has remained healthy through this sales decline as a result of our fabless and our flexible manufacturing model.

Operating expenses were $70 million or 27% of sales.

Down from 28% of sales a year ago and included two months of purpose.

Third quarter R&D expenses were 15% of sales and SG&A was 12% of sales.

Operating margin was 27, 2% of sales compared to 31, 3% in Q2, and 30% a year ago.

The effective tax rate for the quarter was 10% slightly better than expected due to the geographical mix of income.

We are now projecting our full year non-GAAP tax rate to be approximately 12%.

The third quarter diluted share count was $194 6 million shares and net income was 62 million or <unk> 32 per share.

Moving to the balance sheet and cash flow, we ended Q3 with cash of $224 million cash.

Cash flow from operations in the quarter was $77 million and free cash flow was $42 million.

An increase of $27 million for more than 170% sequentially.

Okay.

From a working capital perspective, DSO was 41 days compared to 40 days in Q2.

Inventory declined by $8 million and days in inventory were 124 days compared to 136 days in Q2.

Capital expenditures in the third quarter with $34 million.

As we are completing our capacity expansion.

Our operations in the Philippines.

Also in the third quarter, we opened a new Philippines Tech and shared services Center.

Investments in R&D labs in strategic locations.

I'd like to take a few moments now to speak to the actions we are taking to optimize our financial performance with.

With a focus on free cash flow.

First we continue to prioritize investments in our strategic growth areas, specifically in R&D and sales.

However in response to the recent slowdown in sales, we have aligned factory costs with production levels and taken actions, which have contributed to an $8 million or 11% sequential decline in organic operating expenses.

We now expect organic operating expenses to decline by approximately 9% in the second half of fiscal 'twenty four compared to the first cash.

To further optimize cash flow, we are managing our material purchases, including wafers to align to current production levels.

We are also nearing the end of our most recent capacity expansion in the Philippines and as a result, we expect capex to decline by approximately $25 million or 30% in the second half of fiscal 'twenty four compared to the first half of the year.

Now I will provide a few additional updates on the <unk> acquisition.

As Bill mentioned integration is progressing well and planned synergies are on schedule.

In Q3, we completed the full systems integration and a number of tax and legal steps to allow us to utilize significant pre acquisition tax net operating losses and enable us to begin to realize tax and operating benefits.

Finally, I will turn into our Q4 and full year 2020 for outlook.

We expect fourth quarter sales to be in the range of $230 million to $240 million, which.

Which reflects continued inventory digestion.

At the midpoint of our Q4 guidance, we are projecting sales growth of 7% for fiscal 'twenty four with auto sales expected to grow in the high teens for fiscal 'twenty four.

Based on our current view and historical cycles, we estimate continued inventory digestion for a couple of quarters and we expect Q1 of fiscal 'twenty five or the June quarter to be our trough quarter.

We expect Q4 gross margin to be between $53, 54%, reflecting the projected product and channel mix.

We expect operating expenses to be approximately 31% of sales.

In Q4 operating expenses include a full quarter of crocus and the annual payroll tax reset.

We expect our non-GAAP tax rate to be approximately 12%.

Our diluted share count to be approximately 195 8 million shares.

As a result, we expect non-GAAP EPS to be between 19% and 23 per share.

Now I'll turn the call back to Julian for the Q&A session Julian Thank you Derrick.

This concludes management's prepared remarks before we open the call for your questions.

Like to share our fourth fiscal quarter conference lineup.

We are attending Wilson Amaral semiconductor conference on February 15th at the J Autograph collection in San Francisco, California.

Susquehanna 13th annual Technology Conference on March 1st with attendance virtual.

And Morgan Stanley's TMT conference on March 4th at the Palace Hotel in San Francisco, California.

We will now open the call for your questions. Kevin. Please review the Q&A instructions. Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered you assume with yourself from the queue. Please press star one again to provide the opportunity for everyone to ask a question. We ask that you limit yourself to one question and one follow up we will pause for a moment, while we can.

And Paula Q&A roster.

Our first question comes from Chris Caso with Wolfe Research Your line is open.

Yes. Thank you good morning.

Yes.

First question on.

The guidance for the March quarter, and some of the commentary you had on the June quarter as well could you characterize that between the auto and the industrial segment, obviously industrial has already pulled back quite a bit here from the peak.

In terms of the sequential decline that you expect for March and it seems like you're also.

Implying a sequential decline in June.

Or would that be broken out between the two segments.

Yes, Chris this is derrick.

So when I look at we don't really guide by market right, but when I think about Q4, we're seeing that would be across all end markets and thats really the inventory digestion, continuing particularly in industrial other is starting to come to a trough and then in auto it's been mentioned as a dynamics of inventory kind of clearing out in the auto market, we expect that to continue into Q4.

For Q1.

Yes, Chris This is Ben Thanks for the question So I think the.

We have been pretty transparent and have communicated.

Re digestion in the industrial and other markets I think the order dynamic is more recent and its really a rebalance.

I've engaged with CEO.

CEO of integrators Oems tiers, it's clear that the automotive OEM demand continues to be pretty stable.

And indeed, the ex EV production estimates continue to be very robust.

Really the pressure is coming from the contract manufacturer in the tier side, where the rebalancing of inventory back into the pre pandemic levels and Thats a little bit of what we're seeing here in fiscal Q4, and as Derek alluded to we will see some of the same dynamics continue to the next quarter.

Thank you and as a follow on to that you made it.

Also a comment that.

You expect to.

Can outgrow the.

The market within auto.

When you say that are you define the market as sort of auto units, which which is still expected to grow this year or quarter that auto semiconductor peers take into account that the end market still grows but inventory comes down.

Said more simply do you expect that in calendar 'twenty, four youll be able to grow.

<unk> the auto market on a year on year, but your auto revenue on a year on year basis.

Yes, Chris So a couple of clarifications there right. So anytime we talk about outgrowing the market. It is from an auto perspective, it's based on auto production right. So thats the basis.

And if you recall when we talked at our analyst day, we laid out a model, which talked about 710% growth above auto production right. That's how we categorize market.

Our comment.

Which I think Eric made in the prepared remarks with respect to.

Full year fiscal 'twenty four.

Including our Q4 guidance, where we expect.

For the full year fiscal 'twenty, four topline to be about 7% year over year growth.

Within that automotive to be exceptionally strong high teens.

So that's consistent with our model.

As a reminder, we are a long cycle.

The quarter to quarter, we'd see some perturbations, but really what we're focused on its full year growth and really pleased with how the team has executed a strategy to deliver at that kind of growth considering the backdrop.

Okay. Thank you.

One moment for our next question.

Our next question comes from Gary Mobley with Wells Fargo. Your line is open.

Hey, guys. Thanks for taking my question.

Hi, Derik Youre guiding the fourth quarter gross margin excuse me down about 110 basis point sequentially can you.

