Q2 2025 Allegro MicroSystems Inc Earnings Call
Speaker Change: Good morning and welcome to the Allegro Microsystems of the second quarter fiscal 2025 Burning Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: 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 that your hand is raised.
Speaker Change: To withdraw your question, please rest our one one again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Julian Hoover by President of Investor Relations and Corporate Communications.
Julian Hoover: Thank you, Corey. Good morning and thank you for joining us for today's call to discuss a Lego 2nd fiscal quarter 2025 results. I'm joined today by a Legrose President and Chief Executive Officer Benito Nagawala and a Legrose Chief Financial Officer Derek Dentileo.
Julian Hoover: They will provide highlights of our business, with your quarterly financial performance and share our third quarter outlook. We will follow our prepare for marked the Q&A session.
Julian Hoover: Our earnings release and prepared remarks include certain non-gap financial measures. The non-gap financial measures that are discussed today are not intended to replace or be a substitute for our gap financial result.
Julian Hoover: Reconciliation of these non-gap financial measures to the most directly comparable gap financial measures are included in our earnings release which is available in the Investor Relations page of our website at www.legrimmicro.com
Julian Hoover: This call is also being webcast and a replay will be available in the events and presentation section of our IR page shortly.
Julian Hoover: During the course of this conference call we will make projections and other forward-looking statements.
Julian Hoover: 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 day and as a result are subject to risks and uncertainties that could cause actual results to differ or events to differ materially from projections.
Julian Hoover: and important factors that can affect our business, including factors that could cause actual results of different from our forward-looking statements. Our described in detail in our earnings release for the second quarter of fiscal 2025. And in our most recent periodic or other filings with the Securities and Exchange Commission.
Julian Hoover: Our estimates, expectations, or other forward-liquid statements may change, and the company assumed to know obligation to update forward-liquid statements to reflect actual results, changes to assumptions or other events that may occur, except as required by law.
Speaker Change: It is now my pleasure to turn the call over to a legot present at NCO Vinnie Nargolwala. Vinnie.
Vinnie Nargolwala: Thank you, Jalene and good morning and thank you for joining us second quarter of fiscal year 2025 conference call.
Vinnie Nargolwala: We delivered results consistent with our guidance despite a challenging macro environment.
Vinnie Nargolwala: Due to sales were $187 million with sequential growth in automotive and industrial and other end markets.
Vinnie Nargolwala: Non-Gap EPS was 8 cents at the high end of her outlook.
Vinnie Nargolwala: We are later focused on executing a new product roadmap to bring innovative new solutions to our customers.
Vinnie Nargolwala: In Q2, we announce two new extreme-sense TMR current sensors, which represent the first product's launch in the company's acquisition of Crocus.
Vinnie Nargolwala: These high bandwidth, high resolution TMR sensors, streamlined high power density designs, and provides space and cost savings while improving energy efficiency.
Vinnie Nargolwala: The well suited for automotive powertrain, AI data center, electric vehicle charging infrastructure and solar applications.
Vinnie Nargolwala: and this focus on innovation is paying off as our solutions continue to build momentum across our strategic focus areas with important design ways.
Vinnie Nargolwala: In Q2, we had a large design win with a leading Japanese OEM for a PhDV inverter using a current sensor solution.
Vinnie Nargolwala: Our extreme sense portfolio, one of major projects for clean energy smart metering application in North America.
Vinnie Nargolwala: Our high voltage isolated gate driver secured a wind with a Chinese equipment manufacturer to test lithium batteries used in XV and solar applications.
Vinnie Nargolwala: and finally, we secured another large design when using our TMR technology for blood glucose water tray.
Vinnie Nargolwala: This expands the medical business we obtain through the Crocus acquisition where we continue to gain traction.
Vinnie Nargolwala: The diverse nature of our winds further highlights the resilience of football for you across vehicle architectures and between automotive and industrial markets.
Vinnie Nargolwala: I now want to discuss what we're seeing in our end markets, starting with automotive.
Vinnie Nargolwala: For the past two months, I'm at the opportunity to meet several of our key customers in China, Japan, Europe and North America and really get a sense for how things are on the ground. Both in terms of the state of the market and our engagement with customers.
Vinnie Nargolwala: Overall, I'm really encouraged by the continued global demand for a highly differentiated magnetic sensing and power semiconductor solutions across wave-locked textures and the significant progress made in rebalancing inventory in the channel.
Vinnie Nargolwala: Chinese OEMs are heading full stride with mid-20% growth in XB production and a slew of new products and models at every price point.
Vinnie Nargolwala: The expanding the production outside China with announcements of new plants in Europe, South America and Southeast Asia.
Vinnie Nargolwala: Chinese XIVs are now 45% of total domestic production and expected to exceed 75% of domestic production by 2030.
