Q3 2025 Allegro MicroSystems Inc Earnings Call
Speaker Change: Good morning and welcome to the Allegro Microsystems third quarter fiscal 2025 earnings conference call.
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 todays date and as a result are subject to risks and uncertainties that could cause actual results to differ or events to differ materially.
Speaker Change: Surely projections.
Speaker Change: Factors that can affect our business, including factors that could cause actual results to differ by forward. Looking statements are described in detail in our earnings release for the third quarter of fiscal 2025 and in our most recent periodic filings and other filings with the securities and exchange commissions are estimates expectations or other forward looking statements may.
Speaker Change: Change and the company assumes no obligation to update forward looking statements to reflect actual results changes to assumptions or other events as they occur except as required by law.
Speaker Change: It is now my pleasure to turn the call over to a library, President and CEO, Dr. Wallach Sydney.
Speaker Change: Thank you Julie and good morning, and thank you for joining our third quarter fiscal year 2025 conference call.
Speaker Change: We delivered on our commitments with third quarter sales of $178 million and non-GAAP EPS of seven cents.
Speaker Change: Above the midpoint of our guidance.
Speaker Change: Beyond that we've continued to see positive trends across a number of leading indicators in Q3.
Speaker Change: Greece inter quarter orders, which is an indication of lower channel inventory.
Speaker Change: Cancellations have largely abated.
Speaker Change: And bookings are the highest they've been in the past eight quarters and up 50% year over year.
Speaker Change: In addition, we continue to make good progress on the localization of our supply chain in China, we have begun shipping from our local partners and we expect volumes to expand throughout the calendar year.
Speaker Change: We continue to make progress, reducing inventory and direct and distribution channels.
Speaker Change: And as we enter the 2025 calendar year <unk>.
Speaker Change: Industry estimates project automotive production to be flat and we are in.
Speaker Change: Encouraged by our projections for continued double digit growth in Suvs and <unk> adoption.
Speaker Change: <unk> content is meaningfully higher and hybrids and beds, which enables us to grow even if there is no growth in auto production.
Speaker Change: In our industrial and other end markets. We are encouraged by increasing signs of activity and we are cautiously optimistic that an easing monetary and regulatory environment with fewer demand recovery later in the year.
Speaker Change: I will now discuss key product highlights and achievements in the quarter.
Speaker Change: Innovation with purpose is a core value.
Speaker Change: And integra to serving our customers.
Speaker Change: One of the most powerful ways that we meet and exceed our customers' expectations is by addressing the design challenges through new product innovations.
Speaker Change: And we have doubled the number of new product introductions over the past two years.
Speaker Change: In the quarter, we further strengthened our magnetic sensing portfolio with a slew of new and innovative new products.
Speaker Change: Including new inductor position sensors, featuring integrated high accuracy in advanced diagnostics that performed consistently across a wide temperature range and excel in noisy environments.
Speaker Change: Our newest sensors are ideal for motor position sensing and demanding applications, such as ex EV traction motors steering and braking systems as well as robotics.
Speaker Change: Additionally, our new Micropower magnetic switches and latches are redefining position sensing by using 50% less power than existing solutions.
Speaker Change: These products open up new markets for battery powered applications in Iot home automation and consumer applications.
Speaker Change: And earlier this month, we announced a fully integrated current sensor IC offering the industry's fastest response time for protection of Wideband gap sick and Gan devices.
Speaker Change: Our innovative packaging enables a product, which is five times faster and 40% smaller than existing solutions.
Speaker Change: This offers unparalleled space savings and protection of expensive electronics and solar energy equipment, yes.
Speaker Change: Cloud data servers, industrial machinery, and FCB powertrain systems.
Speaker Change: Our technology leadership also extends to power applications that leverage our automotive great technology.
Speaker Change: In the quarter, while at electronica in Germany, we introduced a groundbreaking series of power products voiced a redefined performance and efficiency across the landscape, including cutting edge 48 Ford Motor drivers featuring a code free industrial product and an automotive Soc solution designed to address the terminal management needs of hybrid electric.
Speaker Change: <unk> AI data service.
Speaker Change: We were honored to receive a best in show award from embedded computing designed for the solution.
Speaker Change: Complementing these new motor drivers, we also introduce a 48 volt pre regulator designed for superior performance and dual voltage hybrid electric vehicles.
Speaker Change: Our ever expanding portfolio of 48 work solutions positions us well to support the transition to 48 volt architectures in automotive and industrial markets.
Speaker Change: Our focus on innovation and the increasing velocity of new product introductions is further enabling design win momentum across our strategic focus areas.
Speaker Change: This quarter, we continued our winning ways across key new opportunities.
Speaker Change: We secured multiple wins leveraging the power steering power in sensing solutions with a top Chinese Oems.
Speaker Change: This included multipart wins for steering electrified powertrain and Kevin applications.
Speaker Change: Our power motor solution secured multiple wins with customers in Taiwan, China, and Japan for data center cooling applications.
Speaker Change: Our high voltage isolated gate drivers continue to gain traction in the market garnering multiple wins across many industrial applications, especially clean energy and automation.
Speaker Change: And finally, our TMR solutions continue to gain momentum securing wins in smart metering and medical applications.
Speaker Change: I will end by thanking our teams around the globe, who are embodying our values, while executing our strategies and going above and beyond to serve our customers.
