Q2 2026 Allegro MicroSystems Inc Earnings Call
Speaker #2: Good morning and welcome to a microsystems second quarter fiscal Year 2026 Earnings Conference Call . Please be advised that today's conference is being recorded .
Speaker #2: I would now like to hand the conference over to Jalene Hoover Vice President of Investor Relations and Corporate Communications .
Jalene Hoover: Thank you. Good morning and thank you for joining us today to discuss Allegro MicroSystems' fiscal second quarter 2026 results. I'm joined today by Allegro MicroSystems' President and Chief Executive Officer Michael Doogue and Allegro MicroSystems' Chief Financial Officer Derek D’Antilio. They will provide highlights of our business, review our quarterly financial performance, and share our third quarter outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures. The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings release, which is available in the Investor Relations page of our website at www.allegromicro.com.
Speaker #3: provide highlights of our business review , our quarterly financial performance , and share our third quarter Thank . We will follow our prepared remarks with a Q&A session .
Speaker #3: Our earnings release and prepared remarks include certain non-GAAP financial measures . The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results .
Speaker #3: A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release , which is available in the Investor Relations page of our website at ALLEGRO MICROSYSTEMS, INC. .
Speaker #3: This call is also being webcast , and a replay will be available in the events and Presentations section of our IR page shortly .
Jalene Hoover: This call is also being webcast and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are based on current expectations and assumptions as of today's date and as a result are subject to risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in detail in our earnings release for the second quarter of fiscal 2026 and in our most recent periodic and other filings with the Securities and Exchange Commission.
Speaker #3: During the course of this conference call , we will make projections and other outlook forward looking statements regarding future events or the future financial performance of the company .
Speaker #3: We wish to caution that such statements are based on current expectations and assumptions . As of today's date , and as a result , are subject to risks and uncertainties that that could cause actual results or events to differ materially from projections .
Speaker #3: Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in detail in our earnings release for the second quarter of fiscal 2026 and in our most recent periodic and other filings with the Securities and Exchange Commission.
Speaker #3: Our estimates , expectations and other forward looking statements may change , and the company assumes no obligation to update forward looking statements to reflect actual results , changes to assumptions or other events that may occur except as required by law .
Jalene Hoover: Our estimates, expectations, and other forward-looking statements may change and the company assumes no obligation to update forward-looking statements to reflect actual results, changes to assumptions, or other events that may occur except as required by law. It is now my pleasure to turn the call over to Allegro MicroSystems' President and CEO Michael Doogue.
Speaker #3: It is now my pleasure to turn the call over to Allegro's president and CEO Mike Duke . Mike .
Michael Doogue: Mike, thank you very much, Jalene, and good morning, and thank you all for joining our second quarter earnings conference call. We remain encouraged by the positive momentum we continue to see across the business, achieving multi-year highs in second quarter bookings and backlog, and delivering strong design win activity in our strategic focus areas, particularly in E Mobility and Data Center. This momentum has enabled us to deliver strong second quarter results with sales, gross margin, and EPS above the midpoint of our guidance ranges at $214 million, 49.6%, and $0.13, respectively. In the second quarter, we saw broad strength in our automotive sales with growth in E Mobility and other auto. Our automotive sensor business grew through increased adoption of our ICs in xEV powertrain systems and motor driver ICs. Sales also grew in electronic power steering systems, in ADAS, and in applications in other auto.
Speaker #4: Thank you very much , and good morning , and thank you all for joining our second quarter earnings conference call . We remain encouraged by the positive momentum .
Speaker #4: We continue to see across the business achieving multi-year highs in second quarter bookings and backlog . And delivering strong design win activity in our strategic focus areas , particularly in e-mobility and data center .
Speaker #4: This momentum has enabled us to deliver strong second quarter results with gross margin and EPs above the midpoint of our guidance ranges at $214 million , 49.6% , and $0.13 , respectively .
Speaker #4: In the second quarter , we saw broad strength in our automotive sales , with growth in e-mobility and other auto . Our automotive sensor business grew through increased adoption of our ICS and powertrain systems , and motor driver IC sales also sales , electronic power steering systems and Adas , and in applications in other auto .
Speaker #4: In our industrial and other end markets , sales growth was led by data center establishing a new quarterly record data center . Momentum was fueled by a broad server power architecture upgrade supporting next generation AI workloads .
Michael Doogue: In our industrial and other end markets, sales growth was led by Data Center, establishing a new quarterly record. Data Center momentum was fueled by a broad server power architecture upgrade supporting next generation AI workloads as systems move toward higher voltage and power levels. As a result, the demand for our Data Center Fan Driver ICs continues to increase, and additionally, our market-leading high-speed current sensor ICs are ramping in data center power supply applications where they enable crucial efficiency and power density improvements. Looking ahead, we are building another growth vector in this market. Within the quarter, we sampled our new high voltage gate drivers for silicon carbide with market leaders in the Data Center power supply space.
Speaker #4: As systems move toward higher voltage and power levels . As a result , the demand for our data center fan driver ICS continues to increase , and additionally , our market leading high speed current sensor ICS are ramping in data center power supply applications where they enable crucial efficiency and power density improvements .
Speaker #4: Looking ahead , we are building another growth vector in this market within the quarter , we sampled our new high voltage gate drivers for silicon carbide with market leaders in the data center , power supply space .
Speaker #4: Collectively , this strong market pull is reflected in our design win activity , where data center continued to lead Q2 industrial design wins with revenue from any of these wins ramping within the next year .
Michael Doogue: Collectively, this strong market pull is reflected in our design win activity, where Data Center continued to lead Q2 industrial design wins, with revenue from any of these wins ramping within the next year. Shifting to automotive design wins, E Mobility continued to lead second quarter activity. We secured a multi-portfolio ADAS win for a steering system using our current sensors and motor drivers with a Chinese OEM. Additionally, our current sensors won multiple designs with an onboard charger and high voltage traction inverter systems with a North American xEV OEM. As I've said in the past, relentless innovation that drives performance leadership is a priority for Allegro MicroSystems. During the quarter, we released the industry's first 10 MHz TMR current sensor, a disruptive IC that further extends our competitive advantage.
Speaker #4: Shifting to automotive design wins , e-mobility continued to lead second quarter activity . We secured a multi portfolio Adas win for a steering system using our current sensors and motor drivers .
Speaker #4: The Chinese OEM . Additionally , our current sensor is won multiple designs within onboard charger and high voltage high voltage traction inverter systems with a North American XXV OEM .
Speaker #4: As I've said in the past , relentless innovation that drives performance , leadership is a priority for Allegro . During the quarter , we released the industry's first ten megahertz TMR .
Speaker #4: Current sensor , a disruptive IC that further extends our competitive advantage . We believe our ten megahertz sensor , the highest bandwidth magnetic current sensor in the market by a significant margin , will help accelerate our sales growth .
Michael Doogue: We believe our 10 MHz sensor, the highest bandwidth magnetic current sensor in the market by a significant margin, will help accelerate our sales growth. These ultra fast sensors reduce the size of inductors and other components in high voltage power systems. Within the quarter, I also traveled to China where I spent time with our teams, our customers, and our suppliers. This time on the road reinforced my excitement about our opportunity and positioning in this important geography. Our sales to China have grown every quarter since Q1 FY2025 when we launched a strategy to quickly correct an over inventory situation. Today, China inventory levels are lean. Design win activity remains strong, and we have no indication of any material pull-in activity from our customers. In response to tariffs, we continue to navigate geopolitical challenges.
Speaker #4: These ultra fast sensors reduce the size of inductors and other components in high voltage power systems . Within the quarter . I also traveled to China , where I spent time with our teams , our customers , and our suppliers , this time on the road reinforced my excitement about our opportunity and positioning in this important geography .
Speaker #4: Our sales to China have grown every quarter since Q1 . FY 25 , when we launched a strategy to quickly correct and over inventory situation .
Speaker #4: Today , China inventory levels are lean design . When activity remains strong and we have no indication of any material pull in activity from our customers in response to tariffs , we continue to navigate geopolitical challenges .
Speaker #4: Therefore, it was encouraging to see China lead our second-quarter automotive design win activity for Allegro, driven by ADAS and XXV applications.
Michael Doogue: Therefore, it was encouraging to see China lead our second quarter automotive design win activity for Allegro, led by ADAS and xEV applications. While in China, I was also pleased to confirm new design ins and wins for our sensor ICs in nascent quadruped and humanoid robotics programs. In summary, we continue to execute on our strategic priorities. We are seeing positive momentum across the business, especially in auto and data center markets, and recent design wins confirm our increasing dollar content opportunity in high growth auto, data center, and robotics applications. I'll now turn the call over to Derek to review the Q2 2026 financial results and provide our outlook for the third quarter.
Speaker #4: While in China , I was also pleased to confirm new design ends and wins for our sensor ICS in nascent quadruped and humanoid robotics programs .
Speaker #4: In summary , we continue to execute on our strategic priorities . We are seeing positive momentum across the business , especially in auto and data center markets and recent design wins confirm our increasing dollar content opportunity in high growth auto data center and robotics applications .
Speaker #4: I'll now turn the call over to Derrick to review the Q2 2026 financial results . And provide our outlook for the third quarter .
Speaker #5: Thank you , Mike , and good morning , everyone . Starting with our second quarter results , net sales were $214 million and non-GAAP earnings per share were $0.13 .
Derek D’Antilio: Thank you, Mike, and good morning, everyone. Starting with our second quarter results, net sales were $214 million and non-GAAP earnings per share were $0.13. Gross margin was 49.6%, operating margin was 13.9%, and adjusted EBITDA was 19% of sales. Total Q2 sales increased by 5% sequentially and 14% year over year. Sales to our automotive customers increased by 8% sequentially and 12% year over year, while E Mobility sales increased by 21% year over year. Industrial and other sales declined by 1% sequentially and grew 23% year over year. We saw continued strong performance in data center offset by a decline in consumer and broad-based industrial where we continue to see some remaining inventory burn. Distribution sales increased by 22% sequentially and 23% year over year. Sell-in was still below POS, which remained near the highest levels it's been in six quarters.