Bridge that delta for us between lower distribution mix.

Operator: Thank you. Good morning, and welcome to the Allegro Microsystems third quarter fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode.

<unk> and contribution crocus and the other factors that.

Affecting that and then as it relates to the.

To start.

Operator: After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. You will then hear an automated message device when your hand is raised.

Fiscal year 'twenty, five I would assume that with June quarter revenue trend.

<unk> down again sequentially.

Should we expect another leg down in the gross margin as well.

Operator: To withdraw your question, please press star 1-1 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President, Investor Relations and Corporate Communications. Thank you, Kevin.

Yes, Gary So our Q3 gross margin came in about 60 basis points better than sort of the guidance. Some of that was mix. We did see some pricing dynamics, particularly in the channel in Q3, which is the first place you usually see the pricing pressure because thats market base, we saw that start in Q3.

Jalene Hoover: Good morning, and thank you for joining us today to discuss Allegra's third fiscal quarter 2024 results. I'm joined today by Allegra's President and Chief Executive Officer, Vineet Agarwala, and Allegra's Chief Financial Officer, Derek D'Antelio. They will provide highlights of our business, review our quarterly financial performance and share our fourth quarter and full fiscal year 2024 outlook. We will follow our prepared remarks at 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.

<unk> into Q4, we're studying we're having the negotiations in their calendar year contracts with our customers. So there will be some pricing going into Q4 before we get the benefit from our vendor pricing negotiations for about a quarter or so so that's a part of the Q4 guide down by call. It 100 basis points off of Q3 some of that is all.

Also the distribution mix, which we expect to be again down in Q4, as we continue to manage channel inventory and then the last piece you're right <unk> is an element of that with their fixed cost as we start to see synergies come in the second half of calendar 'twenty for <unk>.

Jalene Hoover: A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings release, which is available on the investor relations page of our website at www.allicromicro.com. This call is also being webcast, and a replay will be available in the events and presentation section of our IR page shortly. During the course of this conference call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are based on current expectations and assumptions as of today's date and, as a result, are subject to risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in detail in our earnings release for the third quarter of fiscal 2024 and in our most recent periodic filings with the 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, changes to assumptions, or other events that may occur, except as required by law. It is now my pleasure to turn the call over to Allegra's President and CEO, Vineeth Agarwala. Vineeth?

Into Q1, I would expect gross margins to remain in that 53% to 54% range Gary for the short term here. The good news is when we model our gross margins now that we have a really a variable cost structure and our flexible manufacturing model they hold up significantly better than they would have and we had multiple facilities and multiple fabs. So I expect.

Gross margins to hang in that 53% to 54% range in the short term and of course over time as the distribution normalizes, we'll come back up to 55% and then heading towards a model of 58% and the last thing I'll mention is in Q3 organically at gross margin was over 55% for Allegro.

Got it.

Anita I wanted to ask more of a longer term focus question.

China is a very important market in the overall automotive market for sure and so my question to you is this.

What sort of investments are you, making there in terms of forging relationships with localized boundary partners back in partners and whatnot, how are you selling China domestic.

Customers that you are willing to invest in the market in an effort to win their trust and maintain their business.

Gary Thanks for the question.

Vineeth Agarwala: Thank you, Jalene, and good morning everybody, and thank you for joining our third quarter fiscal year 2024 conference call. I am pleased to report that we delivered another solid quarter against a weaker backdrop in fiscal Q3, consistent with expectations in our guidance, but we expect continued inventory digestion across markets in the short term. Our design-win momentum continues at record levels and reinforces our confidence in our ability to grow above market over the midst of the long term, consistent with our target financial model. Furthermore, we are actively managing the business to optimize prosperity and cash flow throughout the cycle.

You're right China is incredibly important to us.

Actually in the most recent quarter, we saw some really nice growth in China.

Despite all the macro noise that you hear which just reinforces that belief we have to be in China to win with the Chinese customers and we're really pleased with the progress we're making to the question. You asked we are investing in localizing, a part of our supply chain in China.

We have.

Inked an agreement with local for SaaS and we expect in the next 12 to 18 months, we've stopped shipping.

From our China partners locally.

And we are also working with.

Vineeth Agarwala: In Q3, we delivered sales of $275 million, up 2% year-over-year, reflecting continued strength in automobiles. Sales in our strategic growth areas, including e-mobility and industrial, which includes clean energy and automation, were up approximately 20% year-over-year to $150 million, or 59% of total sales. Innovation with purpose is our core value. During the quarter, we announced the launch of the second product in our high-voltage isolated gate driver portfolio. Allegro's newest powertrain solution adds crucial safety features designed to protect against high operating temperatures in electric powertrain systems. It also provides high performance in noisy environments present in microinverters in solar applications, power supplies in data center applications, and onboard chargers for electric radios.

Foundry partner in China, which would take a little bit longer to qualify wafers, but it's part of the plan and so it's important for us to demonstrate to our Chinese partners and customers that we are indeed investing in the region.

Not just for supply chain resilience from their perspective also to take advantage of economies of scale locally.

And so we're really excited about.

The progress we are making and will continue to update everybody as we make progress.

Thank you.

One moment for our next question.

Our next question comes from Quinn Bolton with Needham <unk> Company. Your line is open.

Hi, This is Nick Doyle on for Glenn Thanks for taking my questions.

So sentiment around EV is low at least in the U S. I think the China data points continue to be strong.

Vineeth Agarwala: Recall that our high-voltage isolated gate driver technology came to us through our acquisition of HayDay just over a year ago. The progress we're making with our House of Products family demonstrates our ability to effectively integrate acquired technology and bring it to market quickly. We are applying this same approach and intensity to our recent acquisition of Crocus, which further strengthens our magnetic sensing IT portfolio and extends our leadership in this very important product category. I'm pleased to report that the integration of the Crocus team and CMR technology is progressing really well. The acquired business is fully transitioning to our systems and processes, and product sales are underway with sampling actually accelerating in the e-mobility and industrial markets. Both the Electro and Crocus TLR offerings are now combined under a common brand, ExtremeSense, which now represents the world's leading and most comprehensive portfolio, offering the highest accuracy, the lowest power consumption, and the highest sensitivity for the world's most demanding applications.

And I understand Allegro is a bit agnostic to EV versus ice, but wanted to get your sense on customer sentiment.

What are you seeing from use EV customers is there better design activity than the recent data points suggests from guys like Tesla and GM.

Yes, Nick Thanks for the question and so.

Let's take a step back I think as you look at emissions and fuel economy regulations globally.

The <unk>.

<unk> outcome, it's pretty clear that.

All Oems will have to move towards a pretty high mix of battery electric vehicles or some sort of.

Emissions free regularly in order to comply with those regulations.