Speaker Change: I'll now turn the call over to Derek to review the Q3 financial results and provide an outlook for the fourth quarter Derrick. Thank you Manny and good morning, everyone. Starting with a summary of our Q3 financial results sales were $178 million and non-GAAP earnings per share was <unk> <unk>.
All at the high end of our guidance range gross margin was 49, 1% operating margin was 10, 8%.
Speaker Change: And adjusted EBITDA was 17% of sales.
Speaker Change: Total Q3 sales declined 5% sequentially and 30% year over year.
Speaker Change: Sales to our automotive customers were $130 million a decline of 8% sequentially led by expected declines in the U S. As our customers continue to reduce inventories at their year ends.
Speaker Change: Auto sales declined 33% year over year.
Speaker Change: Within auto sales was 73% of total Q3 sales and E mobility sales were $63 million, a decrease of 12% sequentially and represented 48% of total auto sales.
Industrial and other sales were $48 million.
Speaker Change: Increasing by another 5% sequentially largely due to growth in data center and medical.
Speaker Change: Industrial and other sales declined 21% year over year.
Speaker Change: Sales through our distribution channel with $94 million, a decline of 2% sequentially and represented 53% of Q3 sales.
Speaker Change: POS was up quarter over quarter, and we continue to work with our distribution partners to reduce channel inventory levels.
Speaker Change: From a product perspective magnetic sensor sales were $114 million.
Speaker Change: Declining 12% sequentially and represented 64% of Q3 sales.
Speaker Change: Sales of our power products was $64 million, increasing 9% sequentially.
Speaker Change: Sales by geography were again relatively well balanced with 28% of sales in China, 22% and the rest of Asia, 21% in Japan.
Speaker Change: 115% in Europe, and 14% in the Americas.
Speaker Change: Now turning to Q3 profitability.
Speaker Change: Gross margin was 49, 1% and operating expenses were $68 million.
Speaker Change: Operating margin was 10, 8% compared to 11, 7% in Q2, and 27% a year ago.
Speaker Change: The effective tax rate for the quarter was a benefit of 3% and our full year effective tax rate is projected to be 3%.
Speaker Change: This favorable tax rate is driven by research and development credits.
Speaker Change: The third quarter diluted share count was 184 million shares and net income was $13 million or <unk> <unk> per diluted share.
Speaker Change: Moving onto the balance sheet and cash flow, we ended Q3 with cash of $149 million.
Speaker Change: And in the quarter, we made another voluntary principal payment on our term loan of $25 million, bringing the balance to $375 million.
Speaker Change: Cash flow from operations was an outflow of $8 million as we continue to build strategic wafer and die Bank and Capex was $14 million in the quarter.
Speaker Change: We now expect Capex for FY 'twenty five to be approximately 6% of sales.
Speaker Change: From a working capital perspective, DSO was 43 days and inventory days were 182 days.
Speaker Change: I'll now turn to our Q4 2025 outlook.
Speaker Change: We expect fourth quarter sales to be in the range of $180 million to $190 million.
Speaker Change: Or up 4% sequentially at the midpoint.
Additionally, we expect the following all on a non-GAAP basis.
Speaker Change: We expect gross margin to be between 46% and 48%.
Speaker Change: Our Q4 guidance range for gross margin contemplates the expected impact of annual pricing agreements ahead of cost reductions, which typically take one to two quarters to cycle through inventory.
Speaker Change: This range also includes higher estimated excess inventory and capacity charges, resulting from adjusted production levels in the quarter.
Speaker Change: Taken together these items are expected to contribute about 200 basis point headwind to our Q4 gross margins.
Speaker Change: Also as a reminder, opex is expected to increase by about 5% due to annual pay to payroll tax resets in the March quarter.
Speaker Change: We expect interest expense to be approximately $6 million.
Speaker Change: We expect our tax rate to be 3%.
Speaker Change: And the weighted average diluted share count to be 185 million shares.
Speaker Change: As a result, we expect non-GAAP EPS to be between 3% and seven for our share.
Speaker Change: Before I turn the call back to Binney I'd like to review a number of actions, we have taken and continue to take to optimize our cost structure and improve profitability and cash flow.
We continue to align our back end production levels to anticipated demand, while balancing that with building die bank and high running finished goods to be in a position to maintain excellent customer service levels.
Binney: As <unk> mentioned, we are making good progress advancing our China for China strategy with local fab qualification and process and shipments from local <unk> already underway.
Binney: We also continue to reposition our resources to optimize our cost structure and capture high growth opportunities closer to our customers.
Binney: We are leveraging global design and shared services centers, and using AI and automation to enhance efficiency across the company.
Binney: We also initiated a repricing of our term loan and we expect the interest rate to decline by another 25 basis points to sofa, plus 200 basis points.
Binney: And finally, we plan to make another voluntary debt payment of $30 million in Q4.
Binney: We expect the repricing and planned debt payment to result in annual interest savings of approximately $3 million.
Binney: We believe the actions we are taking will position us well for significant earnings growth as the cycle improves now I'll turn the call back over to Vineet for some closing comments.
Vineet: Thanks Derrick.
Speaker Change: Before we open the call for Q&A I want to leave you with three key thoughts.
Speaker Change: First we have a strong foundation and a clear strategic focus with.