Vinnie Nargolwala: We recognize this momentum early on and responded by proactively moving more resources to this region and localizing production in China with our partners I'm pleased to report that our first parts from a newly formed China supply chain will launch before the end of the year
Vinnie Nargolwala: I remain encouraged by the deep engagement of our teams with a China partners, including continued design and progress with customers like BYD and Neo as we collaborate on future solutions.
Vinnie Nargolwala: With the in vitrieticians largely behind us, we are seeing a China shipments returned to normal ordering patterns supporting a strong increase in second quarter sales.
Vinnie Nargolwala: In Europe and North America, we're seeing continued progress from a design and activity standpoint and recognize that Williams are still trying to get their investments and cost structures aligned to market needs.
Vinnie Nargolwala: Why we have made progress in military digestion? We expect continued near-term chop-in-ass in order to balance from North America and European customers.
Vinnie Nargolwala: Despite these near-term challenges, we are highly encouraged that auto-OEMs remain committed to an electrified future and the adoption of more autonomous features.
Vinnie Nargolwala: We are confident in our customer's ability to navigate these challenges and we are well positioned to support them with more leading, magnetic sensing and power semiconductor solutions.
Vinnie Nargolwala: Arkas Summers in Japan and the rest of Asia continue to make steady progress in expanding their hybrid and battery electric solutions.
Vinnie Nargolwala: In our industrial and other and market, we are seeing signs of increased activity after prolonged inventory digestion period.
Vinnie Nargolwala: We still expect demand to recover at some point in calendar year 2025 and we are encouraged by the signals we are seeing from our customers.
Vinnie Nargolwala: Our third quarter sales outlook comprehends continued progress towards vehicle identification, ongoing inventory rebalancing is reflected in the latest third body estimates, and typical December quarter seasonality.
Vinnie Nargolwala: While the macro continues to be uncertain, we remain focused on executing our strategies, accelerating our new product introductions, and serving our customers.
Vinnie Nargolwala: We continue to invest for growth with the intent to extend our market leadership and deliver our commitments to our teams, our customers and our shareholders.
Vinnie Nargolwala: We are encouraged by the progress made and believe the business is possible for acceleration.
Vinnie Nargolwala: I want to thank our teams around the world for the continued hard work and dedication in focusing on what we can control, executing at the highest level and serving our customers.
Speaker Change: I'll now turn the call over to Derek to review the Q2 financial results and provide our outlet for the third quarter. Derek, thank you very good morning everyone.
Derek Dentileo: Studying with a summary of our Q2 financial results, sales will $187 million gross margin was 48.8% operating margin was 11.7% and adjusted even DA was 17.2% of sales.
Derek Dentileo: As a result, earnings were eight cents per share at the high end of our old book range.
Derek Dentileo: Total Q2 sales increased by 12% sequentially but declined by 32% the pay to Q2 of fiscal 24.
Derek Dentileo: Sales to a automotive customers were $122 million and increase of 8% sequentially and a 28% year of a year decline.
Derek Dentileo: Auto Sales were 76% of Q2 sales, and even ability sales were $71 million and increase of 14% sequentially.
Derek Dentileo: Industrial in other sales for $45 million increasing 27% sequentially due to increases in consumer and broad-based industrial markets.
Derek Dentileo: and that's you and other sales decline 42% year over here.
Derek Dentileo: Sales throw a distribution channel with $96 million and represented 51% of Q2 sales.
Derek Dentileo: From a product perspective, magnetic sensor sales were $129 million.
Derek Dentileo: Increasing 12% sequentially in representing 69% of Q2 sales.
Derek Dentileo: Sales of a power product worth $58 million, increasing 13% sequentially.
Derek Dentileo: Sales by geography were again well balanced, the 26% of sales in China, 21% of sales in the rest of Asia, 20% in Japan, 18% in America's and 15% in Europe.
Derek Dentileo: Now, trying to cute you in profitability.
Derek Dentileo: Rose Modg and was 48.8% had operating expenses with $69 million. Down 3% sequentially, 7% compared to Q2 with fiscal 24.
Derek Dentileo: Operating margin was 11.7% sales.
Derek Dentileo: Nearly doubling from 6% to 1%, but down from 31% a year ago.
Derek Dentileo: The effective tax rate for the quarter was 4%.
Derek Dentileo: and our full year effective tax rate is now projected to be 6%.
Derek Dentileo: Loat with an off-review saw look due to the favorable impact of a relatively fixed Arrangee credit on lower taxable income.
Derek Dentileo: The second quarter of the Littagia account was $190 million shares, and net income was $15 million or a neat sense for Littagia up from $3.71.
Derek Dentileo: Moving to the balance sheet and cash flow, we ended Q2 with cash at approximately $200 million and the term loan balance was $400 million at the end of Q2.
