Q1 2025 Allegro MicroSystems Inc Earnings Call

Speaker Change: Good morning and welcome to the Allegro Microsystems first quarter fiscal 2025 earnings conference call.

Operator: Conference call. This and all participants are in a listen-only mode.

Operator: 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.

Speaker Change: This time all participants are in a lesson 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 1 1 on your telephone. You will then hear an automated message advising your hand is raised.

Operator: Please be advised that today's conference is being recorded.

Speaker Change: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded.

Jalene Hoover: I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Micro Systems. Thank you, Steve. Thank you, Steve. Good morning. And thank you for joining us today to discuss Allegro's first fiscal quarter 2020-25 results. I'm joined today by Allegro's President and Chief Executive Officer, Vineet Nargolwala, and Allegro's Chief Financial Officer, Derek Tantillio. They will provide highlights of our business, review, or quarterly financial performance, and share our second quarter outlook. We will follow our prepared remarks with the Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures.

Jalene Hoover: I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications, Allegro Microsystems.

Jalene Hoover: Please go ahead. Thank you, Steve. Thank you, Steve. Good morning and thank you for joining us today to discuss Allegro's first fiscal quarter 2025 results.

Speaker Change: I'm joined today by Allegro's President and Chief Executive Officer, Vineet Nargolwala, and Allegro's Chief Financial Officer, Derek D'Antilio.

Operator: They will provide highlights of our business, review our quarterly financial performance, and share our second quarter outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures.

Speaker Change: They will provide highlights of our business, review our quarterly financial performance, and share our second quarter outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures.

Jalene Hoover: 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 is included in our earnings release, which is available on the Investor Relations page of our website at www.electromicro.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.

Speaker Change: The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results.

Speaker Change: 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.allegromicro.com.

Speaker Change: This call is also being webcast and a replay will be available in the events and presentations section of our IR page shortly.

Speaker Change: 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.

Jalene Hoover: 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 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 first quarter of fiscal 2025 and in our most recent periodic and other filings with the Securities and Exchange Commission. Our estimates, expectations, 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.

Speaker Change: and as a result are subject to risks and uncertainties that could cause actual results to differ materially from projections.

Speaker Change: 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 first quarter of fiscal 2025 and in our most recent periodic and other filings with the Securities and Exchange Commission.

Speaker Change: Our estimates, expectations, 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.

Jalene Hoover: It is now my pleasure to turn the call over to Allegro's President and CEO, Vinnie Nagawala.

Speaker Change: It is now my pleasure to turn the call over to Allegro's President and CEO , Vineet Nargolwala. Vineet?

Vineet Nargolwala: Vinnie? Thank you, Jolene, and good warning, everyone.

Vineet Nargolwala: Thank you for joining our first quarter of fiscal year 2025 conference call. We delivered results towards the higher end of our commitments while making progress on inventory rebalancing across automotive and industrial markets. Q1 sales were $167 million above the midpoint of guidance, and non-GAAP EPS was three cents at the high end of guidance. During the first quarter, we made progress reducing inventory in direct and distribution channels. We believe that inventory rebalancing in automotive will continue into our second quarter, and customers are returning to a more normal ordering pattern, which we expect to drive low double-digit growth in the second quarter sale.

Vineet Nargolwala: Thank you, Jalene. And good morning, everyone. Thank you for joining our first quarter fiscal year 2025 conference call.

Vineet Nargolwala: We delivered results towards the higher end of our commitments, while making progress on inventory rebalancing across automotive and industrial markets.

Vineet Nargolwala: Q1 sales were $167 million above the midpoint of guidance.

Vineet Nargolwala: and Non-Gap EPS was 3 cents at the high end of guidance.

Vineet Nargolwala: During the first quarter, we made progress reducing inventory in direct and distribution channels.

Vineet A. Nargolwala: We believe that inventory rebalancing in the automotive industry will continue into our second quarter, and customers are returning to a more normal ordering pattern, which we expect to drive low double-digit growth in second quarter sales. As we manage Allegro through the recovery, we remain excited about the fundamentals that are driving our end markets and the opportunities that are available to us. To that point, we continue to execute a product and technology roadmap with some major new product introductions in Q1. For example, in our sensor portfolio, we launched new sensor solutions to replace traditional shunt resistors.

Vineet Nargolwala: While industry estimates project a slight decline in calendar year 2024 automotive production, we remain encouraged with the estimates for continued double-visit growth in XIVs, which includes battery electric vehicles and full hybrids. Our industrial outlook reflects the impact of higher interest rates and ongoing inventory digestion. We believe that our industrial and other sales are hovering at the bottom and remain cautiously optimistic about a potential recovery in the second half for fiscal year, though return to normal could be well into fiscal year 2026. As we manage electoral through the recovery, we remain excited about the fundamentals that are driving our end markets and the opportunities that are available to us.

Vineet Nargolwala: We believe that our industry and other sales are hovering at the bottom and remain cautiously optimistic about a potential recovery in the second half of our fiscal year, though a return to normal could be well into fiscal year 2026.

Vineet Nargolwala: As we manage Allegro through the recovery, we remain excited about the fundamentals that are driving our end markets and the opportunities that are available to us.

Vineet Nargolwala: We continue to invest for growth and remain focused on those aspects of the business that we control.

Vineet Nargolwala: We continue to invest for growth and remain focused on those aspects of the business that we control.

Vineet Nargolwala: To that point, we continue to execute a product and technology roadmap with some major new product introductions in Q1. During the quarter, we announce the launch of the third product in our high-voltage power throughput portfolio. Allegro's two-chip, isolated K-Drive or IC solution works with external transformers to provide the freedom to design and maximize power efficiency for clean energy applications, such as solar inverters, XIV charging infrastructures, energy storage systems, and data center power supply units. In our sensor portfolio, we launch new sensor solutions to replace traditional shunt resistors. Our newest plug-in-place sensors provide customers with smaller designs, cooler operation, a lower bill of materials, and simplified implementation to reduce design cycle time.

Vineet Nargolwala: To that point, we continue to execute a product and technology roadmap with some major new product introductions in Q1.

Vineet Nargolwala: During the quarter, we announced the launch of the third product in our high-voltage power-through portfolio.

Vineet Nargolwala: This resonates strongly with customers in fast-growing applications like ADAS, renewable energy, and industrial automation, positioning Allegro for continued success in these markets. We also highlighted our market-leading 48-volt portfolio, which continues to gain traction in automotive and industrial applications, enabling more efficient power supply. Allegro's 48-volt solutions are used today by the leading North American XIV OEM, and we are finding increasing application in the data center market. Our roadmap costs will continue to expand with more 48-volt products expected to hit the market in fiscal 2025. Based on third-party 2023 data, we increase our leadership position in magnetic sensing.

Vineet Nargolwala: We also highlighted our market-leading 48-volt portfolio, which continues to gain traction in automotive and industrial applications, enabling more efficient power supply.

Vineet Nargolwala: Allegro's 48-volt solutions are used today by the leading North American XEV-OEM, and we are finding increasing application in the data center market.

Vineet Nargolwala: The increase in our leadership position is a direct result of our relentless drive to innovate. At Allegro, we take great pride in our market-leading magnetic sensing position.