There is going to be different for each OEM. Some Oems that are investing completely and totally in battery electric vehicles.

Others are taking any more of a mixed approach with plug in hybrids and.

An equal part of their focus and strategy and as you pointed out.

The positive for Allegro is that we are really agnostic to whether the platform is plug in hybrid or a full battery electric or content that is very similar and it's about one five to one seven times that of appeal of ice vehicles. So we're really.

Vineeth Agarwala: Feedback across the customer base has been very encouraging, and a strong majority of our customer discussions recently at CES featured PMR. Moving on to the broader macro environment, industry estimates indicate that calendar year 2024 automotive demand will be stable with continued growth in XE, which includes battery electric vehicles and full hybrids. While XAV adoption varies greatly by geography, the growing number of XAV launches proves that the momentum is strong and increasing. Recall that Elecro is well represented in all automotive segments, with our solutions supporting all powertrains.

Pleased regardless of the direction any OEM takes and we are ready to support the Oems and the tears with a really broad portfolio of magnetic sensing and very targeted power applications from a design activity standpoint, I would tell you that every OEM is investing significant amounts of capital and R&D into electrify.

Their fleet and its various degrees of electrification as I've just pointed out.

Can't comment on any specific OEM, but suffice to say that every OEM is working on a bunch of new models, which will hit the market over the next two to three years and so I think from a consumer standpoint, it can be a really exciting time, because there will be a ton of choice when it comes to.

Vineeth Agarwala: Today, ADOT represents the majority of e-mobility sales and equity, the fastest growing component. And while e-mobility is a key strategic focus, nearly half of our automotive sales are in other automotive applications, such as ICE powertrain and safety, comfort, and convenience, which is agnostic to the choice of powertrain. Additionally, OEMs use both hybrid and full electric platforms to meet fuel economy and emissions regulations positions as well. Allegra's content is full hybrid vehicles. It's similar to that in BEVs, with both significantly higher than that in ICE.

Battery electric vehicles plug in hybrid vehicles at all price points. It from every every brand.

Great and maybe you could talk about the design win activity and data center, specifically that AI liquid cooling I think your exposure there with something new we've kind of heard at the start of the year. What is it about your power solutions that enable you to win these now.

Vineeth Agarwala: And so Allegra wins no matter which platforms OEMs invest in. Meanwhile, while automotive demand remains stable, and we see continued strong momentum in e-mobility, we are seeing sudden inventory dynamics, where tiers and contract manufacturers are bearing back inventory from the 8-10 weeks during the supply chain crisis to pre-pandemic levels of 4-6 weeks as gallon costs become a factor and OEMs end support premiums for inventory. Despite these dynamics, we expect our automotive business to deliver above-market growth for fiscal year 2024, consistent with our target financial model. Our fourth quarter sales outlook takes into account macroeconomic conditions, including ongoing inventory digestion in industrial and consumer markets, as well as the focus of inventory rebalancing in automotive. Looking to the future, we continue to see strong design-led activity with 80% of our Q3 design wins in our strategic growth area and more than 50% in the area of e-mobility. Heat map from a third-quarter design win The following include the following. In the automotive field, we were awarded multiple programs by leading Japanese OEMs for an XCV plant. This is for current sensors on automobile chargers and A.C. loaders and for magnetic position sensors for electronic power steering systems.

Liquid cooling sockets.

Yes, Nick Thanks for the question. So this has been a pivot from R. R. Parker.

Partners that we work with that serve the data center infrastructure market.

As.

Hi.

Data centers are AI chips are proliferating through data centers.

<unk> approach or the cooling solution is much different than a traditional data center.

Chips are larger and they run hotter and so the power consumption and the heat dissipation is orders of magnitude higher than our regular data center chip and so just air cooling is not enough.

And that's why a lot of our partners are innovating and coming up with really clever liquid cooling solutions.

So when we look at the data center market our design win activity through this inventory digestion period has actually stayed pretty strong and now we're starting to see the first design wins on liquid cooling solutions were essentially.

Essentially a motor drivers or us not just now for fans, but also for the pumps that are used to bump the liquid and to make sure that the.

The level and the pressure of the liquid is team staying consistent so really excited about.

Derek D'Antelio: In China, we were awarded multi-solution design wins for XTV powertrains and DPS systems with the leading automotive OEM using our current vector and power technology. In the industrial end market, we want separate designs using our current and isolation sensor technology for clean energy applications, including solar and EV charging. In data center applications, we recorded several design wins with a motor driver with a major OEM for cooling high-performance AI servers using both traditional fans as well as liquid cooling. We remain focused on serving our customers and extending our market-leading position. We're investing for the future with a focus on maximizing growth in these strategic focus areas while positioning the business to scale and grow profitably. This focus is being rewarded by our customers with more business, and our record design wins indicate that we are winning in the market.

What the potential hits here and I think we're just getting started.

Thank you one moment for our next question.

Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yeah, Hi, I, just we need them.

A quick question here, if you look at.

Outlook I think it looks like the key is the inventory destocking, especially on the margin line as you look at June quarter do you think this T and OEM inventory is get back to normal.

In that four to six week range that you've talked about.

Yes, Vijay. Thank you for the question. It usually takes a couple of quarters right. Historically, it's taking generally speaking about three quarters. So I'll call. The December quarter. The first quarter marks the second quarter at journeys the third quarter. So if history is any guidance that would be Dave case that Q1 will get back to normal. So we expect right now that Q1 will be <unk>.

Derek D'Antelio: In fact, for fiscal year 2024, we're on track to close over a billion dollars in design wins, with the majority turning to revenue over the next three years. This is proof that our strategy is working, underpinning our confidence in our ability to deliver top-of-the-market performance over the long term. I want to thank our teams globally for serving our customers and the continued execution of our strategy. I now turn the call over to Derek to review the Q3 financial results and provide guidance for the fourth quarter. Thank you, Zane.

<unk> quarter.

And we're going to argue that across all end markets were starting to see it it's really kind of a rolling cycle as you know so within our consumer business, that's getting to a trough right now and that could come sooner right and that could start to rebound a little bit sooner and then I'd expect industrial to reroute and auto the dynamic has been he'd mentioned, it's relatively new with the auto inventory rebalancing.

<unk> at the tiers and its subcontractors, which will be I think last the kind of complete that rebalancing.

Derek D'Antelio: Good morning, everyone. Starting with a summary of our Q3 financial results. Sales were $255 million, gross margin was 54.6%, operating income was 27.2%, and adjusted EVTA was 34% of sales. As a result, earnings were $0.32 per share, 10% above the midpoint of our guidance range and exceeding the high end.

Got it and then on the auto side, obviously big chunk of your sales to 75% or something.

But the outlook for fiscal 'twenty, four up 15% to 18% versus that MVP is.

Can you talk to what's driving that.

Thanks.