Speaker Change: We continue to be a market leader in magnetic sensing and possess deep expertise in targeted power Ics.
Speaker Change: Second we are encouraged by the progress we've made in the third quarter as we delivered on our commitments with results above the midpoint of our guidance.
Speaker Change: We're laser focused on executing our product and technology roadmap with a record number of new product introductions, and securing important customer wins with our sensing and power solutions.
Speaker Change: Third we believe a Lego is poised for significant value creation, we've been serving the auto and industrial markets for over three decades, and we see multiple catalysts for long term growth in these markets.
Speaker Change: We have transformed by the megatrends of electrification and automation.
Speaker Change: We have taken advantage of the down cycle to expand our portfolio of innovative solutions and reposition our business. This along with the signs of an improving cycle gives us the confidence in our ability to outgrow our served markets deliver a very attractive financial profile and create an opportunity for significant shareholder returns now I will turn the call over to Julie.
Speaker Change: This concludes management's prepared remarks before we open the call for your questions I'd like to share our fourth fiscal quarter conference lineup again.
Speaker Change: We will attend walks semiconductor conference on February 12 at the <unk> Hotel in New York Morgan Stanley's TMT conference at the Palace Hotel in San Francisco on March 4th and also participate virtually and link capitals sixth annual Investor Conference on March 10th.
Speaker Change: We will now open the call for your questions. Kevin Please review Q&A instructions.
Speaker Change: Ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again to provide the opportunity for everyone to ask a question. Please limit yourself to one question and one follow up we will pause for a moment, while we compile the Q&A roster.
Speaker Change: Okay.
Joe: Our first question comes from Joe <unk> with Wells Fargo. Your line is open.
Joe: Yes, thanks for taking the questions.
Speaker Change: Maybe first just kind of.
Speaker Change: <unk> gross margin guidance, a little bit from the March quarter, how should we think about the nature of the impact from.
Speaker Change: Under utilization costs as well as the pricing agreement to this the timing there and then should we think about the March quarter as being kind of the bottom for gross margin this year for the calendar year.
Speaker Change: Hi, Joe Good morning. This is Derek yes, so the 200 basis points the headwind that I talked about and expected in Q4 includes all three of those things includes the pricing resets.
Speaker Change: Out of the cost reductions that cycled through inventory. It includes some minor amounts of excess inventory charges and it does include capacity charges as we dial down some production in Q4.
Speaker Change: If you look back a couple of years ago. The same dynamic happened in 2022, where we had pricing increases ahead of the cost reset. So we had a higher gross margin and to answer your question about the March I would take those things out. These are specific to the March quarter and rolling that forward to June I am not going to give guidance for the June quarter, but I feel pretty good that the March quarter will be a trough in gross margin percentages.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: Paul.
Speaker Change: And then I guess as we just kind of look forward and demand and you are talking to I can appreciate you talking about continue to work down inventory, but I guess like.
Speaker Change: How do you how do you view the shape up for the calendar year and given that you are talking about some of your end markets growing double digit low double digits or double digits for Adas and EV production.
Speaker Change: Can we start to ship to.
Speaker Change: Better than in demand here as we look beyond the March quarter.
Joe: Hey, Joe This is been eight so one step at a time right.
Joe: As I said in my prepared remarks, we're really focused on the leading indicators that start to give us some conviction.
Joe: <unk>.
Joe: We see an increase in within the quarter orders.
Joe: That says that there are pockets of.
Joe: Inventory.
Joe: Gaps that are starting to emerge in the channel.
Joe: Our cancellations are at an all time low and bookings are the highest they've been in the past eight quarters and they are up 50% year over year. So these are the leading indicators that Derek and I look at to say.
Joe: What should we expect over the next quarter or two.
Joe: And then for the mid to long term or the midterm really we're looking at what are the projections for automotive growth what are the projections for <unk> production and I think across the board those signs right now encouraging right. So we're not guiding for next quarter, but at least the indicators that we look at are all pointing in the right.
Joe: <unk>.
Joe: Thank you.
Joe: One moment for our next question.
Thomas O'malley: Our next question comes from Thomas O'malley with Barclays. Your line is open.
Thomas O'malley: Hey, guys. Thanks for taking my questions I have a couple of housekeeping ones and then a broader one into the March quarter could you give us the split between your expectations between auto and industrial and other.
Speaker Change: Tom I won't give it to you by market necessarily but I can give you a little bit of regional color. So as you might expect we expect China to be down single digits in the March quarter with the lunar new year, but the good news about our business model being very well geographically balanced we're still guiding up 4% the midpoint of our.
Speaker Change: <unk> of our guidance and within that we do expect North America to have a nice rebound as well after coming off of a pretty severe inventory decline here in Q4 Q3.
Speaker Change: Okay, and if I look at your <unk> business, you said it was 48% of revenue.
Speaker Change: Is the first time since kind of really like June of 'twenty, three I guess theres been a couple of times, along the way, but you hit a crossover the other auto business or more of like the <unk> auto business.
Speaker Change: Get larger.
Speaker Change: When you look over the next four quarters would you expect there to be a crossover again, where you see more growth on that FCB side or do you think that the trajectory of this year is really growth fueled by.
Speaker Change: The broad based bucket just because it looks as though the faster growing stuff is actually down a bit more year over year at this point.