Vineet A. Nargolwala: At Allegro, we take great pride in our market-leading magnetic sensing position. As our solutions continue to build momentum across strategic growth areas, I will share a few highlights from our first quarter design window. In automotive, we had a multi-portfolio win with a North American OEM for a steering system using a power and magnetic sensor IC solution. During the quarter, we released our second ESG report, where we highlighted ambitious 2030 goals that align with global sustainability trends and focus on renewable energy, gender diversity, and global pay equity.

Vineet Nargolwala: As our solutions continue to build momentum across strategic growth areas, I will share a few highlights from our first-quarter design winds. In automotive, we had a multi-portfolio win with a North American OEM for a steering system using our power and magnetic sensor IC solutions. In industrial, our high-voltage power portfolio was awarded its first wind with a European solar manufacturer for microinvotors, and we secured a large design wind using our TMR technology for blood glucose monitoring.

Vineet Nargolwala: In automotive, we had a multi-portfolio win with the North American OEM for a steering system using our power and magnetic sensor IC solutions.

Vineet Nargolwala: In industrial, our high-voltage power portfolio was awarded its first win with a European solar manufacturer for microinverters, and we secured a large-design win using our TMR technology for blood glucose monitoring.

Vineet Nargolwala: During the quarter, we released our second ESU report, where we highlighted ambitious 2030 goals that align with global sustainability trends and focus on renewable energy, free.

Vineet Nargolwala: Before closing, I'd like to say a few words about the recently announced transaction to repurchase shares from a larger shareholder, Sankin, who had owned a majority of Allegro since 1990. This event marks the first time in nearly 35 years that Allegro has not been controlled by another company and opens a new chapter in our journey of growth and transformation. The transaction also brings significant governance improvements. Sankin reduced the board presence by one seed immediately after falling below majority ownership, and no Sankin-appointed director can share any of our board committees. Our updated shareholder agreement also lays out a transition path for Sankin's presence on a board commensurate with their ownership.

Vineet Nargolwala: Before closing, I'd like to say a few words about the recently announced transaction to repurchase shares from our largest shareholder Sanken, who had owned a majority of Allegro since 1990.

Vineet A. Nargolwala: This event marks the first time in nearly 35 years that Allegro has not been controlled by another company and opens a new chapter in our journey of growth and transformation. The transaction also brings significant governance improvements. The reduction in SACRE ownership, combined with the departure of one equity partner from Allegro, enables us to be completely independent in our strategies and actions. We believe the increased liquidity, improved governance, and clarity and certainty about our future will act as a catalyst for further value creation, and the timing couldn't have been better. With an improving cycle on the horizon, we are poised for re-acceleration towards the goals outlined in our target financial model.

Vineet Nargolwala: This event marks the first time in nearly 35 years that Allegro has not been controlled by another company and opens a new chapter in our journey of growth and transformation.

Vineet Nargolwala: Our updated shareholder agreement also lays out a transition path for Sanken's presence on our board commensurate with their ownership.

Vineet Nargolwala: The reduction in Sankin ownership, combined with the departure of one equity partner from Allegro, enables us to be completely independent in our strategies and actions. I'm very thankful to our teams and advisors for the hard work over the past few months to plan and execute this transaction. We believe the increased liquidity, improved governance, and clarity in certain debout of future will act as a catalyst for further value creation. And the timing couldn't have been better. With an improving cycle on the horizon, we're poised for re-exceleration towards the goals outlined in our target financial model.

Vineet Nargolwala: I'm very thankful to our teams and advisors for their hard work over the past few months to plan and execute this transaction. We believe the increased liquidity, improved governance, and clarity and certainty about our future will act as a catalyst for further value creation. And the timing couldn't have been better.

Derek Tantillio: I'll now turn the call over to Derek to review the Q1 financial results and provide our outlook for the second quarter.

Vineet Nargolwala: I'll now turn the call over to Derek to review the Q1 financial results and provide our outlook for the second quarter. Derek.

Derek Tantillio: Derek, thank you, Vini.

Derek Tantillio: Good morning, everyone. I'll start with a summary of our Q1 financial results. Sales were $167 million. Gross margin was 48.8%. Operating income was 6% and adjusted EBDA was 13% of sales. As a result, earnings were 3 cents per share at the end of our outlook range. Total Q1 sales declined by 31% sequentially and by 40% compared to Q1 of fiscal 24. Sales to our automotive customers were $131 million at a client of 28% sequentially and 29% year-over-year and represented 79% of our Q1 sales. E-mobility sales were $62 million and declined by 31% sequentially and 30% year-over-year to represent 48% of first quarter auto sales.

Derek: Thank you, Vineet, and good morning, everyone.

Derek: I'll start with a summary of our Q1 financial results.

Operator: As a result, earnings were $0.03 per share, at the high end of our outlook range. E-mobility sales were $62 million and declined by 31% sequentially and 30% year-over-year to represent 48% of first quarter auto sales. Effective in the first quarter of fiscal year 2025, we are combining what we historically referred to as other sales into industrial and other sales. Sales through our distribution channel were $81 million, a decline of 36% sequentially and 48% year-over-year, and represented 49% of our Q1 sales, declining 21% sequentially and 34% year-over-year. 17% in the Americas and 16% of sales in Europe.

Derek: As a result, earnings were $0.03 per share at the high end of our outlook range.

Derek Tantillio: Effective in the first quarter of fiscal year 2025, we are combining what we historically referred to as other sales into industrial and other sales. Industrial and other sales were $36 million in the quarter, declining 39% sequentially and 62% year-over-year. Sales through our distribution channel were $81 million, at a decline of 36% sequentially and 48% year-over-year, and represented 49% of our Q1 sales. We continue to monitor channel POS sell-through, which has been higher than sell-in to help manage distributed inventories to appropriate levels. From a product perspective, magnetic sense of sales were $115 million, declining 21% sequentially and 34% year-over-year, and sales of our power products were $52 million, declining 45% sequentially and 50% year-over-year.

Vineet Nargolwala: Effective in the first quarter of fiscal year 2025, we are combining what we historically referred to as other sales into industrial and other sales.

Derek: Sales through our distribution channel were $81 million, a decline of 36% sequentially and 48% year-over-year, and represented 49% of our Q1 sales.

Derek: We continue to monitor channel POS sell-through, which has been higher than sell-in, to help manage distributed inventories to appropriate levels.

Derek: From a product perspective, magnetic sensor sales were $115 million.

Derek: declining 21% sequentially and 34% year-over-year. And sales of our power products were $52 million, declining 45% sequentially and 50% year-over-year.

Derek Tantillio: Sales by geography were, again, well-balanced, with 24% of sales in Japan, as well as the rest of Asia; 19% of sales in China, 17% in the Americas, and 16% of sales in Europe.

Derek: Sales by geography were again well balanced, with 24% of sales in Japan, as well as the rest of Asia, 19% of sales in China.

Derek: 17% in the Americas and 16% of sales in Europe .

Derek Tantillio: Now turning to Q1 profitability, throughout Q1 we continue to manage the inventory reductions in both channels carefully, while focusing on profitability and cash flow. Gross margin was 48.8% in operating expenses for $71 million. Operating margin was 6% of sales compared to 23.8% in Q4 and 31% a year ago. The effect of tax rate in the quarter was 10%, and the first quarter diluted share count was 194.7 million shares, net income was $6 million and $3 cents per diluted share.