Derek Dentileo: Cash Flow from Operations was $16 million. Cash was $10 million. If we cash flow was $6 million.
Derek Dentileo: From a working capital perspective, DSO was 37 days, compared to 35 Q1, and inventory days were 158, compared to 174 days in Q1.
Derek Dentileo: Before I discuss like you three outlook, for modeling purposes I'd like to take a few minutes to highlight key details related to our share repurchase from St. Electric this past July.
Derek Dentileo: A LEGO repurchase 39 million shares from Sankon, which reduces Sankon's ownership in a LEGO from 51 to 33%.
Derek Dentileo: The Fund of the Transaction, Allegra Wissue 29 million shares in an equity offering.
Derek Dentileo: and purpose and retired at net 10 million cheers with an incremental 200 million dollar term loan in cash on hand.
Derek Dentileo: As a result, a Lagos outstanding share count declined from 194 million shares to 1804 million shares.
Derek Dentileo: These transactions also increase the Lagros public flow by 30%.
Derek Dentileo: In addition, St. Henry University Lagerow, all transaction fees and expenses, and paid a Lagerow with $35 million transaction facilitation fee.
Derek Dentileo: As a result of a stock price decline between the fixed-reproject price and the closing of these transactions, a labor was required on the gap to record a forward-reprojects-fair value adjustment.
Derek Dentileo: This resulted in a 35 million dollar non-cash GapWoss Q2.
Derek Dentileo: Finally, a conjunction with a $200 million incremental terminal, we took the opportunity to repricate the entire terminal from SOFER Plus 275 to SOFER Plus 225 basis spikes.
Derek Dentileo: I'll now turn into a Q3 2025 outlook.
Derek Dentileo: We expect the record sales being the range of 170 to 180 million dollars.
Speaker Change: As Benette mentioned, this range contemplates continued progress towards vehicle electrification, ongoing customer inventory rebalancing.
Speaker Change: and December 4, season out.
Speaker Change: We also reject the following on and on gap basis. We expect gross margin to be between 49 and 51%.
Speaker Change: and this morning we made another $25 million dollar voluntary debt payment on our term loan. Bringing the balance down to $375 million. As a result, we now expect the record of non-gab interest expense be approximately $6 million.
Speaker Change: We expect our tax rate to be approximately 6%.
Speaker Change: and our weighted average to Luda Chair counts to be approximately 185 million shares.
Speaker Change: As a result, we expect non-gap EPS to be between 4 and 8 cents per share.
Speaker Change: Now I'll turn on the call back to Jalene for questions Jalene.
Jalene: Thank you Derek.
Jalene: This concludes Management's Prepared remarks. Before we open the call for your questions, I'd like to share our third fiscal quarter conference line up with you.
Jalene: We are attending UBS's Global Technology Conference on December 3 at the Finnation Hotel of Scott Zill. Wells Fargo's 8th Annual TNT Summit at the Terrania Resort in Rancho Palo's Verde's in December 4th.
Jalene: and Barclays 22nd Annual Global Technology Conference at the Palace of Television, San Francisco, and December 12.
Jalene: I would also like to direct you to an updated investor presentation located in the events and presentation section of the investor website section of our website. We will now open the call for your questions. Corey, please review Q&A instructions.
Corey: Thank you very much. At this time we will conduct the question and answer session. As a reminder to ask a question you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 again.
Corey: Provide the opportunity for everyone to ask the question, please limit to one. Please stand by while we compile the Q&A roster.
Speaker Change: Our first call comes from Blaine Curtis of Jeffrey Splangerline, is open. Thank you for your morning and thanks for taking my question. Veneet, I just want to ask that, obviously, you had a very start correction in June. I think you felt comfortable the time that that was such a big correction that you kind of grow off of that. You did.
Speaker Change: and September but then the sequential down again. I'm just going to carry it with you that you're going to be back to kind of the student levels which you thought were way below where they should be. So I'm just going to carry it with you what changed and can you walk it through also for December.
Speaker Change: I'm assuming a big part of that correction is auto but you know industrial was up strongly is that back down into December as well.
Speaker Change: Hey, Blaine, this is Veneet, so thanks for the question. So, you know, our, our, that midpoint are guide for the December quarter will be higher than where we were in June.
Speaker Change: and when we looked at our trends back in that time frame, it really the biggest challenge was the inventory digestion and as I said in my prepare-der-bought, it made some really good progress in bringing that down into normal levels.
Speaker Change: I would tell you that when I look at the automotive sector
Speaker Change: We're seeing some great momentum in China. Our shipments or sales in China in the second quarter, we're up 54%. And the inventory you're balancing is all behind us in China, and we see some great momentum there.
Speaker Change: where we see still some lingering effects of the inventory digestion is North American Europe, which has been compounded by further reduction in production.