Speaker #5: Gross margin was 49.6% . Operating margin was 13.9% , and adjusted EBITDA was 19% of sales . Total Q2 sales increased by 5% sequentially and 14% year over year .
Speaker #5: Sales to our automotive customers increased by 8% sequentially and 12% year over year , while e-mobility sales increased by 21% year over year .
Speaker #5: Industrial and other sales declined by 1% sequentially and grew 23% year over year . We saw continued strong performance in data center , offset by a decline in consumer and broad based industrial , where we continue to see some remaining inventory burn .
Speaker #5: Distribution sales increased by 22% sequentially and 23% year over year . Sell in was still below POS , which remained near the highest levels it's been in six quarters .
Speaker #5: From a product perspective , magnetic sensor sales increased by 1% sequentially and 2% year over year . Magnetic sensor sales increased by 13% in the first half of fiscal 26 , compared to the second half of fiscal 25 , and sales of our power products increased by 13% sequentially and 42% year over year .
Derek D’Antilio: From a product perspective, magnetic sensor sales increased by 1% sequentially and 2% year over year. Magnetic sensor sales increased by 13% in the first half of fiscal 2026 compared to the second half of fiscal 2025, and sales of our power products increased by 13% sequentially and 42% year over year. Sales by geography were as follows: 29% of sales in China, 24% in the rest of Asia, 17% in Japan, 17% in the Americas, and 13% of sales in Europe. Sales grew in all geographies except for Europe, where we saw seasonal declines. Now turning to Q2 profitability, gross margin was 49.6%, an increase of another 140 basis points sequentially. Operating expenses were $76 million, approximately $3 million above our outlook due to an increase in variable compensation expense and a further weakening of the U.S. dollar.
Speaker #5: Sales by geography were as follows 29% of sales in China , 24% in the rest of Asia , 17% in Japan , 17% in the Americas , and 13% of sales in Europe .
Speaker #5: Sales grew in all geographies except for Europe , where we saw seasonal declines . Now turning to Q2 profitability , gross margin was 49.6% , an increase of another 140 basis points sequentially .
Speaker #5: Operating expenses were $76 million , approximately $3 million above our outlook due to an increase in variable compensation expense and a further weakening of the US dollar .
Speaker #5: Operating margin was 13.9% of sales , compared to 11.1% in Q1 and 11.7% a year ago . The effective tax rate for the quarter was 6% , driven lower by tax planning and elections made within the one big beautiful bill .
Derek D’Antilio: Operating margin was 13.9% of sales compared to 11.1% in Q1 and 11.7% a year ago. The effective tax rate for the quarter was 6%, driven lower by tax planning and elections made within the one big beautiful bill. Second quarter interest expense was $5.1 million and the second quarter diluted share count was 186 million shares. Net income was $24 million or $0.13 per diluted share. Non-GAAP EPS increased by 44% sequentially and 63% year over year, demonstrating the significant operating leverage in the business model. Moving to the balance sheet and cash flow, we ended Q2 with cash of $127 million. Cash flow from operations was $20 million, CapEx was $6 million, and free cash flow was $14 million. From a working capital perspective, DSO was 45 days compared to 40 days in Q1, and inventory days were 135 days compared to 141 days exiting Q1.
Speaker #5: Second quarter interest expense was $5.1 million in the second quarter , diluted share count was 186 million shares , net income was or $0.13 per diluted share .
Speaker #5: non-GAAP EPs increased by 44% sequentially , and 63% year over year , demonstrating the significant operating leverage in the business model . Moving to the balance sheet and cash flow , we ended Q2 with cash of $127 million , cash flow from operations was $20 million , CapEx was $6 million , and free cash flow was $14 million .
Speaker #5: From a working capital perspective , DSO was 45 days $24 million , compared to 40 days in Q1 , and inventory days were 135 days compared to 141 days exiting Q1 .
Speaker #5: During the quarter , we made a voluntary debt repayment of $25 million , bringing our total debt balance to $285 million and net to $168 million .
Derek D’Antilio: During the quarter, we made another voluntary debt repayment of $25 million, bringing our total debt balance to $285 million and net debt to $168 million. Finally, I'll now turn to our Q3 2026 outlook. We expect third quarter sales to be in the range of $215 to $225 million. The midpoint of this range equates to a 24% year-over-year increase and above seasonal for the December quarter. Additionally, we expect all the following on a non-GAAP basis. Gross margin to be between 49% and 51%. Interest expense is projected to be $5 million, reflecting a 25 basis point reduction in SOFR. We expect our tax rate for the quarter and full year FY26 to now be 8%, a decline from prior estimates of 10%.
Speaker #5: Finally, I'll now turn to our Q3 2026 outlook. We expect third quarter sales to be in the range of $215 to $225 million.
Speaker #5: The midpoint of this range equates to a 24% year over year increase , and above seasonal for the December quarter . Additionally , we expect debt all the following on a non-GAAP basis , gross margin to be between 49 , 51% .
Speaker #5: Interest expense is projected to be $5 million , reflecting a 25 basis point reduction in Sofr . We expect our tax rate for the quarter and full year FY 26 to now be 8% , a decline from prior estimates of 10% .
Speaker #5: We estimate that our weighted average diluted share count will be 186 million shares . And as a result , we expect our non-GAAP EPs to be between 12 and $0.16 per share .
Derek D’Antilio: We estimate that our weighted average diluted share count will be 186 million shares, and as a result, we expect our non-GAAP EPS to be between $0.12 and $0.16 per share. Now I'll turn the call back over to Jalene for your questions.
Speaker #5: Now , I'll turn the call back over to Joleen for your questions .
Speaker #3: Thank you . Derek . This concludes management's prepared remarks . Before we open the call for your questions , I'd like to share our third fiscal quarter conference lineup with you .
Jalene Hoover: Thank you, Derek. This concludes Management's prepared remarks. Before we open the call for your questions, I'd like to share our third fiscal quarter conference lineup with you. We will attend Wells Fargo's 9th Annual TMT Summit on November 19 in Rancho Palos Verdes, UBS's Global Technology Conference on December 2 and 3 in Scottsdale, NASDAQ's Investor Conference held in association with Morgan Stanley on December 10 in London, and Barclays 23rd Annual Global Technology Conference on December 11 in San Francisco. Finally, we are excited to announce that we will be hosting our next Investor Day on February 3, 2026, in Boston. We'll send a save the date announcement soon, providing additional details. We will now open the call for your questions. Kathy, please review Q&A instructions.
Speaker #3: We will attend Wells Fargo's ninth annual TMT Summit on November 19th in Rancho Palos Verdes . UBS Global Technology Conference on December 2nd and third in Scottsdale .
Speaker #3: Nasdaq's investor conference , held in association with Morgan Stanley on December 10th in London , and Barclays 23rd Annual Global Technology Conference on December 11th in San Francisco .
Speaker #3: And finally , we are excited to announce that we will be hosting our next Investor Day on February 3rd , 2026 . In Boston .
Speaker #3: We'll send a Save the Date announcement soon, providing additional details. We will now open the call for your questions. Kathy, please review the Q&A instructions.
Speaker #2: Yes . Thank you . As a reminder to ask a question , you'll need to press star one one on your telephone . Wait for your name to be announced to withdraw your question , please press star one one again .
Operator: Yes, thank you. As a reminder, to ask a question you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In order to provide an opportunity for everyone to ask a question, please limit to one with one follow-up. Please stand by while we compile our Q&A roster. Our first question comes to the line of Joe Quatrochi with Wells Fargo. Your line is now open.
Speaker #2: In order to provide an opportunity for everyone to ask a question , please limit to one with one follow up . Please stand by while we compile our Q&A roster .
Speaker #2: Our first question comes from the line of Joe Quatrochi with Wells Fargo . Your line is now open .
Speaker #6: Yeah , thanks for taking the question , and congrats on the results . Maybe just kind of to understand a little bit inside the automotive business .
[Analyst]: Yeah, thanks for taking the question and congrats on the results. Maybe just kind of try to understand a little bit inside the automotive business. I think E Mobility was up, you know, a little bit sequentially, but non E Mobility was up a lot more. Any sort of color on just how do we think about what's driving that? Is it inventory replenishment, and how to think about that going forward?
Speaker #6: I think immobility was up a little bit sequentially , but not immobility was up a lot more . Any sort of color . And just how do we think about what's driving that as it inventory replenishment and how do we think about that going forward ?
Speaker #4: Joe , thanks . This is Mike . So yeah , just to kind of reiterate some of the stats on auto up 8% quarter over quarter and up 12% year over year .
Michael Doogue: Joe, thanks. This is Mike. Just to kind of reiterate some of the stats on auto, up 8% quarter over quarter and up 12% year over year. E Mobility was up 21% year over year. We are seeing growth in the E Mobility space as we would expect based on the strong activity we have through design wins in the E Mobility space. When we look at the overall growth of the auto business in this quarter that we're reporting on, we did have some growth in our motors business for what I would call more in-cabin and chassis-related applications. These are sort of the powertrain-agnostic applications where there are an increasing number of motors and we're getting an increasing number of design wins in that area. We were actually quite pleased to see some of those wins flow through within the quarter.
Speaker #4: But mobility was up 21% year-over-year. So we are seeing growth in the mobility space, as we would expect based on the strong activity we have through design wins in the mobility space.
Speaker #4: When we look at the overall growth of the auto business in this quarter that we're reporting on , we did have some growth in our motors business for what I would call more in and chassis related applications .