Operator: Throughout Q1, we continued to manage the inventory reductions in both channels carefully while focusing on profitability and cash flow. Gross margin was 48.8% and operating expenses were $71 million. And the first quarter diluted share count was 194.7 million shares. Moving to the balance sheet and cash flow, we ended Q1 with cash of $184 million. Capital expenditures in Q1 were $11 million.

Derek: Gross margin was 48.8% and operating expenses were $71 million.

Derek: Operating margin was 6% of sales compared to 23.8% in Q4 and 31% a year ago.

Derek: The effect of tax rate in the quarter was 10%.

Derek: In the first quarter, diluted share count was 194.7 million shares. Net income was $6 million and 3 cents per diluted share.

Derek Tantillio: Moving to the balance sheet and cash flow, we ended Q1 with cash of $184 million. Cash flow from operations was $34 million, and free cash flow was $23 million or 14% of sales in a trough quarter. From a working capital perspective, DSO was 35 days compared to 45 in Q4. Inventory dollars increased by $14 million, largely in wafer in dive bank, and days of inventory were 174 days compared to 126 days in Q4, increasing largely as a function of the decline in sales. Capital expenditures in Q1 were $11 million.

Derek: Cash flow from operations was $34 million and free cash flow was $23 million or 14% of sales in a trough quarter.

Derek: And days of inventory were 174 days compared to 126 days in Q4, increasing largely as a function of the decline in sales.

Derek Tantillio: Before I discuss our Q2 2025 outlook, I'd like to take a few minutes to provide some more details about the recent share repurchase from our largest shareholder. This is an important transaction for Allegro and its shareholders. It will reduce Sankin's ownership from 51% pre-transactions to approximately 33%. Resulting in 30% more free flow and a net reduction of approximately 10 million, or 5% fewer shares outstanding. And, as Benete mentioned, it also brings with it significant governance benefits to Allegro shareholders. I'll now highlight a few key details of the transaction. Post-transaction, Allegro's outstanding share count will have decreased from 194 million shares to 184 million shares.

Operator: And before I discuss our Q2 2025 outlook, I'd like to take a few minutes to provide some more details about the recent share repurchase from our largest shareholder. And as Vineet mentioned, it also brings with it significant governance benefits to Allegro shareholders. I'll now highlight a few key details of the transaction. Post-transaction, Allegro's outstanding share count will have decreased from 194 million shares to 184 million shares. We will have repurchased 39 million shares from Sanken and retired those shares.

Speaker Change: And before I discuss our Q2 2025 outlook, I'd like to take a few minutes to provide some more details about the recent share repurchase from our largest shareholder.

Speaker Change: This is an important transaction for Allegro and its shareholders. It will reduce Sanken's ownership from 51% pre-transactions to approximately 33%.

Speaker Change: resulting in 30% more free flow and a net reduction of approximately 10 million or 5% fewer shares outstanding.

Speaker Change: And, as Vineet mentioned, it also brings with it significant governance benefits to Allegro shareholders.

Vineet Nargolwala: I'll now highlight a few key details of the transaction.

Vineet Nargolwala: Post-transaction, Allegro's outstanding share count will have decreased from 194 million shares to 184 million shares.

Derek Tantillio: In terms of transaction mechanics, we will have repurchased 39 million shares from Sankin and retired those shares. The repurchase was funded with a combination of an equity issuance of almost 29 million shares and an incremental term loan of $200 million, as well as cash on hand. Our pro-forma on gross and net leverage on a trailing 12-month basis is 1.4x in Point X respectively. Sankin has agreed to reimburse Allegro and Allegro shareholders for all transaction expenses and pay Allegro a $35 million facilitation fee. We also expect this to be accretive to non-GAAP basis within fiscal year 25.

Speaker Change: In terms of transaction mechanics, we will repurchase 39 million shares from Sanken and retire those shares.

Speaker Change: Our pro forma gross and net leverage on a trailing 12-month basis is 1.4x and .x respectively.

Operator: We also expect this to be accretive on a non-GAAP basis within fiscal year 25, from SOFR plus 275 basis points to SOFR plus 225 basis points. We believe the favorable debt repricing and the ratings upgrade are reflective of the strength and resilience of our business model and our conservative balance sheet management. We also project the following, all on a non-GAAP basis, and our weighted average diluted share count to be approximately 191 million shares, reflecting the repurchase transaction. The weighted average share count reflects the timing of these transactions within Q2, and we expect the diluted share count to reduce further to approximately 184 million shares in Q3.

Derek Tantillio: We also reiterate our commitment to continue to make accelerated and voluntary debt payments with excess free cash flow, as demonstrated by the $50 million voluntary payment made in Q1. In addition, we are taking this opportunity to reprice the entire term loan balance of $400 million from SOFR plus 275 basis points to SOFR plus 225 basis points.

Speaker Change: We also reiterate our commitment to continue to make accelerated and voluntary debt payments with excess free cash flow as demonstrated by the $50 million voluntary payment made in Q1.

Speaker Change: In addition, we are taking this opportunity to reprice the entire term loan balance of $400 million.

Speaker Change: From SOFR plus 275 basis points to SOFR plus 225 basis points.

Derek Tantillio: Finally, in connection with these transactions, Allegro's S&P corporate rating has been upgraded from B plus to double B minus. We believe the favorable debt repricing and the ratings upgrade are reflective of the strength and resilience of our business model and our conservative balance sheet management.

Speaker Change: Finally, in connection with these transactions, Allegro's S&P corporate rating has been upgraded from B+.

Speaker Change: to Double B Minus.

Derek Tantillio: Now I'll turn to our Q2 2025 outlook. We expect second quarter sales to be in a range of $182 to $192 million, implying 12% sequential growth at the midpoint of this range. We also project the following, all on a non-GAAP basis. We expect Q2 gross margin to be between 49 and 51%, reflecting a sequential increase of 120 basis points at the midpoint. We expect interest expense in the second quarter to be approximately $7 million. We expect our tax rate to be approximately 10%, and our weighted average diluted share account to be approximately 191 million shares, reflecting the repurchased transactions.

Speaker Change: Now, I'll turn to our Q2 2025 Outlook.

Speaker Change: We also project the following all on a non-GAAP basis. We expect Q2 gross margin to be between 49 and 51 percent, reflecting a sequential increase of 120 basis points at the midpoint.

Speaker Change: We expect our tax rate to be approximately 10%.

Derek Tantillio: The weighted average share account reflects the timing of these transactions within Q2, and we expect the diluted share account to reduce further to approximately 184 million shares in Q3. As a result, we expect non-GAAP EPS to be between 4 and 8 cents per share, exclusive of the incremental interest expense associated with the recent share repurchase. Estimated non-GAAP EPS at the midpoint of our older range would be 8 cents per share.

Speaker Change: The weighted average share count reflects the timing of these transactions within Q2 and we expect the diluted share count to reduce further to approximately 184 million shares in Q3.

Speaker Change: As a result, we expect non-GAF EBS to be between $0.04 and $0.08 per share.

Speaker Change: An exclusive of the incremental interest expense associated with the recent share repurchase, estimated non-GAAP EPS at the midpoint of our outlook range would be $0.08 per share.

Jalene Hoover: Now, I'll turn the call back over to Jelene for questions.

Jalene Hoover: Jelene. Thank you, Derek.