Speaker Change: and the European Union. So I think that's the new piece of data that we're layering in as we think about the next quarter.
Speaker Change: I think you mentioned a gate driver when with a China OEM. Can I please expand on that? I think it's a new product for you and there's a big discussion about Chinese Silicon Carveye and you know, is your...
Speaker Change: Gatriva appeared with 20-slugging carbide. I'm sure I understand, obviously, there's a bundle situation for some of the vendors. You're kind of breaking that bundle with a better performing chip. This is kind of curious. What's your of that win? Yeah. Maybe the Gatriva pipeline.
Speaker Change: and your exactly right. We bring a unique value proposition with our isolated gate drivers, where we combine essentially three functions into one chip.
Speaker Change: It there is almost 30 to 35%.
Speaker Change: Space Savings and all-Rot System cost savings.
Speaker Change: and for OEMs who are really astute and are looking at ways to reduce overall system cost while also regaining flexibility and sourcing power as the look at different can fats or silicon carbide fats.
Speaker Change: is a great option. So we're getting some really good traction with our gang drivers that are being released into the market that when was related to that and will be shortly sampling our Silicon Carbite drivers as well, which are, you know, we've got a long land of customers waiting to sample that. Thank you for the question.
Speaker Change: Thanks.
Speaker Change: Thank you, one moment for our next question.
Speaker Change: Our next question comes from Thomas O'Malley of Barclays. Thomas your line is open.
Thomas O'malley: Good morning guys, thanks for taking the question. My one's a little bit broader, so if I look at just the general auto space from kind of calendar year 21 on just before the
Thomas O'malley: the pandemic and today you've grown pretty much lost off and there with the auto group.
Thomas O'malley: and if I look at 2024, obviously not everyone has reported yet, but it looks like you're seeing a much sharper correction than your peers this year where just based on your guidance, you're kind of down 28% on the year versus
Speaker Change: and the pure stuff that's just down modestly. So, could you maybe just describe one, do you think that you are just earlier to the correction where you're taking this cut before others and have a little bit more of a lean supply chain given your product type and would see your recovery more quickly or maybe any sort of statistics around inventory work down or where the channel is today or where direct customers are today, that would explain that difference. I guess that's the first question.
Speaker Change: Yeah.
Speaker Change: Yeah Tom, thank you for the question. You know it's hard for me to comment on how others are navigating through what we consider to be pretty challenging.
Speaker Change: and the automotive sector. I will tell you that.
Speaker Change: We didn't really have an extreme use of long-term strategic agreements to lock up customers.
Speaker Change: On Volus, perhaps, then make sense based on your realities.
Speaker Change: and so we were also working very closely with our advanced visibility into our backlog and our order patterns.
Speaker Change: with customers to make sure that we weren't.
Speaker Change: and putting access in the channel. So I would say that we took our medicine early and we believe that we have done some really good work in helping our customers clear out that inventory from the channel and from the positions.
Speaker Change: and so you know I think it remains to be seen you know how we get out on the other side but we're confident that as these near-term
Speaker Change: and the challenges around inventory digestion and the bait and our OEMs.
Speaker Change: Our oil and customers get their production plans in place, aligned to what the market needs.
Speaker Change: We're going to be coming out of it in Poise for Acceleration.
Speaker Change: and Thomas is Derek, I just add that if you remember about a year, exactly a year ago with the November call last year.
Speaker Change: We started talking about opening up our cancellation window, particularly things that were sort of late we will lay it on and for a long time I did that. We did that pretty proactive. This happens every couple of years. Even though things are NC and I, right, we're not going to hold our cousins for those things.
Speaker Change: and to answer the second part of your question.
Speaker Change: and the other side of things.
Speaker Change: and the distribution channel in its Veneet Manchet. We saw that very clearly in China, which China was back up 54%.
Speaker Change: and that all those are distribution, all the auto all the industrial and China. So there's still work to be done in other regions. I'd say Japan is relatively flat, which is good. The rest of Asia isn't pretty good shape. North American Europe still have work to be done quite frankly.
Speaker Change: Help, help. Can you just give us a metric on weeks of inventory at DST? Where is that normally? Where does that kind of peak and where is it now? And just kind of in line with that question, if things are more normalized.
Speaker Change: Do you expect that kind of looking into the March and June quarter? Obviously you described it since he's now being December that you would see some accelerated growth off of the bottom there.
Speaker Change: Yeah, so I'm going to provide the exact weeks on hand, but what I have provided in the past, that typically in the aggregate, we'd like to be within eight to 12 weeks. At one point a couple of years ago, we will well below that. We don't want to be there either.
Speaker Change: Some regions are getting much closer to that right now. Other regions like North American, Europe, and still above that, Japan is just to work above that, kind of in the 14-15 weeks and it stays there.