Speaker #4: These are sort of the powertrain agnostic applications where there are an increasing number of motors . And we're getting an increasing number of design wins in that area .
Speaker #4: So we were actually quite pleased to see some of those wins flow through within the quarter .
Speaker #6: Thanks . As a follow up , I think your slide deck has references an opportunity like $425 per rack of revenue for for AI servers .
[Analyst]: Thanks. As a follow up, I think your slide deck has references to an opportunity like $425 per rack of revenue for AI server racks. Any help in just kind of understanding what you're capturing today, and how do you see that trending over the next couple years?
Speaker #6: Any help in just kind of understanding what you're capturing today and how do you see that trending ? You know , over the next couple of years ?
Speaker #4: Yeah , absolutely . And it's an exciting story . So what we're seeing is that as the data center or let's say new data center start to pivot more towards an AI architecture , not only are the power levels consumed by the servers going up enormously , but in a commensurate basis , you need lots of cooling within those high power data centers .
Michael Doogue: Yeah, absolutely. It's an exciting story. What we're seeing is that as the data center, or let's say new data centers, start to pivot more towards an AI architecture, not only are the power levels consumed by the servers going up enormously, but on a commensurate basis you need lots of cooling within those high power data centers. They get hot. We are seeing strong pull through for our three phase fans that we've been selling into the data center market for many years now. What's happening is the fans are moving into new areas within the rack. Most notably, we're seeing the fans move over into the power supplies, which are now getting so hot that they need to be cooled directly. That's one tailwind for us in the data center space.
Speaker #4: They get hot . So we are seeing strong pull through for our three phase fans that that we've been selling into the data center market for many years now .
Speaker #4: What's happening ? The fans are moving into new areas within the rack , most notably , we're seeing the fans move over into the power supplies , which are now getting so hot that they need to be cooled directly .
Speaker #4: So that's one tailwind for us in the data center space . Another positive sign , which I talked about in my prepared remarks .
Michael Doogue: Another positive sign, which I talked about in my prepared remarks, is our current sensors are now being adopted and ramping within the power supplies as well. Measuring current is essential to having efficient power management in those power supplies. We offer a smaller form factor solution that also has reduced heating or reduced ohmic losses to offer greater efficiency in those power supplies. That business started to ramp roughly a year ago and we're in the middle of the ramp now. We have differentiated ICs. Today we talked about a 10 MHz current sensor using our TMR technology. Within the last year we released a 5 MHz device. These higher speed current sensors help shrink the size and help optimize the control of those power supplies. It is a new growth vector that is ramping right now within the data center as well.
Speaker #4: Our current sensors are now being adopted and ramping within the power supplies as well , measuring current is essential to having efficient power management in those power supplies .
Speaker #4: We offer a smaller form factor solution that also has reduced heating or reduced ohmic losses to to offer a greater efficiency in those power supplies .
Speaker #4: That business started to ramp up roughly a year ago , and we're in the middle of the ramp now . We have differentiated ICS today .
Speaker #4: We talked about a ten megahertz current sensor using our TMR technology within the last year , we released a five megahertz device . These higher speed current sensors help shrink the size and help optimize the control of those power supplies .
Speaker #4: So it is a new growth vector that is ramping right now within the data center as well .
Speaker #6: Thank you .
[Analyst]: Thank you.
Speaker #2: Thank you . The next question comes from the line of Vivek Arya with Bank of America Securities . Your line is now open .
Operator: Thank you. The next question comes to the line of Vivek Arya with Bank of America Securities. Your line is now open.
Speaker #7: Thanks for taking my questions . On the first one , just on the demand side . Very near-term , I was wondering if you are noticing any direct or indirect effects because of the area situation that is going on and is constraining output at some of the larger auto OEMs and in general , how would you describe kind of the regional demand environment ?
[Analyst]: Thanks for taking my questions. On the first one, just on the demand side, very near term, I was wondering if you are noticing any direct or indirect effects because of the next situation that is going on and is constraining output at some of the larger auto OEMs. In general, Mike, how would you describe kind of the regional demand environment? I think you mentioned Europe is still a little bit below trend. Just in general, how would you describe what the kind of the broader regional demand situation is and where you see inventory kind of, you know, being on the better versus worse side?
Speaker #7: I think you mentioned Europe is still a little bit below or below trend , but just in general , how would you describe what the kind of the broader regional demand situation is and where you see inventory , inventory kind of being on the better versus worse side ?
Speaker #4: Yeah , thanks , Vivek . So on the first question , you know , we we read in the press the potential impact of the next Furia situation .
Michael Doogue: Yeah. Thanks, Vivek. On the first question, we read in the press the potential impact of the nextperia situation. Personally, we have not seen any changes in demand from our end customers that can attribute to that situation. I don't have much more to say on that situation. In terms of the regional trends that we see coming into this quarter, we were pleased to see an uptick in sales in the Americas. We also saw growth in all regions other than Europe. We continue to see pockets of weakness and pockets of inventory within the European market. There are still some pockets of inventory in the North American market. That's why we were encouraged to see it grow a bit more in this quarter.
Speaker #4: Personally , we have not seen any changes in demand from our end customers that can attribute to that situation . So I don't have much more to say on on that situation in terms of the regional trends that we see coming into this quarter .
Speaker #4: We were pleased to see an uptick in sales in the Americas . We also saw growth in all regions other than Europe . So we continue to see pockets of weakness and pockets of inventory within the European market .
Speaker #4: And there are still some pockets of inventory in the North American market . But that's why we were encouraged to see it . Grow a bit more in this quarter .
Speaker #7: And from my follow up on , you know , just the sequential trend . So you are guiding to a growth in the December quarter , right ?
[Analyst]: For my follow up on just the sequential trend, you are guiding to growth in the December quarter, which tends to be usually flat to down or so. I'm curious what's driving that above seasonal growth. For extra credit, if you could give us a sense for how should we think about seasonality going into March. Thank you.
Speaker #7: Which tends to be usually flat , flat to down or so . So I'm curious what's driving that above seasonal growth . And for extra credit , if you could give us a sense for how should we think about seasonality going into March ?
Speaker #7: Thank you .
Speaker #5: Yeah , this is Derek . Typically you're right . The December quarter , over the course of almost two decades , we saw about a 5% decline in that quarter , usually led by industrial .
Derek D’Antilio: Yeah, Vivek, this is Derek D’Antilio. Typically, you're right, the December quarter, over the course of almost two decades, we saw about a 5% decline in that quarter, usually led by industrial. Last year we had a 5% decline in that quarter. Interestingly, it was auto in North America and other places. In the years where there's been a cyclical upturn, in those previous years where a cyclical upturn has happened, we've performed above seasonal in the December quarter. We're guiding up this December quarter largely led by continuing strength in auto and in data center, the two areas we've seen a lot of strength in the past several quarters. I'm not going to guide for March, but we've typically not seen seasonality in the March quarter other than Chinese New Year shutdowns in China and other parts of Asia, which typically is a little bit lower for those.
Speaker #5: Last year we had a 5% decline in that quarter . Interestingly , it was auto in North America and other places . But in the years where there's been a cyclical upturn in those previous years with cyclical upturn has happened , we've performed above seasonal in the December quarter .
Speaker #5: So we're guiding up this December quarter , largely led by continuing strength in auto and in data center . The two areas we've seen a lot of strength in the past several quarters .
Speaker #5: I'm not going to guide for March , but we're typically not seen seasonality in the March quarter other than Chinese New Year shutdowns in China and other parts of Asia , which typically is a little bit lower for those .
Speaker #5: But that's the beauty of our business being pretty well geographically diversified . And that's a quarter . We usually see a rebound in the Americas , Japan and Europe .
Derek D’Antilio: That's the beauty of our business being pretty well geographically diversified. That's a quarter we usually see a rebound in the Americas, Japan, and Europe. That typically offsets those things.
Speaker #5: That's that's typically offset those things .
Speaker #7: Thank .
[Analyst]: Thank you.
Speaker #8: You .
Speaker #2: Thank you . The next question comes from the line of Gary Mobley with Loop Capital . Your line is now open .
Operator: Thank you. The next question comes to the line of Gary Mobley with Loop Capital. Your line is now open.
Speaker #9: Morning , everybody . Thanks for taking my question . Derek I'm having a little bit of a difficult time reconciling the 60 basis points of gross margin upside .
[Analyst]: Morning, everybody. Thanks for taking that question, Derek. I'm having a little bit of a difficult time reconciling the 60 basis points of gross margin upside you delivered for the quarter. There were some headwinds like foreign exchange. Also, automotive was a higher percentage of mix. You delivered right on with that $0.75 of gross profit. Gross profit drop through. What drove that gross margin upside for the quarter?
Speaker #9: You delivered for the quarter . And seemingly there were some headwinds , like foreign exchange . Also , automotive was a higher percentage of mix .
Speaker #9: You delivered right on with that $0.75 of gross profit . Gross profit drop through . So what what drove that gross margin upside for the quarter ?
Speaker #9: Yeah .
Speaker #5: I would say Gary , it came in as we expected . Right . I expected to have about 75% drop through . And having the revenue at 214 million above the midpoint , that's the extra 60 basis points .
Michael Doogue: Yeah, I would say, Gary, it came.
Derek D’Antilio: In as we expected.
[Analyst]: Right.
Derek D’Antilio: I expected to have about 75% drop through and having the revenue at $214 million above the midpoint, that's the extra 60 basis points. You're absolutely right. There were certainly headwinds, with the cost of some commodities continuing to go up. Foreign exchange, at least for the Philippine peso, did moderate from a decline in the second quarter here, and we expect it to moderate going forward. That's good. That's a tailwind. We continue to do things in our factory to be far more efficient. Our target is to have that 60% to 65% drop through. The guide for Q3 equates to exactly 65% at the midpoint of that guidance. I feel like it came in as we expected, offsetting some of the headwinds with continuing to look at PPV from our vendors and also factory efficiencies.