Yes, So let me give you the numbers after our fiscal 'twenty four which ends in March we expect our auto sales to be up high double high teens, and overall sales to be up 7% and for that same period MVP.

Derek D'Antelio: Total Q3 sales increased by 2% compared to Q3 of fiscal 23, and sales to our automotive customers were $195 million, an increase of 18% year over year, representing 76% of Q3 sales. E-mobility sales increased by 6% sequentially and 45% year-over-year, representing 54% of third quarter auto sales, up from 44% a year ago. Industrial sales were $46 million, declining 25% sequentially and 14% year-over-

<unk> is about 8% so we're about double that a little bit more than double that consistent with our models was 7% and 10% outgrowth on top of that and really what's driving that has been the continued design wins in a growth within <unk> and FCB and the E mobility sites shut the E mobility side of our business go from 44% of auto a year ago to 54.

Set of auto the same quarter this year.

And then where do you expect to continue that into fiscal 'twenty that same.

Hey, Bob LBP 10 question about it.

Derek D'Antelio: Other sales, which includes consumer applications, were $14 million, down 17% sequentially and 53% year-over-year. Sales for our distribution channel, which comprised the majority of the industrial and auto sales, were down 10% sequentially, as expected. We continue to monitor our channel when sales sell through closely to manage inventory to appropriate levels. From a product perspective, magnetic sensor sales were $154 million, declining 13% sequentially and flat yearly.

Thanks.

Yes were not guiding for 25 right now.

To continue to watch the market closely for 25 Vijay.

Thank you.

One moment for our next question.

Our next question comes from Blake Friedman with Bank of America. Your line is open.

Hi, Thanks for taking my question.

Just kind of wanted to approach the comments on June from a different perspective.

So when I look at your auto and industrial peers on a peak to trough basis, most are down anywhere from 20% to 35% and when I look at your March quarter guidance implies declines on a peak to trough basis closer to mid teens.

Derek D'Antelio: Sales of our power products were $101 million, increasing 2% sequentially and 7% year-over-year. Sales by geography were again well balanced, with 30% of sales in China, 24% in the rest of Asia, 17% in Japan, 15% in Europe, and 14% in the Americas.

So I know you mentioned, Ken would mark the trough of the cycle, but is it fair to say Allegra peak to trough declines the cycle can finish at the lower end of that range.

Yes, so the way we haven't given any guidance Blake with respect to the June quarter, right, but we had a decline of about 8% in the December quarter. Our guidance is about a decline of 8% in the March quarter, and so again if history is any guide we're expecting that these three quarter cycles will continue to see that kind of a decline in the march quarter as well.

Derek D'Antelio: Now turning to Q3 Profitability, Gross margin was 54.6% and was in line with our expectations for the quarter. Gross margin has remained healthy through this sales decline, as a result of the tablets and a flexible manufacturing model. Operating expenses were $70 million or 27% of sales, down from 28% of sales a year ago and included two months of profit.

Got it and then just more of a longer term question on gross margin I know you outlined.

Puts and takes to kind of in the short term recovery, but I guess some of your 58% target can you maybe describe.

That bridge from 54% to 55% to 58% the puts and takes in there.

Derek D'Antelio: Third quarter R&D expenses were 15% of sales, and SG&A was 12% of sales. Operating margin was 27.2% of sales, compared to 31.3% in Q2 for 30% of a year. The effective tax rate for the quarter was 10%, slightly better than expected due to the geographical mix of increases. We are now projecting our full-year non-gap tax rate to be approximately 12%. In the third quarter, Duluth's share count was 194.6 million shares, with a net income of $62 million, or $0.32 per share.

Sure. Good question. So when I look at our Q3, we were actually above 55% on an organic basis before we start to get synergies for <unk>. So that was about a 70 basis point headwind for the focus the first quarter focus and we're continuing to work to get synergies on their business and as that business scales will also get.

Gross margin the other piece of it is our distribution sales are obviously down and as we've talked about in the past that's about 800 to 1000 basis points higher than the Oems just because of the volumes. So as that starts to normalize that is generally about 100 basis points that kind of brings us back up to that 56% to 57% range and then our.

Derek D'Antelio: Moving to the balance sheet and cash flow, we ended the quarter with cash of $224 million. Cash flow from operations in the quarter was $77 million. Repatch flow is $42 million, an increase of $27 million for more than 170% sequentially. From a working capital perspective, the year ago, it was 41 days; this is 40 days in Q2, and inventory declined by $8 million in days and inventory was 124 days; it will appear to 136 days in Q2. Capital expenditures in the third quarter were $34 million as we are completing a capacity expansion of our operations in the Philippines.

Supply chain teams continue to work on our flexible manufacturing model by moving product our standard product to subcontractors as Woody talked about China supply chain, and then continuing to leverage our back end facility in the Philippines, where we continue to have opportunities for optimization and we just finished a large capacity expansion in the Philippines.

And Thats something that happens every few years, that's not going to continue into next year. So we'll continue to leverage the Philippines. So we think with our vendor leverage as we scale, our Philippines facility and getting synergies from crocus and as the distribution sales start to normalize we get to that 58% level and we were there of course two quarters ago.

Very helpful. Thank you.

One moment for our next question.

Derek D'Antelio: Also in the third quarter, we opened a new Philippines Tech and Shared Services Center and made investments in R&D labs in strategic locations. I'd like to take a few moments now to speak to the actions we are taking to optimize our financial performance, with a focus on free cash flow. First, we continue to prioritize investments in our strategic growth areas, specifically in R&D and sales. However, in response to the recent slowdown in sales, we have aligned factory costs with production levels and taken actions that have contributed to an $8 million or 11% sequential decline in organic operating expenses. We now expect organic operating expenses to decline by approximately 90% in the second half of fiscal 24 compared to the first half.

Our next question comes from Joshua Buchalter with TD Cowen Your line is open.

Hey, guys. Thanks for taking my question I guess I wanted to follow up on the previous one and I apologize for beating the inventory digestion and adapt.

Did you just did you just say that you expect the June quarter to be down as much as the.

December and March quarter, and I guess Big picture can you talk to your confidence that you'll be able to get this inventory cleaned up by the June quarter, and any anecdotes about where inventory levels are at your end customers would be helpful. Thank you.

Yes, Josh so right now inventory levels in the channel, where we have direct visibility contractual visibility of our elevated those are above our target ranges and thats why distribution sales of doubt, we continue to manage distribution sales down and watching that Pos and watching the inventory in the channel, we're starting to see that clearing consumer and as I.

Derek D'Antelio: To further optimize cash flow, we are managing our material purchases, including makers, to align to current production levels. We are also nearing the end of our most recent capacity expansion in the Philippines, and as a result, we expect CapEx to decline by approximately $25 million or 30%. This is the second half of fiscal 24 compared to the first half of fiscal 24.