Speaker Change: China is moving much closer to that we're actually seeing.
Speaker Change: Small pockets of behavior where we're seeing orders within lead time and maybe people dip into deep in amulatory. So, you know, those kind of things are good indications that we might start to see some acceleration in 2025.
Speaker Change: Thank you very much, one moment for our next video.
Speaker Change: question.
Speaker Change: Our next question comes from Josh Bucklewilter of TD Cohen. Josh your line is open.
Speaker Change: Hi everyone, this is Landy Ons for a Josh, can you hear me okay?
Speaker Change: Yes!
Speaker Change: Awesome. So kind of switching gears a little bit to industrial. I know it's been a bit of a...
Speaker Change: Plotting to get through the inventory correction but you posted a pretty healthy sequential growth in the quarter and you mentioned
Speaker Change: Broad-based industrial kind of recovery. Where are you seeing some of the green shoots? What are the putty and takes and looking forward into the next one or two quarters? Where do you see the trends lining up? And I have a follow up.
Speaker Change: Sure, highlight this as a Veneetel, I'll take the question. So you'll recall the last quarter we combined our industrial and other segments. So this is sort of more broad-based commentary. You know, we've highlighted success in our medical business. That's continuing to perform nicely for us.
Speaker Change: We're also seeing some consumer, you know, we have very select consumer positions with some major OEMs.
Speaker Change: We're seeing some nice pickup there.
Speaker Change: and the other side of the house.
Speaker Change: We are hesitant to call it a full broad-based recovery in industrial and other. Obviously there's some work to do. We think recovery is most likely in summer in 2025.
Speaker Change: But the initial signs we're seeing in terms of pickup and auto patterns, you know, certain segments showing more strand than others gives us some encouraging signs and we're hopeful that, you know, the industrial segment, industrial and other segment, will recover after what has been a really prolonged inventory type.
Speaker Change: Great, thank you for the color and then I asked one of her Derek looking into the next quarter Gursmargin expected to expand just lightly up a midpoint but revenue down.
Speaker Change: 6.5% quarter of a quarter of a kilo gives a bit of color on the putt and takes there, of course out expectations in terms of like sales, channel, segment, and etc.
Speaker Change: So in the Q2, our gross margin is 48.8%.
Speaker Change: and it had a sort of a poet, a one-time quality resolution of about 80 basis points, plus some geographical mix, right? There was a heavy component of China in there. As we go into Q3, I'm pretty confident that 49 to 51% range is the geographical mix that's the normalized again.
Speaker Change: We're getting better utilization in our factories and then that one time cost goes away So that's really the bridge for Q2 and Q3
Speaker Change: and I'm serious.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question comes from Chris Kaseau of Wolf Research. Chris, your line is open.
Chris Kaseau: Yes, thanks, good morning. I just made just a follow up on that last quick comment you made where the the mixed normalizes in Q4
Chris Kaseau: Maybe you can give some sense of what you expect for the product mix as you go to Q4, with maybe the buckets of...
Chris Kaseau: Water Industrial and what's going on in China there, because obviously a lot changed. There was a lot of China in Q3, a lot of growth in industrial in Q3 and how that kind of plays out as you go into Q4.
Speaker Change: Yeah Chris, we're not gonna buy market.
Speaker Change: but we expect the sales at midpoint sales are the quantity 6% right? That's going to be pretty consistent between the two markets. And so when I talk about mixed as large-EG, your graphical mix and product mix can have the biggest impact on that. So to the extent that certain parts of our current sense of business and other things have a higher component of those sales than even geographically they get impact on that.
Speaker Change: Okay, understood. One of you could also follow up on some of the comments you made about the China supply chain.
Speaker Change: which you're making some changes there. I mean, is that you're going to move some production into trying to domestic to be able to...
Speaker Change: and the local OEMs there, maybe give some color on what the strategy is there and what's the timeline of that.
Speaker Change: Short-rits.
Speaker Change: This is a very big question. So, almost a year ago we started talking about a plant that localised manufacturing in China as...
Speaker Change: We saw the significant boom and production.
Speaker Change: especially related to XEVs both plug-and-hybrid as well as battery electric vehicles or new energy vehicles that they call it China.
Speaker Change: and we started the process of modifying a reference supplier as well as all sets.
Speaker Change: and the both sides are obviously on a shorter time frame. The way for qualification will take a little bit longer but we are starting to see the first parts from our O-Sack partner rule-off by the end of this year. And so really excited about that. We are ahead of our schedule so please about that progress by the team.
Speaker Change: and we will endeavor to move a sizable portion of our China revenues.
Speaker Change: into China.
Speaker Change: and that would really be based by the time taking the qualified different parts as you.
Speaker Change: will remember all of our parts are all more great so it does take time.