Jalene Hoover: This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our second fiscal quarter conference line-up with you. We are attending Needham's fifth annual virtual semiconductor and semi-cap 1-on-1 conference on August 22nd. Jeffrey's Semi-Conductor IT Hardware and Communications Summit on August 27th at the Four Seasons Hotel in Chicago. And Evercore ISI's semiconductor IT hardware and networking conference on August 28th at the automation of Chicago.

Speaker Change: We are attending Needham's 5th Annual Virtual Semiconductor and Semicab One-on-One Conference on August 22nd.

Operator: Jeffrey's Semiconductor IT Hardware and Communications Summit on August 27th at the Four Seasons Hotel in Chicago and Evercore's ISI Semiconductor IT Hardware and Networking Conference on August 28th at the OmniShip Chicago. Thank you.

Speaker Change: Jeffries Semiconductor IT Hardware and Communications Summit on August 27th at the Four Seasons Hotel in Chicago and Evercore's ISI Semiconductor IT Hardware and Networking Conference on August 28th at the Omniship Chicago.

Operator: We will now open the call for your questions.

Operator: Thank you.

Operator: Yes, thank you. Good morning.

Operator: At this time, we will conduct the question-and-answer session. As a reminder, after the question, you will need to cast Star 11 on your telephone and wait for your name to be announced. With all your questions, please press Star 11 again. Please stand by while we compile the Q&A roster.

Speaker Change: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.

Christopher Caso: Our first question comes from the line of Chris Kaso at Wolf Research.

Speaker Change: Our first question comes from the line of Chris Caso at Wolfe Research. Your line is now open.

Vineet Nargolwala: Your line is now open. Yes, thank you.

Operator: I guess the first question is with regard to customer inventory levels and, you know, sort of the progress in getting both the channel and your automotive customers in line. You expressed some intentions last quarter to take down that inventory pretty aggressively. We've heard from some others in the space that the targets for those automotive inventories appear to be coming down, at least for some. Could you give us some sense of what you're seeing in the progress that you've made in the quarter?

Vineet Nargolwala: Good morning. I guess the first question is with regard to customer inventory levels and sort of progress in getting both the channel and your automotive customers in line. You expressed the intentions last quarter to take down that inventory pretty aggressively. We've heard from some others in the space that the targets for those automotive inventories appear to be coming lower, at least for some. Could you give us some sense of what you're seeing in the progress that you've made in the quarter? Yeah, hi, Chris. This is Vinay. Thanks for the question. So I would categorize our progress on inventory as expected.

Chris Caso: I guess the first question is with regard to...

Chris Caso: For those automotive inventories appear to be coming lower, at least for some, could you give us some sense of what you're seeing and the progress that you've made in the quarter?

Operator: Yeah. Hi Chris.

Vineet Nargolwala: Okay. And as we highlighted in our last first quarter or last or next call, we think on average within the automotive channel, which is largely direct through tiers and contract manufacturers, inventories have come down roughly four weeks. Now, some tiers and contract manufacturers are ahead of that; some are obviously behind. And, you know, I would say that every customer, every partner has differing goals, but I would say broadly, we've made substantial progress in bringing the inventory down. Within the industrial business, which is largely self-redistribution, I would say it's more of a regional lens, where some of the regions would stay, you know, with a slightly higher level, which is what is typical, for example, in Japan. But in places like China, in North America, we've made some substantial progress in bringing the inventory down.

Vineet A. Nargolwala: This is Vineet. Thanks for the question. So I would categorize our progress on inventory as expected, okay? And as we highlighted in our last first quarter or last earnings call, we think, on average, within the automotive channel, which is largely direct through tiers and contract manufacturers, inventories have come down roughly four weeks. Now, some tiers and contract manufacturers are ahead of that, but some are obviously behind. And, you know, I would say that every customer, every partner has differing goals. But I would say, broadly, we've made substantial progress in bringing the inventories down within the industrial business, which is largely social distribution.

Speaker Change: We think, on average, within the automotive channel,

Speaker Change: I would say it's more of a regional lens.

Speaker Change: But in places like China, in North America, we've made some substantial progress in bringing the inventory down. So overall, I would say I'm really pleased with the progress that's been made. As you remember, we intentionally undershipped in Q1.

Vineet Nargolwala: So overall, I would say I'm really pleased with the progress that's been made. As you remember, we intentionally undershipped in Q1 with the aim of helping our distributive partners and our channel partners and tiers really work down the inventory very aggressively. And so we think that that's largely done. Some of this is going to, as I said in my prepared remarks, continue into Q2, obviously, but we believe that we've made substantial progress here on the inventory balancing. Got it.

Speaker Change: with the aim of helping our distributor partners and our channel partners and tiers really work down the inventory very aggressively and so we think that that that's largely done.

Speaker Change: Some of this is going to, as I said in my prepared remarks, will continue into Q2, obviously, but we believe that we've made substantial progress here on the inventory balancing.

Vineet Nargolwala: Just as a follow-on to that, you know, given the fact that you expect that there's still some inventory that needs to be worked down in the September quarter, what does that imply for the December quarter, with the assumption that you're still, you know, burning the inventory, you're still undershipping demand, you know, what kind of view can you give us on the December quarter on that basis? So, Chris, we're obviously not guiding for the December quarter, right? But if you go back to our comments that we made in the prior earnings call, you know, there has really been no change to our assumptions set that underpin those comments.

Speaker Change: Just as a follow-on to that, you know, given the fact that you expect that there's still some inventory that needs to be worked down in the September quarter, what does that imply for the December quarter with the assumption that you're still

Speaker Change: So, Chris, we're obviously not guiding for the December quarter, right, but if you go back to our comments that we made in the prior earnings call, you know, there has really been no change to our assumption set that underpinned those comments.

Vineet Nargolwala: And we're pleased that we're able to get back to sequential growth here in this coming quarter. Thank you.

Speaker Change: And we're pleased that we're able to get back to sequential growth here in this coming quarter.

Blayne Curtis: I have a question comes from the line of blame credit at Jeffries.

Chris: Thank you.

Derek Tantillio: Your line is in.

Speaker Change: Thank you. Our next question comes from the line of Blayne Curtis at Jefferies.

Derek Tantillio: Good morning. Thanks for letting me ask a question. I'm just curious when we're looking at the recovery here. If you can just help us for the September quarter, I'm just kind of curious between now and your two segments, where you're seeing the most recovery.

Operator: Good morning, thanks for letting me ask the question. I just am curious, when we're looking at the recovery here, if you can just help us with the September quarter. I'm just kind of curious between your two segments, where you're seeing the most recovery.

Blaine Curtis: Good morning. Thanks for letting me ask the question. I just am curious, when we're looking at the recovery here, if you can just help us for the September quarter. I'm just kind of curious between now your two segments, where you're seeing the most recovery.

Derek Tantillio: So Blaine, this is Derek. I'll start with it by sort of market or application, which is the way we look at it. The majority of that recovery or sort of increase from Q1 to Q2 is automotive. We still see industrial and some consumer markets or other markets being relatively muted, the things like data center and all the areas that have had some more inventory to be digested over the next couple of quarters. Councillor, and I would just add that this is as expected, where we expected that once the automotive tiers and contract manufacturers would be done with their digestion, we would get back to normal ordering patterns. The end market and automotive continues to be pretty stable.

Derek: So Blayne, this is Derek. I'll start with it by sort of market or application, which is the way we look at it. The majority of that recovery or sort of increase from Q1 to Q2 is automotive. We still see industrial and some consumer markets or other markets being relatively muted, but things like data center and other areas that have had some more inventory to be digested over the next couple of quarters.