Tom: Hey, Tom This is right. So just a correction first.
Tom: We talk about our E mobility business, which is a combination of our <unk> products as well as the products that go into Adas applications and that collectively was down a little bit this quarter again as a function of some of the inventory management that is happening in North America, and a little bit in Europe. Okay.
Tom: When we take a step back and look at it.
Tom: What what our business looks like from a mid to long term standpoint.
Tom: It is really our design wins that guide us and I've said this in the past more than 70%, 75% of our design wins in automotive or in the field of E. Mobility. So that gives us a lot of conviction that we are aligned to the fastest growing areas within automotive and recently expect that trend to continue as we move forward here in the next few.
Tom: So I would just regard this crossover as we call it as a blip just for this quarter and really an artifact of some of the inventory management that's happening.
Speaker Change: Got you and then if I can just sneak one more in if you look at the trajectory over the last three quarters. The industrial business has tracked pretty closely with your exposure to China in June there was a very large step alero.
Speaker Change: Lower large step down China stepped down from 27 to 19, you had a really big uptick in September China stepped up from 19 to 26 and now with auto down you're actually seeing a little bit of China growth could you help us understand like as a percentage of your revenue in industrial is China, a bit more outsize there versus the rest of the business. Thank you.
Derrick: Tom This is derrick not necessarily China is not particularly outsized theres some solar business that's been pretty muted that's in China. The data center business. In fact, most of it's outside of China in places like Japan, and Taiwan, and there is a fair amount of industrial in Europe, as well, so where we've seen the strength in industrial over the last couple of quarters has been our new business at medical that came with the <unk>.
Derrick: That's the the patches for the continuous glucose monitoring that's an exciting new business for us and this quarter. We saw some strength in data center and the September quarter, we did see a seasonality of consumer products that is China related but in this quarter here. It was really data center and medical and medical continues to be an exciting area for us and as Nate mentioned many of our.
Derrick: Markets have continued to sort of bounce along the bottom we are encouraged by some of these what I'll call Green shoots and we're watching that very closely and we're focused on the industrial areas as well.
Derrick: One moment for our next question.
Speaker Change: Our next question comes from Gary Mobley with loop capital. Your line is open.
Gary Mobley: Hi, everybody and thanks for taking my question.
Okay, Great and I guess direct in.
Speaker Change: Focus question.
Speaker Change: One do you believe in S&P mobility forecast of flat light vehicle production in calendar year, 'twenty, five and given where your inventory levels are in the automotive channel do you think you can grow in line or better than light vehicle production unit growth in 2025.
Speaker Change: Hey, Jerry this is Renee you broke up a little bit, but I think I got the gist of your question. So.
Speaker Change: I think the first question was do we believe the S&P forecasts for 2025.
Speaker Change: It's one data point, we have direct conversations with Oems, we have direct conversations with the tears and contract manufacturers that serve them and so we sort of triangulate into what we think is the right.
Speaker Change: <unk>.
Speaker Change: <unk> estimate.
Speaker Change: Estimate with some guard bands and then we have our own planning scenarios around it.
Speaker Change: As we said before we actually don't need auto production to grow for our for us to grow it because we see the tail winds from content growth in <unk>.
Speaker Change: Increased <unk> penetration and frankly, even the other side of our business, which is largely in cabin.
Speaker Change: Whether it's thermal management, whether it's LCD drivers, whether it's switching latch for variety of applications in the automobile.
Speaker Change: All of that content is growing as consumers seek more tech heavy content within the cars. So we feel really good about our ability to grow and I'll bring you back to the model that we put out.
Speaker Change: We should expect to see.
Speaker Change: Inventory digestion.
Speaker Change: Put aside we should expect to see surplus or production by 7% to 10% growth. That's our model and we feel really comfortable with that sort of growth going forward.
Speaker Change: Okay.
Speaker Change: Follow up over to ask about pricing on both sides.
Speaker Change: So pricing to your customers and we think about that as being once a year event or is it more dynamic real time adjustments and what sort of pricing trends are you seeing from your various foundry partners.
Gary Mobley: Yes, Gary.
Gary Mobley: I will take the pricing question and I'll, let Derrick talk a little bit about what we're seeing from a cost trend standpoint. So.
Gary Mobley: Pricing within our largest market, which is automotive is back to what I would call normal pricing environment right and I think we got there maybe three quarters, maybe four quarters ago and by normal and what I mean is typically when you win a program Youre pricing is high because volumes are lower and as volumes ramp you shared some productivity with your customers.
Gary Mobley: Those are built into the into the program our long term agreement contracts.
Gary Mobley: That tends to mean that 2% to 3% range and we are back in that range across the majority of our automotive customer base and across geographies.
Speaker Change: Derek you want to talk a little bit about cost sure. Gary. So as you know wafers are our highest piece of the bombing within cost of goods sold we continue to negotiate and we have successfully negotiated price reductions on wafers and the trade off of that is volume we give them more volumes. So we're building some strategic die bank and strategic wafer bank on our balance sheet and that's okay because.
Speaker Change: It's pretty fungible downstream until it's packaged in a can see it for a couple of years. So we're okay with that we're going to we're going to turn that pretty quickly, but we're negotiating those costs down but it takes one to two quarters for that to cycle into the P&L. So you'll start to see that benefit as we move into FY 'twenty six and it's not just wafers, we're working with our <unk>, we are using our own internal facility more efficiently and we.