Speaker #5: You're absolutely right . There were certainly headwinds with the cost of some commodities continuing to go up . Foreign exchange , at least for the Philippine peso , did moderate from a decline in the second quarter here .
Speaker #5: And we expect it to moderate going forward . So that's good . That's a that's a tailwind . And we continue to do things in our factory to be far more efficient .
Speaker #5: So you know , our target is to have that 60 to 65% drop through the guide for Q3 equates to exactly 65% at the midpoint of that guidance .
Speaker #5: So I feel like it came in as we expected , offsetting some of the headwinds with with continuing to look at PPV from our vendors and also factory efficiencies .
Speaker #9: Thanks for that is my follow up . I want to ask about the shipment into the channel is embedded in your your third quarter revenue guide .
[Analyst]: Thanks for that. As a follow-up, I want to ask about the shipment into the channel as embedded in your third quarter revenue guide. You know, that $220 million midpoint. Does that assume that you're still under-shipping to end demand, and maybe you can give the sense, you know, if so, by how much.
Speaker #9: You know that 220 million midpoint is that assume that you're still under shipping to end demand and maybe you can get a sense , you know , if so , by how much .
Speaker #5: So give the statistics on Q3 in Q sorry , in Q2 , we were still shipping below POS . Our sell in was still a couple of percentage points below POS .
Derek D’Antilio: I'll give the statistics on Q3 in Q2. In Q2 we were still shipping below POS. Our sell-in was still a couple of percentage points below POS. We still did burn some inventory. Came down by a couple of million dollars distributed inventory in the second quarter. I would describe it as, you know, the curve is slowing because we burnt a lot of inventory last year. It's been going on for the better part of five quarters now. I would say we're in the late eighth inning right now. There may be some additional burn in the December quarter in the long tail of consumer and broad-based industrial in certain pockets.
Speaker #5: We still did burn some inventory came down by a couple of million dollars , distributed inventory in the second quarter . I would describe it as , you know , the curve is slowing because we burned a lot of inventory last year .
Speaker #5: It's been going on for the better part of five quarters now . I would say we're in the late eighth inning right now .
Speaker #5: There may be some additional burn in the December quarter in the long tail of consumer and broad based industrial in certain pockets .
Speaker #9: Thank you guys .
[Analyst]: Thank you, guys.
Speaker #5: Welcome .
Derek D’Antilio: Welcome.
Speaker #2: Thank you . The next question comes from the line of Tom O'Malley with Barclays . Your line is now open .
Operator: Thank you. The next question comes from the line of Thomas O'Malley with Barclays. Your line is now open.
Speaker #10: Hey guys . Really nice results and thanks for taking my questions . The first is just on the mix of business in the quarter .
[Analyst]: Hey guys, really nice results and thanks for taking my questions. The first is just on the mix of business in the quarter. It looks like your non E Mobility business was very strong. We've seen a bit of slowing on the E Mobility side. Could you just maybe give us the breakdown of what you expect between E Mobility and non E Mobility in your guidance for the third quarter? Thank you.
Speaker #10: It looks like your non-mobile mobility business was very strong and you've seen a bit of slowing on the mobility side , could you just maybe give us the breakdown of what you expect between mobility and non immobility ?
Speaker #10: In your guidance for the third quarter ? Thank you .
Speaker #4: Yeah . So thanks for the question . I mentioned earlier . You know with mobility being up 5% quarter over quarter . But also let's remember that it's up 21% year over year .
Michael Doogue: Yeah, thanks for the question. I mentioned earlier, you know, with E Mobility being up 5% quarter over quarter, but also let's remember that it's up 21% year over year. I mentioned these motor driver design wins throughout the cabin or the chassis in the car. These are these powertrain agnostic applications that we continue to pursue because that's where some of our motor driver technology shines. I've talked many times in the past that we are exceptionally skilled at spinning motors more quietly, more efficiently, etc. We did pick up some wins in those areas and they're ramping within the quarter. That added to the growth of the automotive market within the quarter, obviously. Again, the E Mobility up 5%, auto overall up 8%, these motor applications driving most of the delta between the 5% growth and the 8% growth.
Speaker #4: And I mentioned these motor driver design wins throughout the cabin or the chassis in the car . These are these powertrain agnostic applications that we continue to to pursue .
Speaker #4: Because that's where some of our motor driver technology shines . I've talked many times in the past that we are exceptionally skilled at spinning motors more quietly , more efficiently , etc.
Speaker #4: so we did pick up some wins in those areas and they're ramping within the quarter . And that added to the growth of the automotive market within the quarter .
Speaker #4: Obviously , again , the e-mobility up 5% . Auto overall up 8% . These motor applications driving most of the delta between the 5% growth and the 8% growth .
Speaker #4: .
Speaker #5: And Tom , some of this is geographical . For example , the Americas grew 11% in the quarter , while China grew 7.5% .
Derek D’Antilio: Tom, some of this is geographical. For example, the Americas grew 11% in the quarter while China grew 7.5%. As you might imagine, there's more the traditional auto in the Americas.
Speaker #5: And as you might imagine , there's more of the traditional auto in the Americas .
Speaker #10: Anything on the guidance between those two ? Just into into the quarter on what you're expecting between those two segments ?
[Analyst]: Anything on the guidance between those two just into the out quarter on what you're expecting between those two segments?
Speaker #5: No , we're not going to guide to that level of granularity . I will say that the growth in Q3 from a macro market standpoint will be led by automotive .
Derek D’Antilio: No, we're not going to guide to that level of granularity. I will say that the growth in Q3 from a macro market standpoint will be led by automotive. Tom.
Speaker #5: Tom .
Speaker #4: And maybe the only other thing I'd .
Michael Doogue: Maybe the only other thing I'd add too.
Speaker #10: Add . Go ahead .
[Analyst]: Go ahead.
Speaker #4: I was going to say the only other thing I'd add is , you know , part of the reason we talk about our design wins being so strong in the e-mobility space is just to highlight the fact that most of the growth that we're seeing , most of the dollar content gains that we are seeing , continue to be in the e-mobility space .
Michael Doogue: The only other thing I'd add is, you know, part of the reason we talk about our design wins being so strong in the E Mobility space is just to highlight the fact that most of the growth that we're seeing, most of the dollar content gains that we're seeing, continue to be in the E Mobility space.
Speaker #10: Helpful . And then just as a follow up into the Outyear , I think more broadly , auto estimates for just market growth have have come down a little bit , but you guys have shown an ability to grow really , despite the broader market kind of slowing or really being kind of flattish .
[Analyst]: Helpful. Just as a follow up into the out year, I think more broadly, auto estimates for just market growth have come down a little bit. You guys have shown an ability to grow really despite the broader market kind of slowing or really being kind of flattish. Can you remind us again, is there a way or framework to think about your growth versus what the broad market looks like into 2026 and any kind of puts and takes that we can better apply kind of your growth trajectory versus what we think is kind of more of a flattish market for next year? Thank you very much.
Speaker #10: Can you remind us again , is there a way or a framework to think about your growth versus what the broad market looks like into 2026 and any kind of puts and takes that we can try to apply kind of your growth trajectory versus what we think is kind of more of a flattish market for next year .
Speaker #10: Thank you very much .
Speaker #4: Yeah . So there's a couple different ways to answer that . One , I'll first go back to the model that we've shared many times where we say that our total content opportunity in an internal combustion engine car is roughly $40 .
Michael Doogue: Yeah, so there's a couple different ways to answer that one. I'll first go back to the model that we've shared many times where we say that our total content opportunity in an internal combustion engine car is roughly $40. When you look at either hybrids or EVs, it doesn't matter which one, right? The dollar content is the same roughly in hybrid and full EVs. That dollar content for Allegro today is at $60. As we roll out some of our new products, like our isolated gate drivers, that number goes up to $100. You can see within those statistics, that is the dollar content story that underpins outgrow the vehicle production market.
Speaker #4: When you look at either hybrids or EVs , it doesn't matter which one , right ? It's the dollar content is the same roughly in hybrid and full EVs .
Speaker #4: That dollar content for Allegro today is at $60 . And as we roll out some of our new products , like our isolated gate drivers , that number goes up to $100 .
Speaker #4: So you can see within those statistics , that is the dollar content story that underpins our ability to to far outgrow the vehicle production market .
Speaker #2: Thank you . The next question comes to the line of Chris Caso with Wolfe Research . Your line is now open .
Operator: Thank you. The next question comes to the line of Chris Caso with Wolfe Research. Your line is now open.
Speaker #11: Yes . Good morning . First question is related to gross margins as we go into next year . And in the past , this past year , you've seen a seasonal decline in gross margins in in the March quarter as annual price reductions kind of take hold .
[Analyst]: Yes. Good morning. The first question is related to gross margins as we go into next year. In the past, this past year, you've seen a seasonal decline in gross margins in the March quarter as annual price reductions kind of take hold. Should we expect similar this year? Perhaps with that, could you talk a bit about what your pricing expectations are into next year? Are you still expecting a fairly normal pricing environment?
Speaker #11: Should we expect similar this year and then perhaps with that , could you talk a bit about what your pricing expectations are into next year ?
Speaker #11: Are you still expecting a fairly normal pricing environment ?
Speaker #5: Yeah , Chris , what's interesting is that 60 to 65% gross margin drop through is held . Pretty true since we've been public on an annual basis .