As I said I expect that consumers probably at a trough first which is the March quarter industrial continues to clear, particularly parts of the data set or parts of solar that may take another quarter to clear out of their auto is a relatively new dynamic of course with the rebalancing of the inventory that Bernie talked about and yes. We do expect if history is any guide.

That the June quarter decline would be similar to the decline we saw in the.

Derek D'Antelio: Now I'll provide a few additional updates on the Crocus acquisition. As Vineet mentioned, integration is progressing well, and planned synergies are on schedule. In Q3, we completed the full systems integration and a number of tax and legal steps to allow us to utilize significant pre-acquisition tax net operating losses and enable us to begin to realize tax and operating benefits. Finally, I'll turn to our Q4 school year 2024 award.

December quarter in the March quarter.

Okay. Thank you for clarifying that.

Then just my follow up I wanted to ask you about brocade I believe you mentioned some initial traction in the prepared remarks on E mobility.

Are those products does that indicate that the products are close to or or or auto qualified and maybe you could talk to.

Bigger picture about how your engagement with your customers have changed now that you've got focus in the company and expanding your current sensing portfolio. Thank you.

Derek D'Antelio: We expect fourth-quarter sales to be in the range of $230 to $240 million, which reflects continued inventory digestion. As a midpoint of our Q4 guidance, we are projecting sales growth of 7% for Fiscal 24, with auto sales expected to grow in the high teens. Based on our current view and historical cycles, we estimate continued inventory digestion for a couple of quarters, and we expect you to be on a fiscal 25 for the June quarter. This should be our soft corner. We expect Q4 gross margin to be between 53 and 54 percent, reflecting the projected revenue of Channel X.

Hey, Josh this is great. Thanks for the question. So I can indeed confirm with measure that.

We have now order quantify the <unk> product.

It is what we call a generic call now we will as we are engaging with each individual customer. Obviously, there is a qualification cycle as per the unique design, but we are very actively engaged across automotive and industrial customers and I would characterize the engagements in some of the excitement in two ways. One is with the industrial base that kroger's.

Had where maybe there was a little bit of trepidation on engaging with a smaller company a startup company.

Gone away and now we're able to engage with a much more comprehensive portfolio around sensing and power with those customers and so those customers are really excited to engage with us and really take advantage of the old portfolio.

Jalene Hoover: We expect operating expenses to be approximately 31% of scale, and two for operating expenses include a full quarter of growth and the annual payroll tax rebate. We expect our non-GAAP tax rate to be approximately 12%, and our diluted share count to be approximately 195.8 million. As a result, we expect non-GAAP EPS to be between $0.19 and $0.23 per share. Now, I'll turn the call back to Jalene for the Q&A session. Jalene

While our customer base.

Where perhaps some of the.

More challenging applications.

We were working through some of those those technical challenges. The addition of the Crocus TMR stack has now made the solution very obvious and very easy and so we had accelerating the adoption of the TMR stack onto our parks and really as I mentioned, we are now going to market through a common Brad <unk>.

Jalene Hoover: Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our fourth fiscal quarter conference lineup with you. We are attending Wolfe's Inaugural Semiconductor Conference on February 15th at the Jay Autograph Collection in San Francisco, California, Susquehanna's 13th Annual Technology Conference on March 1st, with attendance via webcast, and Morgan Stanley's TMP Conference on March 4th at the Palace Hotel in San Francisco, We will now open the call to your questions. Kevin, please review the Q&A questions. Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered and you wish to mute yourself from the queue, please press star 1-1 again.

<unk> TMR.

It is now the worlds most comprehensive magnetic sensing portfolio on TMR really addressing the most demanding challenges around sensitivity around speed of response around low power consumption and so we see really an endless set of opportunities that we can address together so really excited about about the two technologies coming.

Together under one brand.

Thank you.

One of them before our next question.

Our next question comes from Thomas amounts of Barclays. Your line is open.

Good morning, and thanks for taking my question guys I wanted to ask about the auto trends into March, but I wanted to ask more specifically on the breakup of those auto trends. So if you look at the December quarter, you're still seeing really strong growth.

Chris Kassel: To provide the opportunity for everyone to ask a question, we ask that you limit yourself to one question and one follow-up. We'll pause for a moment while we compile our Q&A roster. Thank you. Thank you. Thank you. Our first question comes from Chris Kassel with Wolf Research Alliance. Yes, thank you. Good morning.

On a year over year basis from the <unk>, but you are your core non faster growing auto business was down seven could you talk about when you look into March what youre expectations are.

Derek D'Antelio: I guess just a first question on the guidance for the March quarter and some of the commentary you had on the June quarter as well. Could you characterize that between the auto and the industrial segment? Obviously, industrials have already pulled back quite a bit here from the peak. In terms of the sequential decline that you expect for March, and it seems like you're also implying a sequential decline in June, how would that be broken out between the two segments? Yeah, Chris, this is Derek.

The split between those two businesses do you see sequential declines in some of the faster growing eight asset that CV revenue.

And just given all of the weaker data points on an EV that we've been hearing lately is that the reason for the incremental auto weakness for the next two quarters or is it really more of the core more Saar kind of Levered auto. Thank you.

Yes, Tom this is derrick so in the Q3 quarter Youre right E mobility was up strong.

The traditional auto business was down and if you remember in our guidance, we talked about the UAW strike in the United States. It did actually have some impacts when we looked at the pull ahead with the Detroit three sales were down significantly in Q3 compared to Q2. There was some pull ahead restart in Q2, we expected that.

Derek D'Antelio: So when I look at, we don't really guide by market, right? But when I think about Q4, we're seeing that across all end markets. And it's really inventory digesting continually, particularly in industrial, others starting to come to a trough. And then in auto, as Vaneet mentioned, this is the dynamics of inventory kind of clearing out in the auto market. We expect that to continue into Q4 and Q1. Yeah, Chris, this is Vinay.

Vineeth Agarwala: Thanks for the question. I think we have been pretty transparent and communicated the inventory transition in the industrial and other markets. I think the auto dynamic is more recent, and it's really a recalibration.

Aesthetic pointed out we had some.

Vineeth Agarwala: As I've engaged with CEOs of the various OEMs in the tier, it's clear that automotive OEM demand continues to be pretty stable, and at least the XEV production estimates continue to be very robust. Really, the pressure is coming from the contract manufacturer on the tier side, where there's a rebalancing of inventory back into pre-pandemic levels. And that's a little bit of what we're seeing here in fiscal Q4. And as Derek alluded to, you know, we'll see some of the same dynamics continue into the next quarter. Thank you.

To push pull dynamic with our North America customers largely around the UAW strike.

At the same time, we've seen some really strong growth with our China customers and our Japan customers and so I think that's the dynamic we're seeing.

If I take a step back and I sort of look at the mid to long term.