Speaker Change: Continue to bring cost down across the enterprise.
Speaker Change: Thank you both.
Speaker Change: One moment for our next question.
Chris Caso: Our next question comes from Chris Caso with Wolfe Research Your line is open.
Chris Caso: Yes. Thank you I guess, just another question with regard to kind of pricing and margins and it sounds like what you said was there was a 200 basis point.
Chris Caso: Impact from.
Chris Caso: This pricing ahead of cost reduction.
Some of the some of the other charges.
Chris Caso: I guess.
Chris Caso: Question, one would be are we do we expect that we recapture that as we go into the second half on the cost reductions come back and then secondly, and perhaps more importantly.
Chris Caso: What do you think is the right gross margin structure for the company and coming out of the pandemic when prices were going up perhaps that's not the best way to look at it.
Chris Caso: Whats the right way to look at the company's margin structure as we go forward.
Chris Caso: Yes, so Chris that 200 basis points, which equates to nearly $4 million in total in Q4 here that includes the pricing resets ahead of the cost reductions that include some obsolete inventory charges as well as capacity charges specific to Q4. So those items are specific to Q4 and to answer your question directly the cost reductions that.
Chris Caso: Were negotiated and continuing to be negotiated will start to roll as it benefited 26. So some of that stuff will start to normalize and we continue to look for those cost reductions getting past. This Q4 that 60% to 65% drop through that I've talked through in the past that still holds pretty true and Thats actually held true since we've been a public company. If you look at it year.
Chris Caso: Over year, its been right in that 65% range and Thats, what we target is that 65% drop through so long term targets haven't changed 58%. There's a lot of work to get their first step is get back to 50% pretty quickly then back to the mid <unk> and then head towards that long term target.
Speaker Change: Okay understood.
Chris Caso: As a follow up you had spoken.
Chris Caso: I think it was last spring, where you had taken some price actions I think at that time was in the industrial business.
Chris Caso: There was some price support you've provided to the channel to move some inventory.
Chris Caso: Has the pricing.
Chris Caso: That segment now normalized and I guess.
Chris Caso: Our assumption at the time was that was sort of a one time short term thing in order to move some inventory with the channel business whats been the trend in pricing there.
Chris Caso: Yes, Chris I should clarify that wasn't a one time thing I mean in the channel what happens is it's real time pricing right. So back in 2022, we had the same dynamic on the opposite add meaning that pricing in the channel goes up immediately because it's market based pricing and sort of off the shelf in many cases, so that pricing goes up and down pretty quickly with the market I started talking about exactly a year ago now actually.
Chris Caso: A year and a quarter ago in November, but we started seeing pricing come down in our channel and that's been ongoing for the better part of the year. The good news is that stabilized rate and so usually when the cycle comes back that's where you start to see pricing stabilize and then pricing even start to increase when things get a bit tighter in the channel that's still our expectations.
Chris Caso: Okay got it thank you.
Speaker Change: One moment for our next question.
Chris Caso: Yes.
Speaker Change: Our next question comes from Quinn Bolton with Needham <unk> Company. Your line is open.
Quinn Bolton: Thank you Derek.
Quinn Bolton: I wanted to follow up on the gross margin question, you've talked about the 65% incremental fall through for a while now and it sounds like Thats still holds and I guess, obviously, you're taking a step back in March it sounds like some of that are charges like obsolete inventory and so I guess.
Quinn Bolton: If I look at <unk>.
Quinn Bolton: 65% incremental fall through after December base versus a 65% fall through from the March basis, that's a pretty different outlook and so.
Quinn Bolton: No youre not guiding beyond the March quarter, but is there an opportunity at some point in calendar 'twenty five to see better than the 65% fall through as one you start to see these lower costs cycled through inventory you, obviously won't have image Tory charges I hope every quarter.
Quinn Bolton: Just kind of feels like if.
Quinn Bolton: If we're only modeling six 5% fall through off at March base.
Quinn Bolton: Pretty big reset to margins throughout fiscal 2006, and probably into fiscal 2700, <unk>. Just wondering if we might be able to make back some of that that margin.
Quinn Bolton: Over the next several quarters.
Quinn Bolton: Yes, that's a good question and that's why I quantified the 200 basis point headwind for these quarter specific items, which is approximately $4 million.
Quinn Bolton: All else being equal I don't expect those to recur unnecessarily in the June quarter. So you should you should use a higher drop through four from March to June for your gross margins I don't expect those to recur.
Speaker Change: Got it okay, great and then maybe just sort of question what youre seeing from customers.
Quinn Bolton: One of your peers global eye on their call. This morning talked about.
Quinn Bolton: Given some of the slower growth in EEV theyre seeing some customers re emphasize ice vehicles that have just sort of obviously their vehicles not EV. They also have perhaps lower adas content wondering if youre seeing any of this.
Quinn Bolton: Kind of.
Quinn Bolton: Shift back to ice vehicles was lower Ada asset.
Quinn Bolton: If so does that does that have.
Quinn Bolton: What kind of impact might that have on your business over the next couple of years or are you just not really seen any.
Speaker Change: Any major push.
Speaker Change: Yes, reemphasize is among your customer base.