Derek D’Antilio: Yeah, Chris, what's interesting is that 60 to 65% gross margin drop through has held pretty true since we've been public on an annual basis. There are quarter to quarter perturbations, meaning that in that March quarter, typically when pricing is negotiated with customers and they're down, the pricing is down. That hits that quarter immediately like it did this past year, and the cost cycle back into our P&L over the next two quarters, which it did here. We have better drop during those two quarters, and then it normalizes out. Two or three years ago when prices were increasing, we had the opposite effect. We had higher gross margin in that March quarter. It certainly depends on the pricing environment.
Speaker #5: But there are quarter to quarter perturbations , meaning that in that March quarter , typically when pricing is negotiated with customers . And they're down , the pricing is down that hits that quarter immediately like it did this past year .
Speaker #5: And the cost cycle back into our PNL over the next two quarters , which it did here . So we have better drop during those two quarters .
Speaker #5: And then it normalizes out 2 or 3 years ago when prices were increasing , we had the opposite effect , where we had higher gross margin in that March quarter .
Speaker #5: So it certainly depends on the pricing environment . What I did say this past year , in March of 2025 quarter , was the friction on pricing was a bit more than it had been because we had price increases for the past several years , and that was also on a lower revenue number .
Derek D’Antilio: What I did say this past year in March of 2025 quarter was the friction on the pricing was a bit more than it had been because we had price increases for the past several years, and that was also on a lower revenue number. The amount of basis points is higher. Now our inventory days have gone from 185 days on balance sheet to 135. The turns of the cost into the P&L will be quicker. All else being equal, I expect the impact to be less. Maybe Mike could talk a little bit about the pricing environment.
Speaker #5: So the amount of basis points is higher . And now our inventory days have gone from 185 days . On balance sheet to 135 .
Speaker #5: So the turns of the cost into the PNL will be quicker . So all else being equal , I expect the impact to be less .
Speaker #5: And maybe I could talk a little bit about the pricing environment .
Speaker #4: Yeah , from a pricing perspective , you know , there are competitors in the market right now that have been publicly stated as raising prices .
Michael Doogue: Yeah. From a pricing perspective, there are competitors in the market right now that have been publicly stated as raising prices. I don't think there's a broader appetite from our customer base for price increases, nor am I saying that's part of our strategy, but our expectation heading into the new calendar year is that we can hold pricing more favorably for Allegro MicroSystems than we might have been able to do in other periods. Got it.
Speaker #4: I don't think there's a broad appetite from our customer base for price increases , nor am I saying that's part of our strategy .
Speaker #4: But our expectation heading into the new calendar year is that we can hold pricing more favorably for Allegro than we might have been able to do in other periods .
Speaker #11: Got it . That's helpful . I guess going forward , you made some comments , Derek . You know , this was sort of in the late eighth inning with regard to inventory reduction and such .
[Analyst]: That's helpful, I guess, going forward. You made some comments, Derek. This was sort of in the late 8th inning with regard to inventory reduction and such. Is that a comment for both the distribution channel as well as the direct customers? If that's the case, how do we think about that with respect to revenue growth and seasonality as we get over the next few quarters? I mean, if we start to get some restocking, if demand stabilizes here, does that suggest above seasonal quarters once the inventory burn is complete?
Speaker #11: Is that a comment for both the distribution channel as as well as the direct customers ? And if that's the case , you know , how do about that ?
Speaker #11: With respect to , you know , revenue growth and seasonality as we get over the next few quarters ? I mean , is it , you know , if we start to get some restocking , if , demand stabilizes here , you know , does that suggest above seasonal quarters once , once the inventory burn is complete ?
Speaker #5: Yeah . So I'll start . Chris , what we saw in Q2 was continued inventory burn a small amount . Distributor inventory came down by about another $5 million or sell in was mid-single digits below POS .
Derek D’Antilio: Yes. I'll start, Chris. What we saw in Q2 was continued inventory burn. A small amount of distributor inventory came down by about another $5 million. Our sell-in was mid single digits below, POS remained pretty strong. I expect to see a little bit more, and that's all on the distributor side where we get data from our distributors on a regular basis. I expect to see a little bit more inventory burn in the very long tail of consumer and broad-based industrial here in the December quarter. I feel like we're getting to the end of that on the distributor side. On the automotive side, it's a little harder to see the actual inventory with our customers, but we're getting more in-quarter lead time orders. That tells us that, coupled with forecast, that's also getting near the end of the inventory burn as well.
Speaker #5: POS remained pretty strong . I expect to see a little bit more . And that's all on the distributed side , where we get data from our distributors on a regular basis .
Speaker #5: I expect to see a little bit more inventory burn in the very long tail of consumer and broad based industrial here in the December quarter , so I feel like we're getting to the end of that in the distributor side .
Speaker #5: On the automotive side , it's a little harder to see the actual inventory with our customers , but we're getting more in quarter lead time orders .
Speaker #5: So that tells us that that , coupled with forecasts , tells us that that's also getting near the end of the inventory burn as well .
Speaker #4: And I could just add to that , that I mentioned I was in China within the quarter . One nice piece of learning within that trip , our internal teams did a nice job pulling our tier ones in the China market for their inventory levels of Allegro products , and we were seeing very healthy , if not in some cases slightly low levels of inventory in the China market space .
Michael Doogue: I could just add to that that I mentioned I was in China within the quarter. One nice piece of learning within that trip, our internal teams did a nice job polling our tier ones in the China market for their inventory levels of Allegro products. We were seeing very healthy, if not in some cases slightly low, levels of inventory in the China market space. I bring that up for a couple of reasons. Number one, we're getting the obvious and insightful questions being asked. Do you see any evidence of stocking in China? We weren't seeing that, but it also shows that we could be poised for growing to end demand in China in the coming quarters.
Speaker #4: I bring that up for a couple of reasons . Number one , we're getting the obvious . And you know , insightful questions being asked .
Speaker #4: Do you see any evidence of stocking in China ? We weren't seeing that , but it also shows that we could be poised for growing to end demand in China in the coming quarters .
Speaker #5: And Chris , to answer the second part of your question , as we've laid out in our financial model , we expect that end demand for us is growing at low double digits , going forward .
Derek D’Antilio: Chris, to answer the second part of your question, as we've laid out in our financial model, we expect that end demand for us is growing at low double digits going forward. If there was a restocking cycle, which we don't really see evidence of right now, that could be above that number.
Speaker #5: If there was a restocking cycle , which we don't really see evidence of that right now , that could be above that number .
Speaker #11: That's very helpful . Thank you .
[Analyst]: It's very helpful, thank you.
Speaker #2: Thank you . The next question comes from Blayne Curtis with Jefferies . Your line is now open .
Operator: Thank you. The next question comes from Blayne Curtis with Jefferies. Your line is now open.
Speaker #12: Hey . Good morning and nice results . I had two questions . I just wanted to ask . Obviously , data center has been all over the news , and I'm just kind of curious how you've seen the outlook for data center improve over the last quarter .
Michael Doogue: Hey, good morning.
Derek D’Antilio: Nice results. I had two questions I just wanted to ask. Obviously data center has been all over the news and I'm just kind of curious how you've seen the outlook for data center improve over the last quarter, and then I don't know if you're able to kind of frame how big it is within industrial. I'd also be curious, just commentary as to, you know, obviously there's a 3x increase in content to AI, but how much is AI today versus general purpose servers?
Speaker #12: And then I don't know if you're able to kind of frame how big it is within industrial . I'd also be curious , just commentary as to obviously there's A3X increase in content to AI , but how much is AI today versus general purpose servers ?
Speaker #4: Yeah . Thanks , Blaine . I'll I'll talk generically . You can poke at the answer some more if I didn't didn't answer your questions .
Michael Doogue: Yeah, thanks, Blayne. I'll talk generically. You can poke at the answer some more if I didn't answer your questions, but as I mentioned earlier, what we're seeing is just the incredible levels of power that are being consumed in these newer data center architectures. We're starting to see transition to 48 volts, discussion of 800 volt. If I could summarize that at the highest level, all those trends align very nicely with some of the competitive advantages of our products. That would include our motor or fan drivers, our current sensors, and increasingly we're getting some uptick in activity in the data center landscape from our isolated gate drivers. Everything we're seeing is related to the higher power levels. Getting the heat out of these power supplies, getting the heat out of the cabinet or the rack itself is becoming more important.
Speaker #4: But , you know , as I mentioned earlier , what we're seeing is just the incredible levels of power that are being consumed in these newer data center architectures .
Speaker #4: We're starting to see transition to 48 volt discussion of 800 volt . And if I could summarize that at the highest level , all those trends align very nicely with some of the competitive advantages of our products .
Speaker #4: That would include our motor or fan drivers, our current sensors, and increasingly we're seeing some uptick in activity in the data center landscape from our isolated gate drivers.
Speaker #4: Everything we're seeing is related to the higher power levels. Getting the heat out of these power supplies and getting the heat out of the cabinet or the rack itself is becoming more important.
Speaker #4: And we have numerous technologies now that help achieve these higher levels of cooling and higher levels of performance in the data center . We not experts in data center or server architectures , although we're putting more time and energy into studying trends for the future , we do see trends that should increase the number of fans for Allegro in Iraq .
Michael Doogue: We have numerous technologies now that help achieve these higher levels of cooling and higher levels of performance in the data center. We are not experts in data center or server architectures, although we're putting more time and energy into studying trends for the future. We do see trends that should increase the number of fans for Allegro in a rack. Within an AI data center, it should increase the numbers of current sensors and eventually the isolated gate drivers. That's an encouraging sign.
Speaker #4: Within an AI data center should increase the numbers of current sensors and eventually the isolated gate drivers . And that's an encouraging sign .
Speaker #12: Gotcha . Thanks . And then I wanted to ask , I guess , if I did the math right , the sales were up 22% sequentially .
Derek D’Antilio: Gotcha.
Michael Doogue: Thanks. I wanted to ask, I.