We know that Chinese Oems Japanese Oems European Oems are really forging fast and furious towards an all electric future.

The North American Oems are taking.

Their own path with a mix of plug in hybrids as well as battery electric vehicles.

Vineeth Agarwala: As a follow-on to that, you also made a comment that you expect to kind of outgrow the market within the auto industry. When you say that, are you defining the market as sort of auto units, which is still expected to grow this year, or sort of the auto semiconductor peers, taking into account that the end market still grows, but inventory comes down, you know, said more simply, do you expect that in calendar 24, you'll be able to grow the auto market on a year-on-year basis, your auto revenue on a year-on-year basis? Yeah, that's correct.

And we're serving all of them.

In their own unique way, but I think the path on each region to an all electric future will be slightly different and we will take a slightly different timeline.

Helpful. And then my follow up is just on the gross margin.

A bit lower into March, but I think you mentioned mix.

Can you talk about how you see that margin profile recovering.

If lead times have come down in the channel looks a little bit different than it did over the last couple of years shouldn't margins stay kind of more at these levels and.

Derek D'Antelio: So a couple of clarifications, right? So anytime you talk about outgrowing a market, it's from an auto perspective, it's based on auto production, right? And if you recall, when we talked at our Analyst Day, we laid out a model that talked about 7-10% growth above auto production. That's how we categorize the market. Our comment, which I think Derek made in the previous remarks, was with respect to...

If you look at auto potentially recovering does that help bring those margins back after the June September quarter timeframe can you just walk me through the puts and takes of how much recovery do you see in the gross margins and how quickly you think that that comes back.

Yes, as I mentioned, our Q3 gross margin was about 60 points better than we had guided to at the 54, 6% within that a light gross organic gross margin was still over 55% to organic gross margin is still very good very healthy. It holds up well based on the flexible manufacturing model that we have going in.

Derek D'Antelio: Thank you all for joining us for this session of Q4, where we look at the full year of FY24, including our Q4 guidance, where we expect the full year of FY24 top line to be about 7% year-over-year growth, with automotive being exceptionally strong with high gains. And so that's consistent with our model. And, you know, as a reminder, we are a long cycle. You know, quarter-to-quarter, we've seen some perturbations, but really, what we're focused on is full-year growth and really pleased with how the team has executed that strategy to deliver that kind of growth, considering the backdrop. Okay, thank you.

The March quarter, we're guiding to $53 to 54% and that projects that continued decline in distribution sales, which as I mentioned generally has significantly higher gross margins that Oems sales because of the volumes. They are buying product mix also plays a part in that from quarter to quarter and then the third piece of the March quarter is the continued.

Crocus integration and <unk> fixed cost before we start to see synergies in the second half of the year. So I'd expect that gross margin to remain in that 53% to 54% range for the near term. The next couple of quarters and then as we start to get synergies start to see the normalization of the distribution I expect that to go back up to 55% in the medium term.

Gary Mobley: One moment for our next question. Our next question comes from Gary Mobley with Wells Fargo. Your line is open. Hey guys, thanks for taking my question. Derek, you're guiding the fourth quarter gross margin down about 110 basis points sequentially. Can you bridge that delta for us between the lower distribution mix?

And then we will work towards our model of 58% back to where we were a few quarters ago.

Thank you.

At this time im not showing any further questions in the queue I'd like to turn the call back over to Darlene for any closing remarks.

Derek D'Antelio: pricing and contribution focus and the other factors that are affecting that. And then as it relates to the, you know, start of fiscal year 25, I would assume that with June quarter revenue, you know, trending down again sequentially, should we expect another, you know, leg down in the gross margin as well. You have, Gary.

Thank you Kevin we appreciate you taking the time to join US. This morning. This concludes the call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Derek D'Antelio: So our Q3 gross margin came in at about 60 basis points, better than sort of the guidance. But some of that was mixed. We did see some pricing dynamics, particularly in the channel, in Q3, which is the first place you usually see pricing pressure because that's market-based. We saw that start in Q3. Going into Q4, we're having negotiations and calendar year contracts with our customers. There will be some pricing going into Q4 before we get the benefit from our vendor pricing negotiations for about a quarter or so. So that's a part of the Q4 guide down by, we'll call it, 100 basis points off of Q3. Some of that is also the distribution mix, which we expect to be, again, down in Q4 as we continue to manage channel inventories. And then the last piece, you're right, Perocus is an element of that with their fixed costs, which we started to see synergies come from in the second half of the calendar year, 24.

Okay.

[music].

Derek D'Antelio: Going into Q1, I expect gross margins to remain in that 53% to 54% range, Gary, for the short term. The good news is that when we model our gross margins, now that we have a really variable cost structure and a flexible manufacturing model, they hold up significantly better than they would have when we had multiple facilities and multiple staff. So I expect gross margins to hang in that 53% to 54% range in the short term. And, of course, over time, as the distribution normalizes, we'll come back up to 55% and then head towards our model of 58%. And the last thing I'll mention is in Q3, organically at gross margins, over 55% for Allegro. Got it.

Vineeth Agarwala: Vanita, I want to ask more of a longer-term focus question. China is a very important market in the overall automotive market, for sure, and so my question to you is, what sort of investments are you making there in terms of forging relationships with localized boundary partners, backing partners, and whatnot? How are you showing China and domestic customers that you're willing to invest in the market in an effort to win their trust and maintain your business? Gary, thanks for the question. And you're right; China is incredibly important to us.

Vineeth Agarwala: And actually, in the most recent quarter, we've had some really nice growth in China. You know, despite all the sort of macro noise that you hear, which just reinforces our belief that we have to be in China to win with Chinese customers. And we're really pleased with the progress we're making. To the question you asked, we are investing in and localizing a part of our supply chain in China. We have inked an agreement with the local OSAS.

Vineeth Agarwala: And we expect in the next 12 to 18 months, we'll start shipping from our Chinese partners locally. And we are also working with a foundry partner in China, which will take a little bit longer to qualify vapors, but it's part of the plan.

Vineeth Agarwala: And so it's important for us to demonstrate to our Chinese partners and customers that we are indeed investing in the region, not just for supply chain resilience from their perspective, but also to take advantage of economies of scale locally. And we're really excited about the progress we're making. And we will continue to update everybody as we make progress. Thank you.

Nick DeLillo: One moment for our next question. Our next question comes from Quinn Bolton with The Higgins Company. Your line is open. Hi, this is Nick DeLillo. I'm on behalf of Quinn Bolton.

Nick DeLillo: Thanks for taking our questions. So sentiment around EV is low, at least in the U.S. I think the Chinese data points continue to be strong. And I understand Allegro is a bit agnostic to EV versus ICE, but wanted to get your sense on customer sentiment.