Speaker Change: Greg This is Nate I'll take that.
Nate: Just came back from meeting customers in North America or <unk>.
Speaker Change: Customers in Detroit as well as the one.
Nate: One large company in California, and I will tell you that.
Nate: And with our legacy customers nobody is talking about introducing new EIS platform nobody might keep an existing ice platform lingered longer but really in order to meet.
Nate: <unk>.
Nate: They're on a portfolio requirements in some of the emissions requirements globally.
Nate: Introducing more hybrid solutions and I think it's a good reminder, that for Allegro. The hybrid content is very similar to that on battery electric vehicles.
Nate: We gain from.
Nate: Really two bites of the Apple which is the <unk>.
Nate: Powertrain content as well as the electric content, even though the battery size or smaller used really still need all of the same sensing.
Speaker Change: And power controller modalities and products. Thank you.
Nate: And a full bev so.
Nate: It still feels like people are moving forward with hybrid and battery electric programs.
Nate: Alright.
Nate: The tech content, regardless is continuing to be really high.
Nate: Nobody is going backwards in terms of the tech content. So we're not really seeing it.
Amy: Thank you Amy Thank you Derrick.
Nate: One moment for our next question.
Blayne Curtis: Our next question comes from Blayne Curtis with Jefferies. Your line is open hey.
Blayne Curtis: Hey, guys. Thanks, taking my question I had two first of all I'd just go back into gross margin I want to understand obviously, you said higher underutilization charges. Derek just what do you expect to do with absolute value of inventory.
Blayne Curtis: These moves that you've made.
Blayne Curtis: Will that start to come down into March and I'm, just trying to use that as engaged as the recovery.
Blayne Curtis: Into the next fiscal year I know you don't give absolute numbers, but I also want to know is there any interplay between your different fab options that kind of lost track you went during the pandemic back to more polar because it ended up being cheaper there was a storyline about using TSMC and UMC at one point to be cheaper can you just kind of level set us on that as well as it.
Blayne Curtis: Impacts your utilization.
Blayne Curtis: And whether theres any swing factor there.
Blayne Curtis: Yes, Brian good morning, as a kind of a lot to unpack there when I think about the gross margin into play with inventory. So we do expect to continue to build a little bit of inventory at the wafer and die bank in the March quarter.
Blayne Curtis: And as I said, that's the tradeoff of getting price reductions with our wafer fab. So thats, okay with us we will be bringing down our finished goods inventories and those are the high run our finished goods inventories that we've been building the last couple of quarters and as a result, we adjust some of our assembly and test production in our back end facility and we'll adjust cost as well so that's kind of some of that.
Blayne Curtis: <unk> based items in terms of the Fabs that we use.
Blayne Curtis: About a little bit more than half is UMC that hasnt changed over the last couple of years polar is about 35% of it and then TSMC is 10% to 12% and is another small one but we're also qualifying a fab in China. So we'll continue to optimize our fab strategy based on quality cost technology.
Speaker Change: <unk> and more increasingly geopolitics.
Speaker Change: Perfect and then I wanted to ask you on bookings you mentioned some improvement.
Speaker Change: You, probably don't give us book to bill, but kind of Directionally, just kind of I'm trying to understand between your two segments auto and industrial.
Speaker Change: They are above one like I guess kind of just any color you can provide as to where it is today.
Blayne Curtis: Yes, Blayne this is been eight so.
Blayne Curtis: As I said in my prepared remarks, we're encouraged by what we see in our set of leading indicators right. So increased within the quarter orders.
Blayne Curtis: Cancellations at an all time low and then bookings have been at the highest level.
Blayne Curtis: And up 50% year over year book to Bill has stayed above one four.
Blayne Curtis: Few months now, which again is very encouraging for us. So we continue to build positive momentum again, we're not calling it.
Blayne Curtis: At victory and not hanging above mission accomplished flagged, but certainly feel like we've made a lot of progress in clearing things out and my conversations with leadership across the Oems is definitely indicating that we are starting to see now healthy levels and maybe some pinch points from an inventory standpoint, and which is why.
Blayne Curtis: <unk>.
Blayne Curtis: On the side of caution and actually built up some additional die bank. Some additional finished goods, which I think is going to serve us really well.
Blayne Curtis: As and when the demand comes back.
Blayne Curtis: Thanks.
Blayne Curtis: One of them before our next question.
Speaker Change: Our next question comes from Vijay Rakesh with Mizuho. Your line is open.
Vijay Rakesh: Yes, Hi, just a quick question on the bookings in December quarter bookings had a pretty nice pick up 50% sequentially just wondering.
Vijay Rakesh: How that's trending these demands and also if you could give some more color on the bookings.
Vijay Rakesh: On the <unk> side is that spread out between auto and industrial.
Vijay Rakesh: Thanks.
Vijay Rakesh: Yes, sorry.
Speaker Change: We're not going to be able to provide more color than that I will tell you. It's broad based so thats encouraging.
Vijay Rakesh: And.
Vijay Rakesh: It's just.
Vijay Rakesh: Just if you refer back to my prepared remarks, we are seeing.
Vijay Rakesh: Encouraging signs in our industrial business.
Vijay Rakesh: As I talk to customers.
Vijay Rakesh: Feels like automotive inventory is getting to healthy levels now I will tell you that maybe Europe continues to be an area of concern.