Derek: And Blayne, I would just add that this is as expected.

Jalene Hoover: where we expected that once the automotive tiers and contract manufacturers would be done with their digestion, we would get back to normal ordering patterns. The end market in automotive continues to be pretty stable.

Derek Tantillio: Whereas in industrial, you know, and we've said this before, the inventory digestion has been coupled with and muted demand in certain pockets, while there are other smaller areas of industrial that continue to show some growth. And so that's what's reflected in our guide for Q2.

Speaker Change: Whereas in industrial, you know, and we've said this before, the inventory digestion has been coupled with

Derek: Muted demand in certain pockets, while there are other smaller areas of industrial that continue to show some growth. And so, that's what's reflected in our guide for Q2.

Vineet Nargolwala: Thanks, and maybe just following up on the prior question. I wanted to ask, just in terms of the automotive market, you've seen outlets kind of, you know, for demand kind of tick down a bit. So it seems like for others, the corrections are taking a bit longer. You had a very extreme correction in June, and you were always very confident on some sort of recovery in September. So you're seeing a little bit different trends maybe because of the death of that correction, but I'm just kind of curious how your kind of outlook for auto has changed over the quarter.

Speaker Change: You've seen outlooks kind of, you know, for demand kind of ticked down a bit. So it seems like for others, the correction is taking a bit longer. You had a very extreme correction in June , and you were always very confident on some sort of recovery in September . So you're seeing a little bit different trends, maybe because of the depth of that correction. But I'm just kind of curious.

Operator: Yeah, Blayne, you remember that we stay focused on the mid to long term, and for us, you know, whether automotive production or SARC goes up a couple of percent or goes down a couple of percent, it really doesn't change what we do and how we invest.

Vineet Nargolwala: Yeah, Blayne, do you remember that we stay focused on the mid to long term? And for us, you know, whether automotive production or SARC goes up a couple of percent or goes down a couple of percent, really doesn't change what we do and how we invest. We remain encouraged by the continued double-digit growth in XIV production and sales. And when we look at the latest estimates, they're still calling for more than doubling of XIV production and sales by 2030. And the programs we work on, the programs we're getting awarded by our customers, that are customers, trust us, and our products to support their platforms. They're still all very much focused on significant growth in XIV platforms. So that's really what underpins our business fundamentals.

Speaker Change: How your outlook for auto has changed over the quarter.

Speaker Change: We remain encouraged by the continued double-digit growth in XEV production and sales.

Speaker Change: they're still all very much focused on significant growth in XEB platforms. So that's really what underpins our business fundamentals.

Vineet Nargolwala: And, you know, the quarter-to-quarter perturbations, frankly, aren't as important to us. In Blayne, this is directly absolutely right that there's going to be differences between, you know, companies in the market, right? We took a severe downturn in Q1. A lot of that is us working with our customers directly to help manage those inventory levels down and under shipping. Some of our partners have managed it differently throughout the last couple of years, so that trajectory up and down is a bit different than people.

Speaker Change: And, you know, the quarter-to-quarter perturbations, frankly, aren't as important to us. In Blayne, this is Derek, you're absolutely right that there's going to be differences between...

Speaker Change: You know, companies in the market, right? We took a severe downturn in Q1. A lot of that is us working with our customers directly to help manage those inventory levels down and under shipping. Some of our partners have managed it differently throughout the last couple of years, so the trajectory up and down is a bit different for people.

Vineet Nargolwala: Thanks, Seth.

Vineet Nargolwala: Okay.

Speaker Change: Thanks, guys.

Vineet Nargolwala: Thank you.

Quinn Bolton: Our next question comes from the line of Quinn Bolton at Needham.

Vineet Nargolwala: One moment for our next question. Hey, guys, I just wanted to follow up on Blayne's question there. One of your peers at Mobileye this morning talked about, you know, lower volumes of the second half in part two, to the recently tariffs on Chinese vehicle manufacturers.

Operator: One moment for our next question.

Speaker Change: One moment for our next question.

Speaker Change: Talked about, you know, lower volumes in the second half, in part two to...

Vineet Nargolwala: Just wondering if you were seeing that is something that has been a recent change, or whether that's incorporated in your sort of outlook for, you know, a modest, low single-digit reduction in auto production globally this year. Quinn, this has been a thanks for the question. So, you know, maybe there are two parts to this, right? So, we don't really see the impact of tariffs in Europe, really impacting how our Chinese customers are behaving or driving growth for their overall business. I think, you know, I've shared earlier in earlier calls that, you know, we are really well exposed to every Chinese OEM, every one of the top 10 Chinese OEMs, top 10 to 15 Chinese OEMs. And we have great geographical diversity in our business as well.

Speaker Change: We don't really see...

Speaker Change: really impacting how our Chinese customers are behaving or driving growth for their overall business.

Speaker Change: I think, you know, I've shared earlier, in earlier calls, that, you know, we are really well exposed to every Chinese OEM, every one of the top 10 Chinese OEMs, top 10-15 Chinese OEMs.

Vineet Nargolwala: And so we feel really well positioned to get secular growth as it happens with the Chinese OEMs across the world. And let's keep in mind that the tariffs, you know, only applied to vehicles that will be produced and shipped from China.

Operator: Only apply to vehicles that will be produced and shipped from China.

Vineet Nargolwala: Chinese organs are also sending a manufacturing in Eastern Europe, so we think there are ways they will get around it, but to the second part of your question, our guide is really reflected right now on what we believe is is reflected in our auto pattern and our backlog, so we don't really think that's got a material impact on how we see things playing out.

Derek Tantillio: Great, and then maybe just a sort of accounting question of Udarek. You walk, excuse me, through the dynamics of the show repurchase, but you mentioned that $35 million, I think you called it a facilitation fee, and wondering how is that accounted. Is that sort of intended to help offset some of the higher interest expense from the term loan? Is that accounted for, or is it just a one-time payment? Just any help, how we should be thinking about accounting for that payment would be helpful. Yeah sure, so it's a one-time payment to help facilitate this transaction so that we're not one shareholder received a benefit at the expense of all other Allegro shareholders. In addition to that facilitation fee, Sankin is paying all other transaction costs including underwriter spread, arrangement fees on the debt, but our intent is to use that payment or the cash for that to pay interest in principle on our debt. And the way it's being accounted for, blankway frankly, is a reduction of Apex, so it won't even hit our P&L, and it's non-taxable that way as well.

Speaker Change: And then maybe just a sort of accounting question for you, Derek.

Derek: Excuse me, through the dynamics of the share repurchase, but you mentioned that $35 million, I think you called it a facilitation fee, and wondering how is that accounted, is that sort of intended to help offset...

Derek: Some of the higher interest expense from the term loan is that accounted for as just a one-time payment, just any help, how we should be thinking about accounting for that, for that payment would be helpful.

Speaker Change: all other Allegro shareholders. So in addition to that facilitation fee, Sanken is paying all other transaction costs, including underwriter spread, arrangement fees on the debt, but our intent is to use that payment of the cash for that.

Speaker Change: to pay interest in principle on our debt. And the way it's being accounted for, Blayne, quite frankly, is a reduction of APICS, so it won't even hit our P&L. And it's non-taxable that way as well.

Derek Tantillio: Got it. Okay, thank you. Thank you.

