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Allegro MicroSystems, Inc. (ALGM) Q3 2024 Earnings Call Transcript

Allegro MicroSystems, Inc. (ALGM)

Q3 2024 Earnings Call Transcript

Company Participants

Jalene Hoover - Vice President of IR & Corporate Communications

Vineet Nargolwala - President, CEO & Director

Derek D’Antilio - Senior VP, CFO & Treasurer

Conference Call Participants

Chris Caso - Wolfe Research

Gary Mobley - Wells Fargo

Nick Doyle - Quinn

Vijay Rakesh - Mizuho

Blake Friedman - Bank of America

Joshua Buchalter - TD Cowen

Thomas O’Malley - Barclays

Presentation

Operator

Good morning, and welcome to the Allegro MicroSystems Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions]. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised to this conference is being recorded.

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

Jalene Hoover

Thank you, Kevin. Good morning, and thank you for joining us today to discuss Allegro’s third fiscal quarter 2024 results. I’m joined today by Allegro’s President and Chief Executive Officer, Vineet Nargolwala; and Allegro’s Chief Financial Officer, Derek D’Antilio. They will provide highlights of our business review our quarterly financial performance and share our fourth quarter and full fiscal year 2024 outlook. We will follow our prepared remarks 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 are included in our earnings release, which is available in the Investor Relations page of our website at www.allegromicro.com.

This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are based on current expectations and assumptions as of today’s date and as a result, are subject to risks and uncertainties that could cause actual results or events to differ materially from projections.

Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements are described in detail in our earnings release for the third quarter of fiscal 2024 and in our most recent periodic filings with the Securities and Exchange Commission. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changes to assumptions or other events that may occur except as required by law.

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

Vineet Nargolwala

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

I’m pleased to report that we delivered another solid quarter against a weaker backdrop in fiscal Q3, consistent with expectations and our guidance. While we expect continued inventory digestion across markets in the short term, our design win momentum continues at record levels and reinforces our confidence in our ability to grow above market over the mid- to long term, consistent with our target financial model.

Furthermore, we are actively managing the business to optimize profitability and cash flow throughout the cycle. In Q3, we delivered sales of $255 million, up 2% year-over-year, reflecting continued strength in automotive. Sales in our strategic growth areas, including e-mobility and Industrial, which includes clean energy and automation, we’re up approximately 20% year-over-year to $150 million or 59% of total sales.

Innovation with purpose is our core value. During the quarter, we announced the launch of the second product of our high-voltage isolated gate driver portfolio. Allegro’s newest Power-Thru solution has crucial safety features designed to protect against high operating temperatures in electric powertrain systems. It also provides high performance in noisy environments present in microinverters in solar applications, power supplies and data center applications and onboard chargers for electric vehicles.

Recall that a high-voltage isolated gate driver technology came to us through our acquisition of Heyday just over a year ago. The progress we are making with our Power-Thru product family demonstrates our ability to effectively integrate acquired technology and bring it to market quickly. We’re applying the same approach and intensity to our recent acquisition of Crocus which further strengthens our magnetic-sensing IC portfolio and extends our leadership in this very important product category.

I’m pleased to report that the integration of the Crocus team and its TMR technology is progressing really well. The acquired business is fully transitioned into our systems and processes. Product sales are underway with sampling activity accelerating in e-mobility and industrial markets. Both the Allegro and Crocus TMR offerings are now combined under a common brand ExtremeSense, which now represents the world’s leading and most comprehensive portfolio, offering the highest accuracy, the lowest power consumption and the highest sensitivity for the world’s most demanding applications. Feedback across the customer base has been very encouraging, and the strong majority of our customer discussions recently at CES featured TMR.

Moving on to the broader macro environment. Industry estimates indicate that calendar year 2024 automotive demand will be stable with continued growth in xEVs, which includes battery electric vehicles and full hybrids. While xEV adoption varies greatly by geography, the growing number of xEV launches proves that the momentum is strong and increasing. Recall that Allegro is well represented in all automotive segments with our solutions supporting all powertrains.

Today, ADAS represents the majority of e-mobility sales and xEV the fastest-growing component. And while e-mobility is a key strategic focus, nearly half of our automotive sales are in other automotive applications such as ICE powertrain and safety, comfort and convenience, which is agnostic of the choice of powertrain. Additionally, OEs use of both hybrid and full electric platforms to meet fuel economy and emissions regulations positions us well.

Allegro’s content in full hybrid vehicles is similar to that in BEVs with both significantly higher than that in ICE. And so Allegro wins, no matter which platforms OEMs invest in. While automotive demand remains stable, and we see continued strong momentum in e-mobility, we are seeing certain inventory dynamics where tiers and contract manufacturers are paring back inventory from the 8 to 10 weeks during the supply chain crisis to pre-pandemic levels of 4 to 6 weeks as carrying costs pick up a factor and OEMs and support premiums for inventory.

Despite these dynamics, we expect our automotive business to deliver above-market growth for fiscal year ‘24, consistent with our target financial model. Our fourth quarter sales outlook comprehends macroeconomic conditions including ongoing inventory digestion in industrial and consumer markets as well as pockets of inventory rebalancing in automotive.

Looking to the future. We continue to see strong design win activity with 80% of our Q3 design wins in our strategic growth areas and more than 50% in the area of e-mobility. Key highlights from our third quarter design wins include the following: in automotive, we were awarded multiple programs by a leading Japanese OEM for an xEV platform. This was for current sensors on onboard chargers and AC inverters and for our magnetic position sensors for electronic power steering systems; in China, we were awarded multi-solution design wins for xEV powertrains and EPS systems with a leading automotive OEM using our current sensor and power technology; in the industrial end market, we won several designs using our current and isolation sensor technology for clean energy applications, including solar and EV charging; in data center applications, we recorded several design wins with our motor drivers with a major OEM for cooling, high-performance AI servers using port traditional fabs as well as liquid cooling.

We remain focused on serving our customers and extending our market-leading positions. We’re investing for the future with a focus on maximizing growth in these strategic focus areas while positioning the business to scale and grow profitably. This focus is being rewarded by our customers with more business and our record design wins indicate that we are winning in the market.

In fact, for fiscal year 2024, we are on track to close over $1 billion in design wins with the majority turning to revenue over the next 3 years. This is proof that our strategy is working, underpinning our confidence in our ability to deliver above-market performance over the long term. I want to thank our teams globally for serving our customers and the continued execution of our strategy.

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

Derek D’Antilio

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

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

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