Vineeth Agarwala: What are you seeing from U.S. EV customers? Is there better design activity than the recent data points suggest from guys like Tesla and GM? Yeah, Nick, thanks for the question. But, you know, let's take a step back.

Vineeth Agarwala: I think as you look at emissions and fuel economy regulations globally, the end outcome is pretty clear that all OEMs will have to move towards a pretty high mix of battery electric vehicles or some sort of emissions-free vehicle in order to comply with those regulations. The path there is going to be different for each OEM. Some OEMs are investing completely and totally in battery electric vehicles; others are taking more of a mixed approach with plug-in hybrids an equal part of their focus and strategy. As you point out, the positive for Allegro is that we are really agnostic to whether the platform is plug-in hybrid or it's full battery electric.

Vineeth Agarwala: Our content is very similar, and it's about 1.5 to 1.7 times that of a pure ICE vehicle. So we're really pleased regardless of the direction any OEM takes, and we're ready to support the OEMs and their peers with a really broad portfolio of magnetic sensing and very targeted power applications. From a design activity standpoint, I would tell you that every OEM is investing significant amounts of capital and R&D into electrifying their fleet, and there are various degrees of electrification, as I've just pointed out.

Vineeth Agarwala: Concom is very, you know, on any specific OEM, but suffice to say that every OEM is working on a bunch of new models that will hit the market over the next two to three years. And so I think from a consumer standpoint, it's going to be a really exciting time, because there will be a ton of choice when it comes to battery electric vehicles or plug-in hybrid vehicles at all price points and from every brand. Right, and maybe you could talk about the design and activity and data center, specifically that AI liquid cooling. I think your exposure there was something new, we kind of heard at the start of the year. What is it about your power solutions that enable you to win these, you know, AI liquid cooling sockets?

Vineeth Agarwala: Yeah, thanks for the question. So this has been a pivot from our partners that we've worked with that serve the data center infrastructure market, as AI data centers or AI chips are proliferating in data centers. The cooling approach or the cooling solution is much different than a traditional data center because AI chips are larger, and they run hotter. And so the power consumption and the heat dissipation are orders of magnitude higher than a regular data center chip. And so just air cooling is not enough.

Vineeth Agarwala: And that's why a lot of our partners are innovating and coming up with really clever liquid cooling solutions. And so when we look at the data center market, our design with activity through this inventory digestion period has actually stayed pretty strong. And now we're starting to see the first design win on liquid cooling solutions where essentially our motor drivers are used not just for fans but also for the pumps that are used to pump the liquid and to make sure that the level and the pressure of the liquid are staying constant.

Vineeth Agarwala: So, really excited about, you know, what the potential is here. And I think we're just getting started. Thank you.

Vijay Raghavan Rakesh: One moment for our next question. Our next question comes from Vijay Rakesh with Missouho, University of Iowa. Yeah, hi, this is Vineet Indiraik.

Vijay Raghavan Rakesh: This is a quick question here. If you look at your outlook, I think it looks like the key is inventory stocking, especially on the margin line. As you look at June quarter, do you think Difty and OEM inventories will get back to normal in that, you know, four to six week range that you're talking about? Yeah, Vijay, thank you for the question. It usually takes a couple of quarters, right?

Derek D'Antelio: Historically, it's taking, generally speaking, about three quarters, so I'll call the December quarter the first quarter. You know, March is the second quarter, and June is the third quarter. So if history is any guidance, that would be the case that Q1 would get back to normal. So we expect right now that Q1 will be our decline quarter, and we're going to see that across all the markets. We're starting to see that it's really kind of a rolling cycle, as you know.

Derek D'Antelio: So, within our consumer business, that's getting to a trough right now, and that could come sooner, right? And it could start to rebound a little bit sooner. And then I'd expect industrials to rebound. And auto, the dynamic, as Monique mentioned, is relatively new, with the auto inventory rebalancing at the tiers and at the subcontractors, which would be, I think, last to kind of complete that rebalancing. Jalene Hoover, Quinn Bolton, Leanne Sievers. Yeah, so let me give you the numbers.

Derek D'Antelio: For our fiscal 24, as in March, we expect our auto sales to be up high, in the high teens, and overall sales to be up 7%. And for that same period, LVP is about 8%. So we're about to double that, a little bit more than double that, consistent with our models with 7 and 10% outgrowth on top of that. And really, what's driving that has been the continued design wins and the growth within EV and XEV and the strong e-mobility side of our business. Go from 44% of auto a year ago to 54% of auto this same quarter of this year. And would you expect to continue that into fiscal 25, that same 10% above LVP growth? Yeah, we're not guiding for 25 right now, you know, if we're going to continue to watch the market closely for 25 a day. Thank you. One moment for our next question. The next question comes from Blake Freeman. Blake, your line is open.

Blake Freeman: Hi, thanks for taking my question. I just kind of wanted to approach the comments on June from a different perspective. So when I look at your auto and industrial peers on a feed-to-trough basis, most are down anywhere from 20 to 35 percent. And when I look at your March quarter guide, it implies declines on a feed-to-trough basis closer to mid-teens. So I know you mentioned June would mark the trough of the cycle, but is it fair to say later if feed-to-trough declines, the cycle can finish at the lower end of that range?

Derek D'Antelio: Yeah, so the way, you know, we haven't given any guidance, Blake, with respect to the June quarter, right? But we had a decline of about 8% in the December quarter. Our guidance is for a decline of 8% in the March quarter. And so, again, if history is any guide, we're expecting that these three-quarter cycles will continue to see that kind of a decline in the March quarter as well.

Derek D'Antelio: And then just more of a long-term question on gross margin. I know you outlined the puts and takes to kind of, you know, in the short-term recoveries, but to get to your 58% target, can you maybe describe that range of 54% to 55% to 58% puts and takes in there? Thanks.

Derek D'Antelio: Sure, good question. So, when I look at our 2-3, we were actually above 55% on an organic basis before we started to get synergies for Procus, so that was about a 70 basis point that went to Procus, you know, the first quarter of Procus. And we're continuing to work to get synergies out of their business, and as that business scales, we'll also get gross margin. The other piece of it is that our distribution sales are obviously down, and as we've talked about in the past, that's about 800 to 1,000 basis points higher than the OEMs just because of the volume. So, as that starts to normalize, that's generally about 100 basis points.

Derek D'Antelio: So, that kind of brings us back up to that 56% to 57% range. And then our supply chain teams continue to work on a flexible manufacturing model by moving product, the standard product, to subcontractors. As Manish talked about, the Chinese supply chain.

Derek D'Antelio: And then continuing to leverage our back-end facility in the Philippines, where we continue to have opportunities for optimization. And we just finished a large capacity expansion in the Philippines, and that's something that happens every few years. That's not going to continue into next year, so we'll continue to leverage the Philippines. So, we think with our vendor leverage, as we scale our Philippines facility and get synergies from Procus, and as the distribution sales start to normalize, we can get to that 58% level. And we were there, of course, two quarters ago. Very helpful, thank you.