Operator: Thank you. I'd like to come on the line with Vijay Rakesh from Nesuho. One second, please.

Operator: The point is going to leave a repurchase on Missoulo.

Blayne: Got it. Okay. Thank you.

Vijay Rakesh: One second, please; your line is now open. Yeah, thanks.

Vineet A. Nargolwala: Thanks Vineet and Derek. Just a quick question. I know you mentioned 2023 magnetic sensor share up and in a leading position there. One question that we've been getting from investors is given the depth of research, around 40% year on year, let's say, if you can give us some clarity on how your market share is trending here in EV and ADAS and how the design pipeline looks, especially in autos and XEV.

Vineet Nargolwala: We need to make this a quick question. I know you mentioned 20, 23 bankatex sensors share up and leading questions there. One question that we've been getting from investors is, given the depth of research in a down 20 percent year on year, let's say. If we can give us some clarity on how your market share is spending here in EV and ADS, and how the design pipeline looks especially in autos and XEV. Yeah, Vijay, just to understand a question you're asking, but how's our design pipeline fairing? Yeah, and some more conference around the market share here, you know, post the reset here.

Speaker Change: Your line is now open.

Speaker Change: Thanks Vineet and Derek. Just a quick question. I know you mentioned 2023 magnetic sensor share up and a leading question there. One question that we've been getting from investors is given the depth of research in around 40% year-on-year let's say, if you can give us some...

Blayne: Yeah, Vijay, just so I understand the question you're asking about how is our design pipeline faring? Yeah, and some more confidence around the market share here, you know, post the reset here.

Vineet Nargolwala: So Vijay, as our office is prepared remarks, third-party data shows we've extended a market share; we're really pleased with that, and really it's a testament to the hard work our teams do every single day to serve our customers and really deliver innovation. I would say that, you know, let's keep in mind while we've been intentionally undershipping toward distributors and to the tiers, that demand is still being met by a legal product from inventory, right? So it should have zero impact on share position. The second part of your question, which is around our design pipeline, it continues to grow really well.

Speaker Change: So Vijay, as I referenced in my prepared remarks, third party data shows we've extended our market share. We're really pleased with that and really it's a testament to the hard work our teams do every single day to serve our customers and really deliver innovation.

Blayne: I would say that, you know, let's keep in mind, while we've been intentionally undershipping to our distributors and to the tiers, that demand is still being met by Allegro product from inventory, right? So it should have zero impact on share position.

Vineet A. Nargolwala: That demand is still being met by Allegro products from inventory, right? So it should have zero impact on the share position.

Vineet A. Nargolwala: The second part of your question, which is around our design pipeline, it continues to grow really well. We continue to win more than our fair share in the market and in the applications we serve and the markets we serve. And I get some qualitative information around some of the key wins we had in the first quarter, and we'll continue to provide visibility into how our backlog is growing at regular intervals. I provided some visibility in the last earnings call.

Speaker Change: The second part of your question, which is around our design pipeline, it continues to grow really well.

Vineet Nargolwala: We continue to win more than our fair share in the market and the applications we serve and the markets we serve, and by getting some qualitative information around some of the key wins we had in the first quarter, and we'll continue to provide visibility into how our backlog is growing at regular intervals. I provided some visibility in the last earnings call, but we continue to be pleased with our design pipeline and how it's growing, and it's a significant indication of how our customers trust us to continue to support them in this transition to a more electric and mortons.

Blayne: We continue to win more than our fair share in the market, in the applications we serve, in the markets we serve.

Speaker Change: And I gave some qualitative information around some of the key wins we had in the first quarter. And we'll continue to provide visibility into how our backlog is growing at regular intervals. I provided some visibility in the last earnings call.

Vineet A. Nargolwala: But we continue to be pleased with our design pipeline and how it's growing, and it's an indication of how our customers trust us to continue to support them in this transition to a more electric and more autonomous future.

Speaker Change: but we continue to be pleased with our design pipeline and how it's growing and it's a significant, it's an indication of how our customers trust us to continue to support them in this transition to a more electric and more autonomous future.

Derek Tantillio: George. And then on the gross margins side, Derek, obviously a lot of it has to do with the this T side. How do you, can you talk to all the this T side supports that are growing and how do you see that those gross margins progressing towards that in a 50, 55, 58 that you're seeing historically? Yeah, Vijay, so, you know, going from Q4 to Q1, gross margins to climb by about 400 basis points; the majority of that was actually utilization. So if you look at us sort of historical drop-through or variable contribution margin, just taking the change in sales and the change in gross margin, that's between 60 and 65 percent.

Speaker Change: I hope you enjoyed it. And I hope you'll join us again next time. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.

Speaker Change: The majority of that was actually utilization, so if you look at our sort of historical drop-through or variable contribution margin, just taking the change in sales and the change in gross margin, that's between 60 and 65 percent. If you project that forward, you get to our guidance gross margin midpoint for Q2, and you can kind of extrapolate that forward to whatever revenue numbers.

Derek Tantillio: If you project that forward, you get to our guidance gross margin midpoint for Q2, and you can kind of extrapolate that forward to whatever revenue numbers you put in for the next couple of quarters. And you're absolutely right on the mix side of things. We have sort of two mix things. One is product mix, which is a little bit weak here in Q1, but Disney mix also was lower in Q1. It was 49 percent sales, which was actually the lowest number it's been in the last three years because we're obviously undershipping the distribution channel. So the biggest piece in the short term of growing up gross margins back will be the utilization.

Speaker Change: you put in for the next couple of quarters. And you're absolutely right. On the mix side of things, we have sort of two mix things. One is product mix, which is a little bit weaker in Q1, but Disney mix also was lower in Q1. It was 49% of sales.

Blayne: which was actually the lowest number it's been in the last three years because we're obviously undershipping the distribution channel.

Derek Tantillio: You can use that gross margin drop-through number and apply it to your sales projections, but also both product mix and distribution mix will help enhance gross margin again in the between now and the end of the year. And then getting to that 58 percent model we're still committed to over time, that's going to require the three things we just talked about. Plus, continue to leverage our backend facility in the Philippines, leverage our suppliers as we get back to scale, and continue to release new products that we talked about. We released some really exciting new current sensors, TMI products, that start with a higher ASP.

Blayne: and Distribution Mix will help enhance gross margin again between now and the end of the year.

Operator: Thank you for joining us. Okay, thanks a lot. Thank you.

Operator: As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Thank you very much.

Operator: As a reminder, if that's the question, you will need to ask Scar 111 on your telephone and wait for your name to be announced.

Speaker Change: Got it, okay, thanks a lot.

Speaker Change: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.

Thomas O'malley: Our next question comes from the line of Thomas O'Malley at Barclays. Thank you. So my first question is around some of the numbers you gave. I think that you said e-mobility was 48 percent of auto, which is about 62 million. If you look at kind of how e-mobility, and quote unquote your other auto business have been tracking, e-mobility has been doing a lot better, just from just really a year-over-year perspective. And now, kind of into the June quarter, both are kind of down around 30 percent year-over-year. Could you talk about what you're seeing there as to why those are tracking the same?

Speaker Change: Our next question comes from the line of Thomas O'Malley at Barclays.

Operator: So my first question is about some of the numbers you gave. I think you said e-mobility was 48% of cars, which is about 62 million. If you look at kind of how e-mobility and quote unquote your other auto business have been tracking, e-mobility has been doing a lot better just from both, just really a year over year perspective. And now, kind of into the June quarter, both are kind of down around 30% year over year.