Derek D’Antilio: guess if I did the math right, the distributor sales were up 22% sequentially. I think that's a high number versus historically. I'm just curious. You just described that you said inventories are down in that channel. I guess why the jump? Is it more end market related? If you can just provide any color, that would be great. Yeah, Blayne, that's exactly right. Distributed sales for us were up 22%. We continue to see, we continue to ship below POS by about mid single digits, and we also burned about $5 million in inventory in the distribution channel. Our sales into the distributors have been pretty low for the past six quarters. It's back to what it was about six quarters ago. I think we're going to continue to see that increase.
Speaker #12: So I think that's a high number versus historically . I guess I'm just curious , do you just describe that ? You said inventories are down in that channel , I guess .
Speaker #12: Why the jump ? And is it more end market related if you can just provide any color would be great .
Speaker #5: Yeah . Blaine . That's exactly right . So distributor sales for us selling was up 22% . We continue to see we continue to shift below POS buy about mid-single digits .
Speaker #5: And we also burned about $5 million in inventory in the distribution channel . So distributor sales into the distributors have been pretty low for the past six quarters .
Speaker #5: So it's back to what it was about six quarters ago . And really , I think we're going to continue to see that increase the way I distribute sales work is all of our industrial products go through distribution , and then we have fulfillment done through distribution for both auto and industrial in places like Japan and most of China , as well .
Derek D’Antilio: The way our distributor sales work is all of our industrial products go through distribution, and then we have fulfillment done through distribution for both auto and industrial in places like Japan and most of China as well. Gotcha. Thank you.
Speaker #12: Gotcha . Thank you .
Speaker #2: Thank you . The next question comes to the line of
Operator: Thank you. The next question comes from the line of Quinn Bolton with Needham and Company. Your line is now open.
Speaker #2: Quinn are Bolton with Needham and Company . Your line is now open .
Speaker #13: Hey , guys . Nice job on the on the results and outlook . I guess I just wanted to come back . I think last quarter you had sort of put a consumption at the end of 24 somewhere in the level of two , 20 to 230 million .
[Analyst]: Hey guys, nice job on the results and outlook. I guess I just wanted to come back. I think last quarter you had sort of put consumption at the end of 2024, somewhere in the level of $220 million to $230 million. I think you sort of felt that that was probably a good level to think about through this year given some of the annual price declines. Just wanted to make sure you guys hadn't changed your outlook for where you think sort of end consumption is. Looking forward, when do you think you get back to that sort of low double-digit growth rate in that TAM? Do you think that's something you're looking for in 2026?
Speaker #13: And I think you sort of felt that that was probably a good level to think about through this year , given some of the annual price declines .
Speaker #13: Just one wanted to make sure you guys hadn't changed your outlook for where you think sort of end consumption is , and then looking forward , when do you think you get back to that sort of low double digit growth rate in that ?
Speaker #13: Tam , do you think that's something you're looking for in 2026 ?
Speaker #5: Yeah, Quinn. That's exactly right. We talked about getting to about $225 million in the fourth quarter of 2024. That $225 million number was the number I gave for consumption at that point.
Derek D’Antilio: Yeah Quinn, that's exactly right. We talked about getting to about $225 million in the fourth quarter of 2024. That $225 million number was the number I gave of end consumption at that point. That number has continued to grow organically just from the markets that we serve, offset by some of the price declines that have happened in the market over two years. We still think that number's in that range. It may have moved up a little bit from there. Now that pricing has largely stabilized, that number should continue to move up at the rate of our content opportunity in the market, call that the 10% per year. That will continue to increase. As I mentioned as we get through here, Q3, I think we're in the late innings of this inventory burn for us. I don't expect to continue to see material inventory burns beyond that.
Speaker #5: That number has continued to grow organically just from the markets that we serve . Offset it by some of the price declines that have happened in the market over two years .
Speaker #5: So we still think that number is in that range . It may have moved up a little bit from there . Now that pricing is largely stabilized , that number should continue to move up at the rate of our content opportunity in the market .
Speaker #5: So call that the 10% per year . So that number will continue to increase . And as I mentioned , as we get through here , Q3 , I think we're in the late innings of this inventory burn for us .
Speaker #5: I don't expect to continue to see material inventory burns . And beyond that , as a caller previously asked if there is a restocking cycle , we could even see growth above that .
Derek D’Antilio: As a caller previously asked, if there is a restocking cycle, we could even see growth above that, that content opportunity growth.
Speaker #5: You know , that content opportunity growth .
Speaker #13: Great . Then I wanted to follow up , Mike , you sort of addressed some of the applications in the data center , but I was wondering if you could specifically talk about 800 volt , given a number of the hyperscalers and OCP talking about moving to 800 volt rack , you know , power distribution rails , index generation racks , you know , I think you've kind of gone through where you play in 48 volt , but do you have specific applications at that 800 volt rail on top of what you've kind of previously highlighted on the 48 volt rail ?
[Analyst]: Great. I wanted to follow up. Mike, you sort of addressed some of the applications in the data center, but was wondering if you could specifically talk about 800 volt given a number of the hyperscalers and OCP talking about moving to 800 volt rack power distribution rails in next generation racks. I think you've kind of gone through where you play in 48 volt, but do you have specific applications at that 800 volt rail on top of what you've kind of previously highlighted on the 48 volt rail?
Speaker #4: Yeah . Great question , Quinn . And we have a great 800 volt story . And part of the reason is that a lot of the technologies we developed for the EV space were all developed around 800 volt batteries in EVs .
Michael Doogue: Yeah, great question, Quinn. We have a great 800 volt story, and part of the reason is that a lot of the technologies we developed for the EV space were all developed around 800 volt batteries in EVs. Whether you look at our current sensors or our isolated gate drivers, they were all designed specifically to offer efficiency gains, power density gains, and size benefits in 800 volt systems. We are actually excited about the coming transition to an 800 volt architecture in data center.
Speaker #4: So whether you look at our current sensors or our isolated gate drivers , they were all designed specifically to . Offer efficiency gains , power density gains , size , benefits in 800 volt systems .
Speaker #4: So we are actually excited about the coming transition to an 800 volt architecture in data center .
Speaker #13: Perfect . Thank you .
[Analyst]: Perfect, thank you.
Speaker #2: Thank you . The next question comes from Joshua Buchalter with TD Cohen . Your line is now open .
Operator: Thank you. The next question comes from Josh Buchalter with TD Cowen. Your line is now open.
Speaker #14: Hey guys . Thank you for taking my question . And congrats on the results . And guide . You know , I'm sensing a lot of optimism on the current sensing side .
[Analyst]: Hey guys, thank you for taking my question and congrats on the results and guide. I'm sensing a lot of optimism on the current sensing side. It seems like it's been building all year. Is this because of the TMR portfolio maturing and potentially being applicable and ready for autos? Maybe you just speak to how much of the current sensing piece is current and ready on TMR across your applications. Thank you.
Speaker #14: Really . It seems like it's been building all year . Is this because of the TMR portfolio maturing and potentially being applicable and ready for autos ?
Speaker #14: Maybe you could just speak to how much of the current sensing piece is current and ready on TMR across your applications ? Thank you .
Speaker #4: Yeah . Thanks , Josh . It's Mike , so we're excited about current sensors for lots of reasons . One of them is just the growth potential .
Michael Doogue: Yeah, thanks Josh. It's Mike. We're excited about current sensors for lots of reasons. One of them is just the growth potential that current sensors offer, both in electrified vehicles and really in the electrification of everything, which would include the data center. The team has done a really nice job increasing the number of package offerings that we deliver to customers that help them solve some of the size problems they have, some of the power density problems that they have, and the packaging technologies create a great platform for what becomes circuit innovations.
Speaker #4: That current sensors offer . Both in electrified vehicles and really in the electrification of everything , which would include the data center . So the team has done a really nice job increasing the number of package offerings that we deliver to customers .
Speaker #4: That helped them solve some of the size problems they have . Some of the power density problems that they have and the the packaging technologies create a great platform for then what become circuit innovations .
Speaker #4: I talked about this new ten megahertz TMR current sensor , and this is a great example of us taking market leading TMR tech , combining it with our market leading packages , and creating a product that is highly sought after , both in the EV space , like in the onboard charger part of the EV world .
Michael Doogue: I talked about this new 10 MHz TMR current sensor and this is a great example of us taking market leading TMR tech, combining it with our market leading packages and creating a product that is highly sought after both in the EV space, like in the onboard charger part of the EV world, but also in these data center power supplies. These faster current sensors help protect against short circuit conditions with gallium nitride and silicon carbide. When you switch these power supplies faster, not only can you make them more efficient, but you can also shrink the size of some expensive inductors and other components in the power supply.
Speaker #4: But also in these data center power supplies . And once again , these these faster current sensors help protect against short circuit conditions with gallium nitride and silicon carbide .
Speaker #4: But when you switch these power supplies faster , not only can you make them more efficient , but you can also shrink the size of some expensive inductors and other components in the power supply .
Speaker #4: So TMR is helping out quite a bit in the world of current sensors and in our sensor business as a whole .
[Analyst]: So.
Michael Doogue: TMR is helping out quite a bit in the world of current sensors and in our sensor business as a whole.
Speaker #14: Thank you for all the color there . My follow up . It sounds like you've incremental confidence in the pricing environment . I was maybe I was hoping you could expand on what's changed in the market .
[Analyst]: Thank you for all the color there. My follow-up, it sounds like you have incremental confidence in the pricing environment. I was hoping you could expand on what's changed in the market that's driving that confidence. When you talked about being able to hold pricing better into Q1, you know, or I think you said stable, are you expecting flat pricing into 2026 or is that just relative to the step down that happened at the beginning of this year that it's more stable? Thank you.