Speaker Change: but really our focus is to make sure that we are serving a China customers the best way that they want to be served and increasingly that's local manufacturing.
Speaker Change: and just to follow on to my follow on, is there any margin implications with that, with moving that production into domestic China?
Speaker Change: Open Chris, over time we do expect that to be positive to grow smart GTS.
Speaker Change: God. Thank you.
Speaker Change: Thank you very much. One moment for our next question.
Speaker Change: Our next question comes from a great jazoon of UBS, great your line is open.
Speaker Change: Hey, it's Tim. I'll carry you. So can you talk a little bit about what's going on with magnetic sensors versus P-Mix? Is the outlook better in one market versus the other?
Speaker Change: The End.
Speaker Change: Timmy.
Speaker Change: Not particularly, I think we're seeing broad-based momentum when their comes to our design wins or to our orders, you know, generally.
Speaker Change: We do a lot of solutions selling as well which kind of tends to make them move together. Having said that, we're obviously considered a magnetic sensing. We tend to win more than a fair share, whereas in the power portfolio we have leadership and selected applications that we focus on. So hopefully that gives you a sense for how these things move.
Speaker Change: and the whole world. In 10 to 2, you know, they were kind of up similarly. The magnetic sensing was up 12%, powers up 13%. And typically there's a bit more power and industrial and other. In a bit more sensing and automotive, see kind of correlate those two a little bit.
Speaker Change: Perfect, yeah, got it. So Derek, I think that I can may, you were hopeful to get to mid 50s gross margin by March.
Speaker Change: and obviously things are worse than you thought then. But can you talk about some of the puts and takes as you look into next year and maybe what the sort of incremental drop solution think about is on the gross margin as you come off the bottom.
Speaker Change: The End of the Video
Speaker Change: Yeah, so the Q2 draw through when we gave the guidance was expected to be 65% and that's kind of where it's been historically the last three years since we've been public essentially
Speaker Change: I still expect that to hold pretty true.
Speaker Change: That's it. One time charge is like we had here in Q2 and actually going into Q3 is when you point it out we're having it to 26% in revenues and still having gross margins improved by 120 basis points at the midpoint of our guidance.
Speaker Change: and I'm still believing that 65% we still see that as utilization. So that's the good news. As we continue to have revenue number in your model, we should get that 65% to our top of that we expect tailwits from normalization of Mexican industrial.
Speaker Change: and by region plus a lot of the new products that were released as those started to get momentum in the market while these isolated gay drivers, the TMR products, those inherently have high aggros margins at VARASPs.
Speaker Change: Thanks Jack.
Speaker Change: Thank you very much for one moment for our next question.
Speaker Change: Next question comes from DJ Mortesh of Mizzuhov. DJ your line is open.
DJ Mortesh: Hi, I just took two quick questions. On the Vistice side, can you talk to where in Ventries are like and where there should be versus normal levels, I guess.
Speaker Change: The VGA really I mentioned that normal levels are about 8 to 12 weeks and that's in the aggregate regions like Japan to be carry a little bit more inventory and then not borrow off of that but consistent in Japan for the last couple of waters.
Speaker Change: as we built that distribution channel away from St. in a year and a half ago. So that's been pretty good shape. China has come down pretty significantly heading towards that 12 weeks.
Speaker Change: Rest of Asia, I think is getting close to that. There's some pocket late data, so I think they're just taking time with specific products that with that A1, I want it distribution inventory for quite some time. As the eat mentioned in North American Europe, there's still work to do open next quarter or two.
Speaker Change: and then I shall look out, let's say look out to next year, this wondering how the competitive landscape looks, you know, what do you think in terms of your share on the magnetic fence or side and.
Speaker Change: Are you seeing any pricing pressure or do you expect pricing to be pretty stable into next year? If you engage some clever around that, thanks.
Speaker Change: Yeah, so we did a little two questions in one but I'll start with maybe the share piece.
Speaker Change: Look, you know, we've talked about our momentum and design wins, our momentum and our engagement with customers and all of that gives me a lot of confidence that we will not only maintain our shared and magnetic sensing but most likely extended. And that's really where our new product introduction focuses.
Speaker Change: It's really excited about the slew of new products we're bringing to the market. You'll hear more about it in the coming weeks and months. I highlighted some in my prepared remarks. We highlighted some in the last quarter. So there's a lot of momentum.
Speaker Change: in our new products velocity.
Speaker Change: So excited about that and I think that's gonna help us.
Speaker Change: Bill, maintain an extent share from a pricing standpoint I would say we're back into the stable environment. So what do I mean by that?
Speaker Change: In order motive, we're governed by our strategic design wins in the contract associated with that. So typically, you know, when we launch a part.
Speaker Change: It's also a higher price than that at one year of RAM, so we get to be sure that we're doing our customers and that's very, very typical. And that's usually the 2% range. And we've got back to that a couple of quarters ago, so no change there.