Thomas O'malley: E-mobility has been doing a lot better, just from both a, just really a year-over-year perspective, and now kind of into the June quarter, both are kind of down around 30% year-over-year. Could you talk about, you know, what you're seeing there as to why those are tracking the same? I would expect kind of the e-mobility side to track a little bit better. In the recovery for the remainder of the year, would you expect one to kind of grow faster than the other? But just any color there would be helpful.

Operator: Can you talk about what you're seeing there as to why those are tracking the same? I would expect the e-mobility side to track a little bit better. In the recovery for the remainder of the year, would you expect one to kind of grow faster than the other? But just any color there would be.

Vineet Nargolwala: I would expect kind of the e-mobility side to track a little bit better. In the recovery for the remainder of the year, would you expect one to kind of grow faster than the other, but just any color there would be helpful.

Vineet Nargolwala: Yeah, hey Tom, this is Vinnie. I'll take that question. So keep in mind that the product ups and downs you see here in our Q1 results are really a function of what we are shipping or undershipping. And so I wouldn't read too much into the product trends there. I would say broadly speaking, when we look at our design pipeline, more than three quarters of that within automotive is tied to e-mobility. And so it's natural to expect that e-mobility will have a faster acceleration as we come out of this trough, as we come out of this inventory rebalancing period.

Vineet Nargolwala: And certainly, as we look to the future, we would expect the e-mobility sales to continue to trend higher.

Vineet Nargolwala: Helpful. And then if I look at the Geos you gave as well, I think I caught that China was 19% of revenue; that looks like it's down about 50% sequentially. In terms of your China revenue, is that mostly auto or industrial? And I just wanted to make sure that there wasn't a correlation between the drop in China and potentially the weakening EV side. Any kind of color on where that China weakness came from would be helpful. Thank you.

Vineet Nargolwala: Yeah, Tom. It's related to what I just said earlier. It's an artifact of us undershipping very significantly into the China market. China is largely self-redistribution. Both are automotive from a fulfillment standpoint, as well as our industrial business in China, which gets self-redistribution. And that's where we really wanted to inflect a significant inventory rebalancing, if you will. And so I think China bore the brunt of that inventory correction in Q1. And so I wouldn't read too much into it other than we have successfully taken out a big chunk of inventory in the China region. And that now sets up really well as we look to the coming course.

Vineet Nargolwala: Hopefully, that answers your question.

Operator: Thank you.

Operator: Thank you. Our next question comes from the line of Joshua Buchalter. Josh, your line is now open.

Joshua Buchalter: Our next question comes from the line of Josh Baculture at T.D.

Speaker Change: Hopefully that answers your question.

Speaker Change: Thank you. Our next question comes from the line of Josh Buchalter.

Derek Tantillio: Cohen. Josh, your line is now open. Hey guys, thank you for taking my question. I wanted to follow up on the earlier comments about gross margins. So totally understand that under utilization is sort of driving the headwinds now. But how should we think about that unwinding over the next few quarters? And also, is there any lingering impact? And can you remind us on how crocuses margins should start to layer in over the next several quarters? And to still feel confident you can get back to that mid 50s levels by the end of the fiscal year.

Speaker Change: Crocus's margins should start to layer in over the next several quarters and do you still feel confident you can get back to that mid-50s levels by the end of the fiscal year? Thank you.

Derek Tantillio: Thank you. Yeah, Josh. So, as I just talked about a few minutes ago, really the way to think about the utilization is the last two years we've put in place a significant amount of capacity at a Philippines facility. And CapEx was running 12-13% of sales. That's down to 7% if you want. It's expected to revert towards our model of about 6% as we don't need the capacity. CapEx; there'll be some unique things. But we have a significant amount of capacity, and the majority of the declining gross margin from Q4 to Q1, the 400 basis points.

Operator: Yeah, Josh, so as I just talked about a few minutes ago, really the way to think about utilization is that over the last two years, we've put in place a significant amount of capacity at a Philippines facility, and CapEx was running, you know, 12, 13 percent of sales. That's down to 7 percent in Q1, and it's expected to revert towards our model of about 6 percent as we don't need the capacity of CapEx. There'll be some unique things.

Speaker Change: Yeah, Josh, so as I just talked about a few minutes ago, really the way to think about the utilization is the last two years

Operator: But we have a significant amount of capacity, and the majority of the declining gross margin from Q4 to Q1, the 400 basis points, the majority of that was utilization. And if you kind of look at the change in revenue versus the change in margin, there's about 65 percent drop-through, and that's historically been around the number 60 to 65 percent. So if you extrapolate that forward and look at that for Q2, that's about on our Q2 guidance at the midpoint.

Speaker Change: As we don't need the capacity of CapEx, there'll be some unique things, but we have a significant amount of capacity, and the majority of the declining gross margin from Q4 to Q1, the 400 basis points, the majority of that

Derek Tantillio: The majority of that was utilization. And if you kind of look at the change in revenue versus the change in margin, there's about 65% drop-through. And that's historically been around the number of 60 to 65%. So if you extrapolate that flow and you look at that for Q2, that's how that's about one, our Q2 guidance at the midpoint. Mix will play a fact that, to the extent that you have positive product mix, positive distribution mix will all start to work its way back.

Speaker Change: was utilization, and if you kind of look at the change in revenue versus the change in margin...

Speaker Change: There's about 65% drop through, and that's historically been around the number 60 to 65%.

Operator: Mix will play a factor to the extent that you have positive product mix, and positive distribution mix will all start to work their way back. So yes, that gets us back to that kind of Q4 level of gross margin by the end of this fiscal year.

Derek Tantillio: So yes, that gets us back to that kind of Q4 level of gross margin by the end of this fiscal year. Got it. Thank you for that color, Derek.

Speaker Change: Product Mix, Positive Distribution Mix will all start to work its way back. So yes, that gets us back to that kind of Q4 level of gross margin by the end of this fiscal year.

Vineet Nargolwala: And then maybe a bigger picture one. I know Sankin has the lock up and the board seats thresholds that are still below the 33% level. But is there any change long-term? I mean, once we get through this lock up, do you expect Sankin to continue to want to monetize their position? Or do you think that it's important to them to keep the strategic relationship with the leg row longer and beyond the lock-up period? Thank you. George, this is Vinay. Thanks for the question. Obviously, this question is best posed to Sankin. You know, I can relay what our conversations have been around, which is they continue to really enjoy the strategic relationship.

Speaker Change: still below the 33% levels. But is there any change long term? I mean, once we get through this lockup, do you expect Sankin to continue to, you know, want to monetize their position? Or do you think that, you know, it's important to them to keep the strategic relationship with Allegro longer and beyond the lockup period? Thank you.

Vineet Nargolwala: And they've taken a really big chunk of their value in Allegro and monetized it in this transaction. And the reason for that, you know, that large transaction was to make sure that they had enough capital to meet all of their needs for some time to come. Having said that, obviously, things are dynamic; they can change, and they'll have to make their determination once they get out of the locker period. But certainly, from our perspective, we are pleased with this transaction and what it means for Allegro shareholders. I understand. Thank you, Vinay. Appreciate the color there.

Speaker Change: They've taken a really big chunk of their value in Allegro and monetized it in this transaction. And the reason for that large transaction here was to make sure that they had enough capital to meet all of their needs for some time to come.