Vijay Rakesh: It's going beyond just the inventory digestion.
Vijay Rakesh: There is enough news around what's happening with Oems in tears in Europe, and so we're watching that pretty carefully Europe is one of our smallest geographic regions. So we're.
Vijay Rakesh: We're not super exposed to it but certainly what happens in Europe.
Vijay Rakesh: It is important to us and we continue to win with the winners there in Europe, and so we're watching that space pretty carefully.
Vijay Rakesh: And then on the gross margin side.
Vijay Rakesh: Can you walk us through just and if you look at for the next four.
Vijay Rakesh: Great quarters, how this should play out between what are the puts and takes to it.
Vijay Rakesh: Pricing and inventory and utilization of demand et cetera. Thanks.
Vijay Rakesh: Yes, Vijay as I've answered a couple of times and.
Vijay Rakesh: <unk> asked a good question there is about 200 basis points of headwinds specific to the March quarter I don't expect those to recur in the June quarter. So if you take those 200 basis points out all else being equal I'd expect the June quarter to be that much better. So the drop through from March to June will be better than the normal 65% going beyond that the 60 to 60.
Vijay Rakesh: 5% drop through our variable contribution margin has held really true since we've been a public company and I expect that to continue it might be better than that if we start to have some of those cost reductions coming quicker cycle through inventory, we started to see the pricing in the channel go up a little bit some of the new products, many talked about around TMR and some of the other interesting products have a higher.
Vijay Rakesh: ASP.
Vijay Rakesh: Those are all tailwind to potentially drive that 65% above that.
Vijay Rakesh: Alright, thank you.
Speaker Change: One moment for our next question.
Vijay Rakesh: Yeah.
Vijay Rakesh: Our next question comes from Joshua Buchalter with TD Cowen Your line is open.
Joshua Buchalter: Hey, guys. Thanks for squeezing me in.
Joshua Buchalter: Wanted to follow up on some of <unk> comments, just now so is it correct. It sounds like you think inventory levels.
Joshua Buchalter: In autos at your tier one partners and Oems.
Joshua Buchalter: Level, where you want them to be and you're no longer feel like you need to under ship anymore and it's just waiting on end demand.
Joshua Buchalter: Thing I guess.
Joshua Buchalter: <unk> risk is more in the other direction that there is too little and too much right now I just wanted to just.
Joshua Buchalter: Ask that one pretty directly.
Joshua Buchalter: Hey, Josh we need here. So the second part of your question I do think the risk is now more on hot spots.
Joshua Buchalter: And we're seeing evidence of that with more sort of increase in order in quarter order activity.
Joshua Buchalter: No.
Joshua Buchalter: Provide the analogy.
Joshua Buchalter: As such we put out the fire, but there are still some embers from an inventory standpoint so.
Joshua Buchalter: There are certain parks certain customers that are still a little too hot and we are watching those very carefully but I would say on a broad level. We feel good about the progress we've made in helping our customers.
Joshua Buchalter: Absorb the inventory.
Joshua Buchalter: Been pretty clear in past.
Joshua Buchalter: Earnings calls as well as various investor conferences, we believe that our demand profile is intact. It's just being fulfilled through inventory on hand, we have been watching.
Joshua Buchalter: Our design wins are secured programs.
Joshua Buchalter: Actual consumption levels, and so that gives us pretty good conviction that as the inventory digestion I guess completed we're going to start shipping into normal consumption I would tell you that in certain regions. We already are right.
Joshua Buchalter: As we said last time North America was lagging we think this quarter has gone a long way in getting that right size.
Joshua Buchalter: <unk>.
Joshua Buchalter: My conversations last week with customers indicated that we had at healthy levels I would say in most of the places maybe a couple of hotspots Europe continues to be in every watch very carefully because the inventory situation. There got compounded with sort of more structural issue is in the auto sector there.
Joshua Buchalter: But Asia continues to home long really well for us.
Speaker Change: Okay got it thank you and I guess.
Joshua Buchalter: Yes.
Joshua Buchalter: <unk> for beating the dead horse here on pricing.
Joshua Buchalter: But I assume that there'd been no material change in the competitive environment, that's driving any of the incremental changes in pricing. You described it is back to normal I just wanted to check.
Joshua Buchalter: Second on the competitive front and also ask.
Joshua Buchalter: Within <unk>.
Joshua Buchalter: Your product portfolio.
Joshua Buchalter: How much is current sensing contributing today and I would just be a couple of you an update on <unk>, sorry, it's not doing there right.
Joshua Buchalter: Yeah. So that's like three questions Josh So we.
Joshua Buchalter: Youre going to put a penny on the Jarden next time.
Joshua Buchalter: So I think the.
Joshua Buchalter: In terms of new products.
Joshua Buchalter: We don't split out current sensing specifically, but I will tell you that we've got a lot of momentum.
Joshua Buchalter: Laura we've really built out the current sensing portfolio ever.
Joshua Buchalter: Everything from your standard Hall to very high speed Hall, we've got five megahertz, and our 10 megahertz current sensor different packages different form factors.
Joshua Buchalter: And all with a view of serving every nation every need from a customer standpoint, our TMR business continues to grow really well.