Speaker #14: That's driving that confidence . And then also when you talked about being able to hold pricing better into one . Q or I think you said stable , are you expecting flat pricing into 2026 , or is that just a relative to the step down that happened at the beginning of this year , that it's more stable ?
Speaker #14: Thank you .
Speaker #4: Yeah , it won't be flat pricing . It'll just be more stable . I think what we're seeing is that some of the larger players in the market who had been very aggressive on pricing to try to fill factories , they're starting to take their foot off the gas .
Michael Doogue: Yeah, it won't be flat pricing, it'll just be more stable. I think what we're seeing is that some of the larger players in the market who had been very aggressive on pricing to try to fill factories, they're starting to take their foot off the gas. Some of them are even talking about price increases, and we just think it creates a more stable environment for pricing. We're not saying pricing will be flat entering next year.
Speaker #4: Some of them are even talking about price increases , and we just think it creates a more stable environment for pricing . But we're not saying pricing will be flat entering next year .
Speaker #14: Got it . Thank you .
[Analyst]: Got it. Thank you.
Speaker #2: Thank you . The next question comes from the line of Vijay Rakesh with Mizuho . Your line is now open .
Operator: Thank you. The next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open.
Speaker #15: Yeah . Hi , Mike and Derek . Just a just a quick clarification on the immobility and magnetic sensors . I saw immobility growing 21% year on year .
[Analyst]: Hi Mike and Derek. Just a quick clarification on the E Mobility and magnetic sensors. I saw E Mobility growing 21% year-over-year and the magnetic sensor was growing only 2% year-over-year. Is that because a lot of the traction is on the motor driver side here? Do you see a pull through for the magnetic sensors with the motor drives like the position, speed, or current sensing alongside those motor drives as you look at Derek.
Speaker #15: And the magnetic sensor was growing only 2% year on year . Is that because a lot of the traction is on the motor driver side here ?
Speaker #15: And do you see a pull through for the magnetic sensors with the motor drivers , like the position , speed or current sensing alongside those motor drives ?
Speaker #15: As you look out ?
Speaker #4: Yeah . Thanks , PJ . I'm actually glad you asked this question . So as Derek stated in his prepared remarks in the first half of fiscal year 26 , Meg sensors were up 13% relative to the second half of FY 25 .
Michael Doogue: Thanks, PJ. I'm actually glad you asked this question. As Derek D’Antilio stated in his prepared remarks, in the first half of fiscal year 2026, MAG sensors were up 13% relative to the second half of FY2025. What you're seeing in the stats in the second quarter of last year, FY2025, it was a bit of an anomalous spike up in revenues for magnetic sensors, which are making the numbers this quarter on a year-over-year basis just a bit anomalous based on some lumpiness within the quarters. We feel great about our magnetic sensor performance. Very strong wins in the EV space and the ADAS space. As I mentioned, we're ramping the current sensors and data center. We're seeing robotics wins. We actually had a record quarter for TMR sales within this quarter.
Speaker #4: And what you're seeing in the stats in the second quarter of last year of FY 25 , it was a bit of an anomalous spike up in revenues for magnetic sensors , which are making the numbers this quarter on a year over year basis just a bit anomalous based on some lumpiness within the quarters , we feel great about our magnetic sensor performance .
Speaker #4: Very strong winds in the EV space and the Adas space . As I mentioned , we're ramping the current sensors and data center .
Speaker #4: We're seeing robotics wins . We actually had a record quarter for TMR sales within this quarter . So there's a little bit of a timing dynamic in the numbers in terms of year over year growth .
Michael Doogue: There's a little bit of a timing dynamic in the numbers in terms of year-over-year growth, but the story for magnetic sensors remains quite strong.
Speaker #4: But the story for magnetic sensors remains quite strong .
Speaker #15: Got it . And then Derek on the longer term , 58% gross margin target . Just wondering how we should look at that .
[Analyst]: Got it. Derek, on the longer term, 58% gross margin target, just wondering how we should look at that, the progression to that, whether it's product mix or foundry or loading, pricing, et cetera, if you can just walk through focus to that. Thanks.
Speaker #15: You know , the progression to that , whether it's product mix or foundry or loading pricing , etc. , we can just walk us through that .
Speaker #15: Thanks .
Speaker #5: Yeah , so so 58% our long term target . We're taking it sort of piece by piece . Right . The first goal was to get back to 50% .
Derek D’Antilio: Yeah. 58% is our long term target. We're taking it sort of piece by piece. The first goal was to get back to 50%. The guide for our midpoint in the December quarter is 50% coming off some troughs kind of at the 46% range. We continue to grind our way back to 50% and the biggest piece of that continues to be leverage. We have a significant amount of capacity both at our wafer suppliers and in our back end facility in the Philippines where we've invested heavily over the last four years. We get a lot of leverage. That's that 60% to 65% drop through and that's really the biggest piece of it, aside from that mix will certainly help.
Speaker #5: The guide for a midpoint in the December quarter was 50% . Coming off some troughs , kind of at the 46% range . So we continue to grind our way back to 50% .
Speaker #5: And the biggest piece of that continues to be leverage . We have a significant amount of capacity , both at our wafer suppliers and in our back end facility in the Philippines , where we've invested heavily over the last four years .
Speaker #5: So we get a lot of leverage . That's that 60 to 65% drop through . And that's really the biggest piece of it .
Speaker #5: Aside from that mix will certainly help some of these newer products that Mike talks about with the TMR , the high voltage gate drivers , this ten megahertz current sensor , we released those inherently have more value to our customers and higher gross margins as they begin to ramp .
Derek D’Antilio: Some of these newer products that Mike talks about with the TMR, the high voltage gate drivers, this 10 MHz current sensor we released, those inherently have more value to our customers and high end gross margins as they begin to ramp. We continue to do a lot of good things with efficiencies in our factory, which does two things. Improves gross margin and allows us really to temper our CapEx. This quarter our CapEx was $6 million or 3% of sales. I expect that to remain below 5% of sales, our target model. Those are really the things that will drive gross margin. On the variable contribution margin side, I don't expect that to change considerably because we'll be continuing to have cost downs with our vendors, of course, and those hopefully will exceed the price downs we have with our customers.
Speaker #5: And we continue to do a lot of good things with efficiencies in our factory , which does two things improves gross margin and allows us really to temper our CapEx this quarter .
Speaker #5: Our CapEx was $6 million or 3% of sales . I expect that to remain below 5% of sales . Our target model . So those are really the things that will drive gross margin on the variable contribution margin side .
Speaker #5: I don't expect that to change considerably because we'll be continuing to have cost downs with our vendors . Of course , and those hopefully will exceed , you know , the price downs we have with our customers .
Speaker #5: And that's kind of the netting that happens there , right ?
Derek D’Antilio: That's kind of the netting that happens there.
[Analyst]: All right, thank you.
Speaker #15: Thank you .
Speaker #2: Thank you . The next question comes to the line of Joe Moore with Morgan Stanley . Your line is now open .
Operator: Thank you. The next question comes to the line of Joe Moore with Morgan Stanley. Your line is now open.
Speaker #4: Great .
[Analyst]: Great, thank you. I wanted to come back to the data center business. I think I want to make sure I have the right sizing that it's kind of mid single digit % of revenues. Can you kind of help us with how much of that currently is cooling versus power? Yeah.
Speaker #16: Thank you . I wanted to come back to the data center business . I think I want to make sure I have the right sizing , that it's kind of mid-single digit percentage of revenues .
Speaker #16: And can you help us with how much of that currently is cooling versus power ?
Speaker #4: Yeah . Hey , Joe , this is Mike . So we have said publicly in the past that data center had hit 7% of sales for Allegro .
Michael Doogue: Hey Joe, this is Mike. We have said publicly in the past that Data Center had hit 7% of sales for Allegro, and in Q2 the number was only slightly higher than that, but did set a record. We are still seeing the majority of our revenue coming from cooling, but we're seeing a faster ramp on the power supply side of things. I think the future is bright on both the cooling and the power supply side of the business.
Speaker #4: And in the in here in Q2 , the number was only slightly higher than that . But did set a record . And we are still seeing the majority of our revenue coming from cooling .
Speaker #4: But we're seeing a faster ramp on the power supply side of things . So I think the future is bright on both the cooling and the power supply side of the business .
Speaker #16: Okay . That's helpful . Thank you . And then with regards to the comment , you made a few minutes ago that the rack content is quite a bit different , can you expand on that a little bit ?
[Analyst]: Okay, that's helpful, thank you. With regards to the comment you made a few minutes ago that the rack content is quite a bit different, can you expand on that a little bit? Just, you know, because the market right now there's a combination of kind of racks of 8-way servers versus full rack scale. You know, what's the difference in content for you guys?
Speaker #16: Just , you know , because the market right now is a combination of kind of racks of eight way servers versus full rack scale , you know , what's the difference in content for you guys .
Speaker #4: Yeah , Joe , I have no expert on all the permutations of the configurations out there . But in our investor deck on our website , we talk about $150 of potential content in a more conventional high compute going up to 425 for Allegro in more of a Gen A type server configuration that's not tied to any one hyper specific server configuration , it's more related to the conversations we're having with our customers about the transition over to magnetic current sensors in the power supplies being a general trend , and then also the need to have more fans in the server architectures .
Michael Doogue: Yeah, Joe, I am no expert on all the permutations of the configurations out there, but in our investor deck on our website we talk about $150 of potential content in a more conventional high compute server going up to $425 for Allegro in more of a Gen A type server configuration that's not tied to any one hyper specific server configuration. It's more related to the conversations we're having with our customers about the transition over to magnetic current sensors and the power supplies being a general trend. Also, the need to have more fans in these server architectures. We are seeing significant numbers of fans in certain architectures that rely on liquid cooling heavily as well. I think there's some positive news in at least some of the architectures. We've seen that even though there's liquid cooling, there tends to be quite a few fans.