Operator: Having said that, obviously things are dynamic, they can change, and they'll have to make their determination once they get out of the lockup period. But certainly, from our perspective, we are pleased with this transaction and what it means for Allegro shareholders.

Operator: Thank you.

Speaker Change: Understood. Thank you, Vineet. Appreciate the call over there.

Mark Lipacis: Our next question comes from the line of Mark Lipacis.

Operator: Our next question comes from the line of Mark Lipasis at Evercore ISI. Mark, your line is now open.

Speaker Change: Thank you. Our next question comes from the line of Mark Lipasis at Evercore ISI. Mark, your line is now open.

Vineet Nargolwala: Evercore ISI. Mark, your line is now open. Great. Thanks for taking my question. Two questions, actually, if I may. The odd all of the businesses down pushing about 80% revenues, I think, historically it's been the 70% range. Is this just an artifact of an inventory of what's going on in inventories in the supply chain? Would you expect steady state to be in the 70% range, or should we think differently about that mix? And then I have to follow up if I may?

Operator: Great. Thanks for taking my question. Actually, two questions, actually, if I may.

Vineet A. Nargolwala: The auto business is now pushing about 80% of revenues, I think, and historically, it's been in the 70% range. Is this just an artifact of inventory, of what's going on in inventories in the supply chain? Would you expect a kind of steady state to be in the 70% range, or should we think differently about that mix? And then I had a follow-up question, if I could.

Mark Lipasis: Two questions, actually, if I may. The auto business is now pushing about 80% of revenues, I think, and historically it's been in the 70% range.

Mark Lipasis: Is this just an artifact of an inventory, of what's going on in inventories in the supply chain and would you expect kind of steady state to be in the 70% range or should we think differently about that mix and then add a follow-up if I may?

Vineet A. Nargolwala: Yeah, Mark, this is Vineet. You're exactly right. I think we shouldn't read too much into product or segment trends just for this quarter because we've been working very hard with our customers and partners to really draw down inventory. And that's obviously been very, you know, different for each, each customer, each partner.

Vineet Nargolwala: Yeah, Mark, this is Vinay. You're exactly right. I think we shouldn't read too much into product or segment trends just for this quarter, because we've been working very hard with our customers and partners to really draw down inventory. And that's obviously been very different for each customer, each partner. I would expect that, as things normalize, we should get back to a more traditional mix. However, from quarter to quarter, things do vary, and it depends on really a function of the auto pattern as opposed to a strategic intent to grow one area over the other. Gotcha.

Vineet A. Nargolwala: Yeah, Mark, this is Vineet. You're exactly right. I think we shouldn't read too much into product or segment trends just for this quarter because we've been...

Vineet Nargolwala: Working very hard with our customers and partners to really draw down inventory and that's obviously been very You know different for for each each customer each partner

Derek Tantillio: That makes sense.

Derek Tantillio: And then the second question on distribution in inventories. How should we think about, or how do you think about what the right level should be? I think, if I remember correctly, you had taken them down and then you started to restock the channel, and now you're destocking. How do you think about going forward? Is there a steady state level that you like to have on a day's basis in the channel, or do you think about different times of the cycle you want to have different levels there? You just help us think about longer term, how you think about distribution in inventories in the right levels.

Mark Lipasis: How should we think about, or how do you think about, what the right level should be? I think, if I remember...

Speaker Change: is, like, how do you think about...

Speaker Change: Do you think about, you know, different times of the cycle? You want to have different...

Derek Tantillio: Thank you.

Derek Tantillio: Yeah, Mark. In the past, we've talked about ideally having eight to 12 weeks in the distribution channel in a given time, and that'll vary by region. Some regions, like Japan, like to carry more to inventory. We're still stalking that channel, quite frankly, as we'll go away from Sankin in the last year and a half. Other regions, if you remember going back two years, so the trough did about four weeks, three weeks, which was very difficult for everybody. And as often happens, we're above those levels right now. We expect to get back into those levels over the next couple of quarters.

Speaker Change: Any given time and that'll vary by region, you know, some regions like Japan like to carry more at this, you know, inventory We're still stocking that channel quite frankly as we've moved away from Sanken in the last year and a half

Derek Tantillio: Yeah, I would just add, Mark, that, you know, distribution serves two purposes for us. One is fulfillment for some auto customers, largely in Asia, and the second is serving our very fragmented, broad, but high growth industrial verticals. And so the dynamics that are very different, one of the key things that we focus on through distribution is part of availability. And so we never want the inventory to come down below the 8 to 10 weeks that Derek has mentioned. So that's really the sweet spot for us. And we need to make sure that we get our partners back into that range.

Mark Lipasis: Yeah, I would just add, Mark, that, you know,

Operator: serves two purposes for us. One is fulfillment. We've said this before, and I'd say it again, we get really good data in terms of point of sale.

Mark Lipasis: One of the key things that we focus on through distribution is part availability. And so we never want the inventory to come down below the 8 to 10 weeks that Derek has mentioned. So that's really the sweet spot for us. And we need to make sure that we get our partners back into that range.

Derek Tantillio: We've said this before; I'll say it again: we get really good data in terms of on a sale, as well as the days of inventory on hand. So we're able to really guide each partner to the right level of inventory depending on the mix of fulfillment versus organic, organic demand creation. Very helpful, thank you.

Operator: Very helpful; thank you.

Derek: And I'd be, this is Derek. I'd be remiss if I didn't answer the second part of Josh's question with respect to Crocus margins. So, you know, Crocus has been largely, almost entirely integrated into Allegro.

Derek Tantillio: And I'd be, this is Derek. I'd be remiss if I didn't answer the second part of Josh's question with respect to Crocus Margin. So, you know, Crocus has been largely, almost entirely integrated into Allegro. And so we're focusing on R&D in that business, and their variable contribution margins are really quite acceptable above our existing variable contribution margins. And we've fully absorbed their raw facts. And if you look at our raw facts, it's actually down 5% year over year, inclusive of fully absorbing Crocus. And we're making investments in the research and development. They're expected to release more parts this year that they have it has, and the variable contribution margins are really healthy.

Speaker Change: Very helpful, thank you.

Derek: And I'd be, this is Derek, I'd be remiss if I didn't answer the second part of Joshua's question with respect to Crocus margins, so...

Derek: And so we're focusing on R&D in that business, and their variable contribution margins are really quite acceptable above our existing variable contribution margins. And we've fully absorbed their ROPEX. And if you look at our ROPEX, it's actually down 5% year over year, inclusive of fully absorbing Crocus. And we're making investments in research and development. They're expected to release more parts this year than they ever have. And the variable contribution margins are really helpful.

Operator: This time I'm showing no further questions in the queue.

Operator: Next time I'm showing no further questions in the queue. I would now like to hand it back to Jalene for closing remarks.

Jalene Hoover: I would now like to hand it back to Jillene for closing remarks.

Jalene Hoover: Thank you, Steve.

Jalene Hoover: Thank you, Steve. This concludes this morning's conference call. We appreciate you taking the time to join us.

Jalene Hoover: This concludes this morning's conference call. We appreciate you taking the time to join us. Thank you for your participation in today's conference.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Operator: This does conclude the program. You may not disconnect.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Speaker Change: Jalene Hoover, Jalene Hoover, Jalene Hoover