Joshua Buchalter: One moment for our next question. Our next question comes from Joshua Buchalter with TD Callaghan. Your line is open. Hey guys, thanks for taking my question. I guess I wanted to follow up on the previous one, and I apologize for beating the inventory, digesting to death.

Derek D'Antelio: But did you just say that you expect the June quarter to be down as much as the December and March quarters, and, I guess, big picture? Can you talk about confidence that you'll be able to get this inventory cleaned up by the June quarter? Any anecdotes about where inventory levels are at your end customers would be helpful. Thank you. Yeah, Josh.

Derek D'Antelio: So right now, inventory levels in the channel where we have direct visibility and contractual visibility are elevated, and those are above our target ranges. And that's why distribution sales are down. We continue to manage distribution sales down and watch that POS and watch inventory in the channel. We're starting to see that clearly in consumer spending. And as I said, I expect that consumers probably had a drop first, which is the March quarter. Industrial continues to clear, particularly parts of the data center and parts of the solar panels. That may take another quarter to clear out of there.

Derek D'Antelio: Auto is a relatively new dynamic, of course, with the rebalancing of the inventory that Monique talked about. And yes, we do expect, if history is any guide, that the June quarter decline would be similar to the decline we saw in the December quarter and the March quarter. Okay, thank you for clarifying that. And then, as a follow-up, I wanted to ask about ProPyth.

Vineeth Agarwala: I believe you mentioned some initial traction in the prepared remarks on e-mobility. Are those products, does that indicate that the products are close to or are auto-qualified? And maybe you could talk about a bigger picture about how your engagements with your customers have changed now that you've got ProPyth in the company and expanded your current sensing portfolio. Thank you. Hey George, this is Vinay.

Vineeth Agarwala: Thanks for the question. So, I can indeed confirm with pleasure that we have now auto-qualified the Crocus product. It is what we call a generic qual.

Vineeth Agarwala: Now we will, as we are engaging with each individual customer, obviously, there's a qualification cycle as per the unique design, but we are very actively engaged across automotive and industrial customers. And I've characterized the engagement and some of the excitement in two ways. One is, with the industrial base that Crocus had, where maybe there was a little bit of trepidation about engaging with a smaller company, a startup company, that's gone away, and now we're able to engage with a much more comprehensive portfolio around sensing and power with those customers. And so those customers are really excited to engage with us and really take advantage of the whole portfolio on our customer base, where perhaps some of the more The addition of the Procus TMR stack has now made the solution very obvious and very easy.

Vineeth Agarwala: And so we're accelerating the adoption of the TMR stack onto our part. And really, as I mentioned, we are now going to market under a common brand. Extreme Sense TMR is now the world's most comprehensive mechanical sensing portfolio on TMR, really addressing the most demanding challenges around sensitivity, around speed of response, around low power consumption.

Vineeth Agarwala: And so we see really an endless set of opportunities that we can address together. So, really excited about the two technologies coming together under one brand. Thank you. One moment for our next question. And the next question comes from Thomas O'Malley from Barclays. Your line is open. Good morning, and thanks for taking my question, guys.

Thomas O'malley: I wanted to ask about the auto trends into March, but I wanted to ask more specifically about the makeup of those auto trends. So, if you look at the December quarter, you're still seeing really strong growth, you know, on a year-over-year basis from the ADAPT and XED-REV, but your core non-faster-growing auto business was down seven. Could you talk about, when you look into March, what your expectations are for the split between those two businesses? Do you see sequential declines in some of the faster-growing ADAPT and XED-REV? And just given all of the weaker data points on EV that we've been hearing lately, is that the reason for the incremental auto weakness for the next two quarters, or is it really more of the core, more star kind of levered auto? Thank you. Yeah, Tom, this is Derek.

Derek D'Antelio: So in the Q3 quarter, you're right, e-mobility was up strong, while the traditional auto business was down. And if you remember in our guidance, we talked about the UAW strike in the United States. It did actually have some impact. So we looked at the pull-ahead, you know, with the Detroit Big 3, sales were down significantly in Q3. Compared to Q2, there was a pull-ahead in Q2, and we expected that. And rolling into Q4, we're not going to break that out of guidance by market, but it's really inventory digestion, primarily at the tiers and at the subcontractors. It's not specific to end-market demand, certainly not eBay, certainly not ADAS. Yeah, Thomas, this is Vinay, so I'll just add to that.

Vineeth Agarwala: At that point, we had some auto push-pull dynamic with our North America customers, you know, largely around the UAW strike. But at the same time, we've seen some really strong growth with our Chinese customers and our Japanese customers. And so I think that's the dynamic we're seeing. You know, if I take a step back, and I sort of look at the mid-to-long term. We know that Chinese OEMs, Japanese OEMs, and European OEMs are really forging fast and seriously towards an all-electric future. You know, North American OEMs are taking their own path with a mix of plug-in hybrids as well as battery-electric bracelets, and we're shaping all of them in their own unique way, but I think the path for each region to an all-electric future will be slightly different and will take a slightly different path

Derek D'Antelio: And then my follow-up is just on the gross margins, which were a bit lower into March, but I think you mentioned NICs. Can you talk about how you see that margin profile recovering? I mean, if need times have come down and the channel looks a little bit different than it did over the last couple of years, shouldn't margins stay kind of more at these levels?

Derek D'Antelio: And if you look at auto potentially recovering, does that help bring those margins back after, you know, the June and September quarter time frame? Do you just walk me through the puts and takes of how much recovery do you see in the gross margins and how quickly you think that comes back? Yeah, as I mentioned, our Q3 gross margin was about 50 points better than we had it guided to at 54.6%. Within that, Allegro's organic gross margin was still over 55%. So organic gross margin is still very good and very healthy. It holds up well based on the flexible manufacturing model that we have.

Derek D'Antelio: Going into the March quarter, we're guiding 53 to 54%. And that projects a continued decline in distribution sales, which, as I mentioned, generally have significantly higher gross margins than OEF sales because of the volumes they're buying. Product mix also plays a part in that from quarter to quarter.

Derek D'Antelio: And then the third piece of the March quarter is the continued Crocus integration and Crocus fixed costs before we start to see synergies for the second half of the year. So I'd expect that gross margin to remain in that 53 to 54% range for the near term, for the next couple of quarters. And then, as we start to get synergies, start to see the normalization of the distribution, I expect that to go back up to 55% in the medium term. And then we'll work towards our target of 58%, back to where we were a few quarters ago.

Jalene Hoover: Thank you. At this time, I'm not showing any further questions in the queue. I'd like to turn the call back over to Jalene for any closing remarks. Thank you, Kevin. We appreciate you taking the time to join us this morning. This concludes the call. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.