Speaker Change: The competitive wise, I think pricing pressure, we talked about some perhaps trying to fill the fast, getting real people desperate. I think that has become more normalized now and certainly people are seeing pass that and okay, what is the...
Speaker Change: and FIT to Function and really focusing on value. So I would say it's stable.
Speaker Change: Thanks for watching.
Speaker Change: Thank you very much for one moment for an next question.
Speaker Change: Next question comes from Mark LePakas of Evercore, Mark Ulan is open.
Mark LePakas: Great, thanks for taking my questions.
Mark LePakas: The need you said you had visited a lot of time visiting customers in the past quarter and I'm wondering if you look past your own distributors to your customers and I guess particularly at the tier ones.
Mark LePakas: Do you have a sense that inventories there for further downstream past the distributors are still above normal and going to normal levels or do you think they're at normal levels going to below normal levels that part of the supply chain?
Mark LePakas: Mark Thanks, that's a really insightful question and I think there is a geographical split to this. I would say that in China and you know broad parts of Asia.
Mark LePakas: We look at inventory ad distributors and beyond the distributors. We feel pretty good about where they are and where they're trending. In some parts we're starting to see orders coming within lead time.
Mark LePakas: that indicates that maybe some customers are a little too skinny on inventory.
Mark LePakas: We're trying to respond the best we can, as it will recall we've built a strategic day bank inventory that's allowing us to respond in a very agile way.
Mark LePakas: We expect more of that to happen, by the way, as the quarter goes on and perhaps even into the next quarter, we think a lot of customers have become too skinny on inventory.
Mark LePakas: in Europe and North America.
Mark LePakas: The Inventory Situation has been compounded recently with
Mark LePakas: Cards and production rates, a little bit of repositioning in the portfolio by the OEMs.
Mark LePakas: which is having some downstream impact on the contract manufacturers and tiers as the sort of figure out what parts do they need in order to go serve perhaps a real-life portfolio. That's causing a bit of churn to be honest.
Mark LePakas: and so it's hard to look at that picture and say, are they?
Mark LePakas: You know, there might be pockets where they have no inventory and there might be pockets where now based on realign product plants that might be an electricity. So that's a little bit harder to read, it's for transparency but we are working through that in close collaboration with the OEMs as well as the contract manufacturers and the gears.
Speaker Change: That's very helpful. Thank you for that follow-up. If I may just just move into that you discuss the dive bank.
Speaker Change: You had a large decline in your own days of inventory on your balance sheet.
Speaker Change: Could you just remind us of the target that we're shooting here for here and can you characterize that? Is that mostly dive bang to the extent it's finished good?
Speaker Change: What do you think happens to your own inventories over the next several quarters of the decline in aggregate affecting your own effective lead times on an aggregate basis or how you're able to respond to your customers. Thank you.
Speaker Change: The Yamachtus is there, so our inventory doll is actually increased by about a million dollars. Quarter of the court of the day came down pretty significantly from 174 to 159 as a function of the increase in revenue quarter of the quarter.
Speaker Change: I obviously revenue is declining at the mid-point of our guide 6% in.
Speaker Change: The December quarter, we expect to increase our on-balance, and inventory is a little bit as we continue to purchase waitvers, as we get favorable pricing to continue to buy waitvers and turn those into dive-bang, which we're confident we could use in their future. So, I expect inventory days to take up a little bit this next quarter. And about half of our inventory is either wait-for-bank.
Speaker Change: War Dybex and then the finished goods inventory.
Speaker Change: We carefully look at that to ensure that we have finished good inventory that is standard parts or catalog type parts such that we can respond within quarter because we're not in the sea something within quarter quarters, particularly for distributors. So that's how we look at our inventory profile mark. Yeah.
Speaker Change: and more just to add that the strategic dive bank is really important for us as I visited customers over the past couple of months. You know, the constant refrain I heard globally was.
Speaker Change: We aren't sure about what's happening with inventory in the channel or at CNs.
Speaker Change: But they are very concerned, the Williams are very concerned that the channel on an aggregate basis has gone too skinny.
Speaker Change: and so the diabang that we're putting in place helps us protect our final OEM customer and us to be honest in a lot of ways. And so we think that that's really important as we go through this sort of turbulent period here in both the industrial and the auto markets.
Speaker Change: and I'm very helpful. Thank you.
Speaker Change: The next question comes from Quinn Bolton of Needleman Company. Quinn your line is open.
Quinn Bolton: Hey, hey guys, I'm hoping you might be able to help square the circle here, you know, in the June quarter, you guys thought pretty heavy to climb and revenue and I think you said at the time that you took four weeks out of...
Quinn Bolton: and customer inventory with that decline.