Speaker #4: We are seeing server significant numbers of fans in . Certain architectures that rely on liquid cooling heavily as well . So I think there's some positive news in at least some of the architectures we've seen that even though there's liquid cooling , there tends to be quite a few fans .
Speaker #4: And then as we look ahead , you know , it becomes even more exciting when we can put high voltage gate drivers into the power supplies .
Michael Doogue: As we look ahead, you know, it becomes even more exciting when we can put high voltage gate drivers into the power supplies. As I said in my prepared remarks, we're working with customers on that right now.
Speaker #4: And as I said in my prepared remarks , we're working with customers on that right now .
Speaker #16: Great . Thank you much . Congratulations on the numbers .
[Analyst]: Great, thank you very much. Congratulations on the numbers.
Speaker #2: Thank you . The next question comes from the line of Timothy Arcuri with UBS . Your line is now open .
Operator: Thank you. The next question comes in the line of Blayne Curtis with UBS. Your line is now open.
Speaker #17: Thanks a lot . I wanted to go back to this question on distribution . It was up 22% . It sounds like it's just shy of $120 million , but then you said that that they burn $5 million worth of your parts .
[Analyst]: Thanks a lot. I wanted to go back to this question on distribution. It was up 22%. It sounds like it's just shy of $120 million. You said that they burned $5 million worth of your parts. It sounds like sell through was $5 million even higher than that. Yet the direct sales were down 10%. It kind of seems like end customers are building inventory and they're pulling from the distribution. I know that you don't have as much visibility as to what's happening at the end customer, but does that make you a little concerned that maybe they are building inventory just out of, you know, disp.
Speaker #17: So it sounds like sell through was like $5 million . Even higher than that . Yet the direct sales were down 10% . So it kind of seems like end customers are building inventory and they're pulling from the testes .
Speaker #17: So I know that you don't have as much , you know , you know , visibility as to what's kind of happening at the end .
Speaker #17: Customer . But does that make you a little concerned that maybe they are building inventory just out of , you know ?
Speaker #5: That's not what we're seeing right now . We don't have visibility further down the line , but a lot of that is geographical for us as well .
Derek D’Antilio: That's not what we're seeing right now. We don't have visibility further down the line, but a lot of that is geographical for us as well. We use distributors for both demand generation for the industrial side of the business, but also for fulfillment in auto in Japan and China. Distributors could be up to the extent that China's up, Japan was up. Industrial in certain markets like Data Center was served through distributors. That really will drive some of that.
Speaker #5: We use distributors for both demand generation for the industrial side of the business , but also for fulfillment in auto in Japan and China .
Speaker #5: So dusty could be up to the extent that China is up . Japan was up industrial in certain markets like data center , was served through distributors .
Speaker #5: So that really will drive some of that .
Speaker #17: Okay . And then it sounds like based on the answer to a prior question , it sounds like data center . You're kind of a mid to high single digit share of this $900 million Tam that you put in the deck .
[Analyst]: Okay, it sounds like based on the answer to a prior question, it sounds like Data Center, you're kind of a mid to high single digit share of this $900 million TAM that you put in the deck. How big do you think your share can get there? I know that the story really is one that that TAM is growing versus your share, but are you also going to gain share in that TAM and kind of where do you think that your share can get to.
Speaker #17: So how like , how big do you think your share can get there ? Is it ? I know that the story really is more that that Tam is growing versus your share , but but are you also going to gain share in that Tam .
Speaker #17: And kind of where do you think that your share can get to ?
Speaker #4: Yeah . So I'll take that one . This is Mike . I won't comment on absolute share numbers , but I would say the best trend that we want to make sure is crystal clear is that we had had a data center business that was largely built on fan drivers .
Michael Doogue: Yeah, I'll take that one. This is Mike. I won't comment on absolute share numbers, but I would say the best trend that we want to make sure is crystal clear is that we had had a data center business that was largely built on fan drivers.
Derek D’Antilio: Drivers.
Speaker #4: We're now happily seeing current sensors ramp in the power supply . And then the third wave will be these isolated gait drivers that we talked about as we bring in current sensor and isolated gate driver technology .
Michael Doogue: We're now happily seeing current sensors ramp in the power supply and the third wave will be these isolated gate drivers that we talked about. As we bring in current sensor and isolated gate driver technology, we're starting from a low base. It inherently implies market share gains for Allegro MicroSystems, and I think in aggregate it creates a strong story of growth in the data center. There's really so much going on in terms of the architectures of the data centers. When is it 800 volts or not? It's tough to give any tangible numbers regarding the future, but I'm confident in saying that we have a strong story in data center.
Speaker #4: We're starting from a low base , so it inherently implies market share gains for Allegro . And I think in aggregate it creates a strong story of growth in the data center .
Speaker #4: There's really so much going on in terms of the architectures of the data centers . When is it 800V or not ? It's tough to give any tangible numbers regarding the future , but I'm confident in saying that we have a strong story in data center .
Speaker #17: Okay . Thank you .
[Analyst]: Okay, thank you.
Speaker #2: Thank you . Our last question comes in line of Mark Lopaka with Evercore ISI . Your line is now open .
Operator: Thank you. Our last question comes in line of Mark Lipacis with Evercore ISI. Your line is now open.
Speaker #5: Great .
[Analyst]: Great, thanks for taking my question. Derek, you had mentioned that you're seeing some of your customers trying to order within lead time. I'm hoping you could just review some of the cycle signals. Are you seeing expedites, are you seeing pull ins, or any of these things changing quarter to quarter, and is anything going on with your own company lead times? Are there any changes there or lead times from your suppliers? I had a follow up.
Speaker #14: Thanks for taking my question , Derek . You had mentioned .
Speaker #11: That some .
Speaker #18: Of you're seeing some of your customers trying to order within lead and time lead time . So I'm hoping you could just review some of the , the cycle signals .
Speaker #18: Are you seeing expedites ? Are you seeing pull ins or any of these things changing quarter to quarter . And and what's going on with your own company ?
Speaker #18: Lead times or any changes there or lead times from your suppliers . And then I had a follow up .
Speaker #5: Yeah . Mark , we continue to see book to Bill be above one . We haven't given the absolute numbers that continues to be pervasively above one .
Derek D’Antilio: Yeah, Mark, we continue to see book to bill be above one. We haven't given the absolute numbers. That continues to be pervasively above 1 all of calendar 2025. That's good. Our backlog continues to build. We are seeing orders within lead time, and we're having a typical sort of upcycle constraint in the sense that we're also building some delinquency, meaning we're having challenges building product and getting it through our back end factory. We're putting more capacity online to service things like data center in the future as we move forward. I would say those are the types of metrics you usually see when you come into this environment after a prolonged inventory clearing period.
Speaker #5: All of calendar 25 here . So that's good . Our backlog continues to build . We are seeing orders within lead time . And we're having a typical sort of cycle constraint in the sense that we're also building some delinquency , meaning we're having challenges building product and getting it through our back end factory .
Speaker #5: We're putting more capacity online to service things like data center in the future , as we as we move forward . So I would say , you know , those are the types of metrics you usually see when you come into this environment .
Speaker #5: After a prolonged inventory clearing period .
Speaker #18: Gotcha . Very helpful . And then a , you know , there's there's in the news , you know , concerns around rare earth metals .
[Analyst]: Gotcha. Very helpful. Then a follow up. You know, there's in the news concerns around rare earth metals. Do you guys use those? If so, what's your strategy for building inventories there? Thank you.
Speaker #18: Do you guys use those ? If so , what's your strategy for building inventory , sir . Thank you .
Speaker #18: Do you follow up
Michael Doogue: Yeah, thanks. Mark, this is Mike. Rare earth is used throughout so many industries, as you know. I would say the first signs we saw in terms of rare earth tightness were from some of our customers that were putting rare earth materials into things like motors. They've done a bunch of work starting in the spring and seem to have been navigating that carefully. Additionally, we're looking at a vendor that we use to buy some magnets from. We spoke to them a few months ago, and they assured us they had multiple years' worth of supply of rare earth materials, and we continue to work with them. Finally, obviously, today was a big day for announcements about potential U.S.-China relations and the lifting of some potential restrictions.
Speaker #4: know , Rare Earth is used throughout so many industries . As you know , I would say the first signs we saw in terms of rare earth tightness were from some of our customers that were putting rare earth materials into things like motors .
Speaker #4: They've done a bunch of work starting in the spring , and seem to have been navigating that carefully . Additionally , we're looking at a vendor that we use to buy some magnets from .
Speaker #4: We spoke to them a few months ago , and they assured us they had multiple years worth of supply of rare earth materials , and we continue to work with them .
Speaker #4: And then finally , obviously , today was a big day for announcements about potential US-China relations and the lifting of some potential restrictions .
Speaker #4: Net net I think lots of companies have their head on a swivel and are doing all the right things to make sure they have continuity of supply and people have been navigating that successfully , successfully , at least from our seat to date .
Michael Doogue: Net net, I think lots of companies have their head on a swivel and are doing all the right things to make sure they have continuity of supply. People have been navigating that successfully, at least from our seat today.
Speaker #18: Great . Thank you very much .
[Analyst]: Great. Thank you very much.
Speaker #2: Thank you. At this time, I'm showing no further questions in the queue and would now like to hand it back to Julian for closing remarks.
Operator: Thank you. At this time, I'm showing no further questions in the queue and would now like to hand it back to Jalene for closing remarks.
Speaker #3: Thank you Kathy , and thank you all for taking the time to join us . This concludes this morning's conference call .
Jalene Hoover: Thank you, Kathy, and thank you all online for taking the time to join us. This concludes this morning's conference call.
Operator: Again, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.