Joshua Buchalter: We talked about the success in medical that's expanding we've qualified in automotive we've got a lot of our leading customers now starting to test and sample TMR in their most demanding applications, including battery management systems, which is a new Sam for us So feel really good about it.
Speaker Change: One is the first part of the question pricing.
Joshua Buchalter: On.
Joshua Buchalter: Scott.
Joshua Buchalter: Any change in competitive environment on the <unk>.
Joshua Buchalter: <unk> environment.
Josh: We see the same set of competitors Josh.
Josh: In fact, we saw a really nice report coming out of one of our big investors, who has done their own checks and it shows that we don't really have any real competition in China.
Josh: We're always pattern.
Josh: And we continue to create more IP the tsunami of new products, we've brought out on the last call. It.
Josh: Three to six quarters is really a testament to the hard work. The team does every single day to meet customer needs and really out innovate our competition when it comes to our core markets and.
Speaker Change: And I should clarify Josh the competition in China is still western competition right. That's what I mean by that and we continue to win in China, and having a China for China strategy has been really really helpful and even while we've done things like repositioning our business bring our opex down quarter over quarter. We've invested in research and development has been eats talked about we taped out twice.
Speaker Change: As many products as we ever have in the past that's all while having the lowest opex number in two years and really where its come out of his SG&A with optimize our SG&A structure. That's the lowest it's been in three years. So we're continuing to invest in certain places the high growth areas the high growth products, while optimizing our cost structure.
Speaker Change: Alright, Thanks, guys and noted that with any O'brien next time alright.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Garrett Johnson with UBS. Your line is open.
Speaker Change: Hey, good morning, guys in the presentation, you called out industrial being led higher by medical and data center, but I was wondering if you could talk about what youre seeing in your other industrial end markets like clean energy and broad markets are we seeing.
Speaker Change: Policy uncertainty macro overhanging on clean energy and how would you characterize broad markets generally.
Speaker Change: Yes, so we are seeing good strength in medical.
Speaker Change: Our data center business and remember datacenter, it's coming off historic lows right. So really the only way it can go up.
We're also seeing strength in the broad industrial base.
Speaker Change: And again, when I say strength, it's all relative we are seeing increasing activity, we are seeing encouraging signs more on quarter orders.
Speaker Change: Our clean energy business, which is largely solar.
Speaker Change: Its still soft and.
Speaker Change: I don't want to put it on policy uncertainty just yet I think we're still dealing with older inventory and certain pockets. That's an area that continues to be sort of a frustrating area not just for us for a lot of.
Speaker Change: The players in this arena where.
Speaker Change: Through the pandemic just a lot of inventory was built up I would say on the whole I think industrial.
Speaker Change: Segment will benefit from easing regulatory easing monetary environment.
Speaker Change: I'd say that globally right, it's not just a U S commentary I'll remind you of that.
Speaker Change: Close to 80% of our sales are outside the U S. So we are highly dependent on what happens in every part of the world when it comes to our industrial business.
Speaker Change: Thanks.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from Mark with pockets with Evercore ISI. Your line is open.
Mark: Great. Thanks for taking my question.
Speaker Change: When.
Speaker Change: You talk about the doubling of the product introductions over the past two years with six quarters can you just.
Speaker Change: Help us understand where are you in the revenue.
Speaker Change: Realization part of that maybe you could just step us through.
Speaker Change: The design win process too.
Speaker Change: When you start to when you start to recognize revenues from the new products and then when you really.
Speaker Change: Hit your stride with those and when do they start to really have a nice pipeline. The top line. Thank you.
Mark: Mark Thank you great question.
Mark: And I'll split it down buyer behavior.
Mark: Behavior in the automotive market versus the industrial markets.
Mark: Automotive as everybody knows has tended to be long cycle.
Mark: Those cycles are compressing, but from the time you introduce a new product we're still looking at a minimum of two years, sometimes three years to startup production with customers because once we introduce a product there is some concurrent sampling that happens but really.
Mark: It starts happening in earnest and typically we are shipping to a tier or a contract manufacturer who does their own validation and then the OEM does their own validation and typically in automotive you have to go through our summer cycle in a winter testing cycle.
Mark: As I've said before cycles are compressing, but that still is holding true across legacy Oems and some of the newer Oems. So typically in automotive you are looking at two to three years from the time introduce a product to start up production and then you really hit stride, probably four to five years from the time introduce the product to see peak revenue.
Mark: In the industrial side, it's much shorter typically it's 12 months from the time, we introduce a product to startup production, sometimes less but typically it tends to be in that realm.
Speaker Change: What's really important for us here is that as Derek pointed out we have maintained our investment in research and development and engineering, we've continued to expand our global design centers and we've really doubled down on the velocity of new products, we're bringing out really trying to address every need that our customers have expressed within automotive.
Speaker Change: We are creating more derivatives and spend for our industrial customers. So how do we think about technology investment as we build a platform for automotive and then we take generators from that platform into our industrial sectors, and sometimes our consumer sectors as well. So hopefully that gives you a sense for how we think about our engineering.
Speaker Change: Very helpful. Thank you.
Speaker Change: I'm not showing any further questions at this time I'd like to turn the call back over to Julien for any closing remarks.
Julien: Thank you Kevin we appreciate you taking the time to join US. This morning. This concludes this morning's conference call late.
Speaker Change: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.