Quinn Bolton: and from that June base, you know, a quarter ago you sort of thought you could grow low-double digits, you know, through the end of the fiscal year. Obviously, we're seeing a little bit of a reset in December and I understand your comments about, you know, pockets of inventory and lower-to-mac in North America and Europe, given some of the...
Speaker Change: Production Cuts, but that's only a third of your total sales.
Speaker Change: and so I guess I'm just trying to get a better sense from you. Where do you think and...
Speaker Change: and Sumshen of your devices are. It sounds like inventory in China.
Speaker Change: Japan and most of the rest of Asia is back to pretty normalized levels and so I'm just trying to figure out our use of implying that the...
Speaker Change: Run Rate of your business, you know, kind of sell out POS type. Is that now well below prior expectations or is there still a fair amount of inventory, tights your chest, you can embed it in the September and December numbers.
Speaker Change: When this is a great question and I want to start by saying that we still see really strong demand.
Speaker Change: and Market demand for our product institutions. And my conversations with various customers as I went through all the regions that we serve, really confirmed that. And I think the short answer to your question is...
Speaker Change: We have pockets of...
Speaker Change: Father Inventory, Judd, to go.
Speaker Change: Namely, North American European Auto.
Speaker Change: that are taking a little bit longer than we expected. You know, hand the production cuts not happened and keep in mind that it's not just the OEMs, it's the tiers that are in based in North America and perhaps have more exposure, you know, in North America and in Europe.
Speaker Change: that are probably sitting on a little bit of excess inventory that they have got to work through. It's compounded by the cuts they are seeing in North America in Europe, right? Which are pretty substantial, and you only have to look at what German O'Hames and North American O'Hames of an hour, since it's...
Speaker Change: and the business is trying to get ready for this electric transition to an electrified future. So that's really what's weighing on them. I think if you look beyond that, I would say it's playing out pretty much the way we thought it would.
Speaker Change: and so this may be a sort of a difficult number but you know would you sort of think that as you get through these pockets of inventory over the next one it's quarter or seven do you think?
Speaker Change: Natural Consumption or Demand for your parts is that.
Speaker Change: Posture to say 225 million a quarter is a closer to 50 million a quarter or you think that it's it's lower
Speaker Change: again if you're 175 in December.
Speaker Change: Um, you know, getting back to kind of the prior run rates of 250 or above.
Speaker Change: But that's a pretty hefty jump that I'm just trying to figure out whether you think that's still kind of in the cars or whether they're there may have been, you know, demand destruction or just lower production, you know, kind of says maybe you don't think you get back to that level all that quickly.
Speaker Change: Yeah, quit this is there so the way I'll maybe approach this is when I go back to Q4 of that Y24
Speaker Change: We were at about $250 million and we had some excessive inventory shipping and what did we talk about of about $25 million?
Speaker Change: and nothing has changed in the end markets. We still see the end markets growing.
Speaker Change: Low-double digits, we've actually refreshed the data, we've refreshed our best appreciation that we posted to our Internet this morning. So, nothing has changed there. In terms of when that timing is, we get back to that run rate. That's hard to call right now given the near term job in this year. And, you know, our target model was...
Speaker Change: for automotive, solar production plus at least 10% to 10%.
Speaker Change: I would tell you that our consumption estimates still track that.
Speaker Change: Right?
Speaker Change: So it's really a question of how long does it take for the inventory bubble to get completely digested and as I said, it's largely now an artifact in North America, Europe.
Speaker Change: Obviously there might be some tears that are more than North American Euro, so that's you're a fact of that in, but we believe that the consumption model continues to be intact.
Speaker Change: Katsutsu, kind of, in consumption, maybe in that C25 million a quarter range.
Speaker Change: is growing at sort of 10% so once you get back to that level, whether that's 25 or into physical 26, we'll see, but it sounds like that's kind of the right, and demand levels to be thinking about.
Speaker Change: Yeah, when we still believe in our long-term model as I mentioned, we went through a pretty expensive exercise, both an strategic planning and updating our investor presentation that really corroborated those numbers and some of the interesting things you'll see in that investor presentation is
Speaker Change: Even when we went public four years ago, there was an expectation of EV growth around the world, or actually EV growth being pretty good. We were not actually better today than next five years, so we were pleasantly surprised in some of the data we found. We do that when hearing that from our customers, but the data corroborated that.
Speaker Change: Thank you.
Speaker Change: Thank you very much. At this time, I'm showing no further questions in the queue. I would not like to turn and call back over to Jalene for closing remarks.
Jalene: Thank you, Corey. We appreciate you taking the time to join us. This concludes this morning's conference call.
Jalene: Thank you for your participation in today's conference call. This does conclude the program you may now disconnect.
I'm a little bit tired, but I'm not tired. I'm a little bit tired.